Monday, May 29, 2006

Equalization’s easy and it matters, I swear

VICTORIA  - After 14 years as Alberta premier, Ralph Klein still doesn’t have a clue about how equalization works.
He's not alone. Despite all the fussing about the program, most people don't know much about it, and what they do know is likely wrong.
It’s going to be a hot issue for the next few months. Here’s a five-minute primer so you‘ll be more clued in than Alberta’s premier. It’s interesting, honest.
Klein scored some big headlines by threatening to pull out of the equalization program if Alberta’s resource revenues became part of the funding formula. “This is a political showdown,” he vowed.
It made no sense, or no more sense than declaring that Alberta would pull the military out of Afghanistan.
Klein seems to think — like lots of people — that equalization means Ottawa bills some provinces and then passes on the money to Canada’s losers, like forced charity. And he seems to think a province can opt out.
But equalization is an entirely federal program. Ottawa takes some of the tax money it collects and chooses to help poor provinces deliver education and health care and other responsibilities. Alberta could urge its citizens to withhold two per cent of their federal income tax as a protest, I suppose, but there’s no real way to opt out
Back in 1867 the Fathers of Confederation carved up taxing powers and responsibilities between federal and provincial governments. Ottawa got defence and major economic development initiatives; the provinces got health and education and social services.
It made sense at the time, but by the Dirty Thirties things had changed. Education, for example, was a low-cost item in 1867. By 1930 providing education was already costing provinces more than they could afford. (The total cost of education and public welfare programs was less than $5 billion in 1874 and some $360 billion by 1937.)
The problem hit a crisis point in the Depression, when some provincial governments faced huge demands for services they couldn’t afford to provide.
The solution was to shift some responsibilities and tax powers to Ottawa. The federal government was to take the extra revenue and share it among the provinces, based in part on need.
The principle was that some provinces - like Ontario - could raise lots of taxes off their large industrial base. Others struggled. The federal government would transfer enough money to ensure that every province could offer adequate services without taxing its citizens too heavily. You wouldn’t die early because you lived in New Brunswick.
The current debate is about how you calculate those transfer payments. Right now the federal government looks at five provinces - Ontario, Quebec, Manitoba, Saskatchewan and B.C. - and calculates their average ability to bring in different kinds of taxes. Provinces that fall below that level get money to bring them up to the average.
Perhaps, the current thinking goes, all 10 provinces, including Alberta with its big energy revenues, should be included in the calculation. That would mean total payments - from the federal government - would rise by $6 billion from the current $9.5 billion.
Mostly Canadians have accepted the idea that all provinces should be able to provide basic services. It’s not a radical principle. B.C. provides some extra money for rural school districts on the same basis.
But Klein is right in one way. The money has to come from somewhere. If the federal government wasn’t helping out poorer provinces, it could cut taxes or spend more on the military.
The basic facts are clear, but the issues are complex. For example, B.C. got more than $800 million in equalization payments in 2004-5. Does the province really need money to deliver basic services? Would higher transfers reduce poorer provinces’ commitment to finding new economic opportunities? Or are inadequate transfers holding them down?
Those are the important questions. Equalization is ultimately a balance of idealism and pragmatism. The public’s view matters.
Your’re now more knowledgeable than Alberta’s premier.
Footnote: The fundamental issues are fascinating. How much revenue should government collect? What share should go to the military and what share to health care? How much tougher should life be in Newfoundland? What should the provinces be able to decide and where do national standards matter? It’s an important debate.

1 comment:

Anonymous said...

I completely agree that Klein was talking out of his hat when he suggested that Alberta would “opt out” of the transfer program. However the real issue in the fiscal imbalance remains the same; the average citizen pays far more in personal income tax to the Federal Government than they do to their respective Provincial Government. And yet it is their Provincial Government that must providing the serves most required in day to day lives. Health Care, Education, Welfare, Most major transportation needs, etc,etc all fall under Provincial jurisdiction.

There is only one level of taxpayer as most Premiers will correctly point out. Maybe it is time that the federal Government agreed to reduce Federal income tax rates provided that Provincial Governments agreed to increase their rates by corresponding amounts. This way every Province would gain more money at the Federal Governments expense, however they would do so based on the actual income of their own residents, thus providing an incentive to create strong Provincial economies while residents still end up paying a similar amount of tax in total

Something has to be done. Ottawa collects too much, and the Provinces not enough and taxpayers cannot afford to pay anymore. The current game of Ottawa cutting deals left right and center is not working either. Time for something new