April 1997 . Number 12

Toronto Megacity:
Projecting the Amalgamation Tax

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Government amalgamation is not cost efficient. Academic research demonstrates that municipal amalgamations do not save money, either in Canada or elsewhere.⁽¹⁾

There is no academic evidence to suggest that consolidation produces savings.⁽²⁾

Indeed, the evidence indicates that costs decline as the number of municipalities in a metropolitan area increases.⁽³⁾

Government amalgamation tends to increase unit costs: The increased cost might be characterized as an "amalgamation tax."

• During the 1950s and 1960s, US primary and secondary school districts consolidated to a greater degree than ever before (or since). Annual cost increases per student rose 1.6 percent more during the consolidation period than before and after.
  
  

• During the 1960s and 1970s, many US transit agencies were consolidated. Annual cost increases per kilometer of service averaged 2.4 percent more during the consolidation period than before and after.

The Toronto Megacity amalgamation tax could be substantial. Metro and local government amalgamation in Toronto (Megacity) is likely to increase expenditures:

• Transitional costs have been estimated at $200 million to $400 million. These costs can only be recovered from future savings, which research indicates have simply not occurred in previous amalgamation cases.
  
  
• Megacity expenditures for operations⁽⁴⁾ alone could be at least $800 million higher in 10 years (2007).⁽⁵⁾ The excess expenditure over the period could be more than $4 billion.
  
  

  Even if Megacity were able to achieve half the expected amalgamation tax rate, 2007 expenditures would be $400 million higher and gross expenditures over 10 years would be $2 billion higher.

Megacity could cost each household more then $5,000 over 10 years. The combined 10 year amalgamation tax could approach $4.5 billion (operating cost escalation and transitional costs). And this would just be the beginning. The more expensive cost structure of Megacity would continue to impose unnecessarily higher taxes on residents of the former six municipalities.

Cost increases would continue, even with tax or spending limits. Legislation that limits Megacity expenditures or taxes would not curb the cost increasing influences of amalgamation. Unit costs could be expected to increase, which would necessitate service reductions and poorer service quality. In this environment, the "amalgamation tax" would be assessed in deteriorating public services.

The cost increasing dynamics of amalgamation: Government amalgamation tends to increase costs for the following reasons:

• Services among the former smaller units of government will be "harmonized." This usually means that service levels will be increased to equal the service level in the most costly jurisdiction.
  
  

• Labour agreements will be harmonized. Government employee unions would seek equity with the most generous pre-existing labour contracts.
  
  

• Larger governments require larger numbers of administrators, because larger governments require more layers of bureaucracy.
  
  

• Administrators are paid more than in smaller governments. This is because public sector administrative compensation tends to be tied to budget size and staff size.
  
  

• Larger governments create economies of scale for special interests, which are invariably spending interests. Larger governments are more process oriented and more bureaucratic. It is often necessary to employ lawyers or lobbyists to effectively deal with larger governments. As a result, the individual taxpayer and local community groups have less effective access to government and diminished voice.
  

End Notes

1. See Andrew Sancton, "Reducing Costs by Consolidating Municipalities: New Brunswick, Nova Scotia and Ontario," Canadian Public Administration (Fall 1996) for a summary of this research.

2. Sancton.

3. David A. Sjoquist, "The Effect of the Number of Local Governments on Central City Expenditures, " National Tax Journal (May 1982), cited in Sam Staley, "Bigger is not Better: The Virtues of Decentralized Local Government, Policy Analysis, Cato Institute (Washington, DC: January 21, 1992).

4. Administration, labour, material and supplies (debt service and transfers excluded).

5. If operating costs were to increase by lower of the two "amalgamation tax" rates experienced in the United States.