Fair Equalization Payments? Not in Canada

OTTAWA — In 2004, Canadians smoked an average of 1,207 cigarettes each. Quebeckers smoked an average of 1,434 cigarettes — 227 more. This disparity cost Quebec almost $190-million in lost […]
Published on February 27, 2006

OTTAWA — In 2004, Canadians smoked an average of 1,207 cigarettes each. Quebeckers smoked an average of 1,434 cigarettes — 227 more. This disparity cost Quebec almost $190-million in lost federal equalization payments. It wasn’t a penalty for smoking too many cigarettes. It was a penalty for profiting too much from them. Since Quebeckers smoked more cigarettes than the “Canadian Standard,” Quebec thereby possessed “excess fiscal capacity,” meaning that it stood to make more money per capita from cigarette taxes than other provinces.

The federal equalization formula requires that excess fiscal capacity, in 33 different kinds of taxes, be shared with provinces that have “deficient fiscal capacity.” In the case of Quebec and the tobacco taxes, you calculate the precise dollar value of the province’s excess fiscal capacity by a simple mathematical equation. You multiply the 227 extra cigarettes by the average tax imposed in the “Canadian Standard” (11 cents per cigarette) and multiply again by population (7,482,864). One hundred and eighty-seven million dollars.

The equalization program determines each year which provinces are “have” provinces and which are “have not.” More precisely, it determines which provinces don’t get federal equalization payments and which do, which is a different thing altogether. Alberta and Ontario don’t, all other provinces do — though, with a minuscule alteration in the rules, Ontario now could. The rules change often, and arbitrarily. When former finance minister Ralph Goodale tweaked the resource rules for Saskatchewan in 2004, he produced a $750-million equalization windfall for his home province. When federal manipulation of the rules results in more money for the provinces, it’s called co-operative federalism. When provincial manipulation produces the same result, it’s called “gaming the system.” Either way, though, equalization payments are important. They deliver more than $10-billion a year — almost 25 per cent of the revenues of the Atlantic provinces, almost 20 per cent of the revenue of Manitoba and almost 10 per cent of the revenue of Quebec.

Canada’s only authentic “have” province, Alberta, isn’t even a part of the Canadian Standard. It’s excluded. The four Atlantic provinces are excluded, too. Using a process that throws out the high-end fiscal capacity of Alberta and the low-end fiscal capacity of the Atlantic provinces, the government sets the Canadian Standard using only five provinces — British Columbia, Manitoba, Saskatchewan, Ontario and Quebec. This five-province standard can be exactly expressed: for 2004-05, $6,217 per person. The federal formula determined that Ontario’s fiscal capacity in 2004-05 was $6,500 per capita, meaning Ontario remained a “have” province only by the slimmest of margins and by the most skillful mathematics. Canada isn’t ready for a “have-not Ontario.” (The formula defined Alberta’s 2004-05 fiscal capacity at more than $10,000 per capita.)

The federal government used to have a 10-province Canadian Standard. Since it adopted the five-province standard in 1982, it has saved $30-billion. And Alberta has prospered, moving from welfare recipient to the richest folk in town. Should the government revert to a 10-province model, and all other factors remained as they are, the Canadian Standard would rise and all the recipient provinces, including Ontario, would get equalization payments. Although Alberta’s oil revenues haven’t been counted for more than two decades, Saskatchewan’s oil revenues have — inflating Saskatchewan’s fiscal capacity, reducing its equalization payments and producing the inequity that Mr. Goodale quite properly fixed.

In its manic manipulation of Atlantic Canada’s offshore oil revenues, the minority Paul Martin government set out to treat all of the provinces in roughly the same way, although offshore resources are owned by the federal government, not the provinces. The government, however, kept its resource fixes for Newfoundland and Nova Scotia off the books. These provinces will get rebate cheques delivered in plain envelopes. This way, the program isn’t overtly corrupted and other recipient provinces won’t get ticked. Quebec, however, feels distinctly ticked anyway. In its most recent budget papers, it observed that — for many years — only 20 per cent of Canada’s oil and gas revenues were used in calculating the Canadian Standard. On the other hand, it said, 95 per cent of Canada’s hydro-generated revenues were counted. For hydro-rich Quebec, this means more excess fiscal capacity.

Just because Quebec collects $4-billion a year in equalization payments doesn’t mean it doesn’t have a few legitimate grievances. Consider property taxes. In 2001, the federal government changed the way it calculated property tax capacity in the Canadian Standard provinces. For one thing, it abandoned market assessment. For another, it adopted a highly complex formula that no one understood. The new method determined that Quebeckers owned $30,621, per capita, in residential property; that British Columbians owned $71,406, per capita — more than twice as much. A reasonable conclusion. Yet, for purposes of equalization payments, the new method calculated Quebec’s residential tax base at $45,709 per capita; and the B.C. residential tax base at $46,273, a mere 1 per cent higher. The equalization bureaucrats imposed a $655-million penalty on Quebec (for past overpayments) and docked the province another $185-million a year. With commendable understatement, Quebec called the property tax formula “counterintuitive.” Indeed.


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