Equalization Payments. Please School Me.

[sexualbanana]

I just want to know more about equalization payments, and, in the process, maybe dispel some of the apparent myths and misperceptions of about them.

So far, I've read:

https://www.thecanadianencyclopedia....ation-payments

https://www.policyschool.ca/unpackin...ments-2018-19/

https://globalnews.ca/news/4314547/e...ta-ottawa-oil/

I remember learning about equalization payments in high school, but seeing as that was basically 20 years ago, a lot gets forgotten and/or twisted. I would say one of the misconceptions about equalization payments is that I literally thought the Alberta government makes an annual payment to the federal government based on their calculations - a formula I don't fully understand at the moment - that would then be distributed to other provinces. From the Global link, that doesn't actually seem to the case. The simplest explanation being that Albertans make more money and therefore pay more in federal tax than those in other provinces. That money is then distributed to other provinces in order to prop up their revenues and allow them to spend it on whatever they want (the lack of oversight can be a subject for a later debate).

Would you consider that to be a the basics of how equalization payments?

[Buster]

Don't get fooled by discussion around the accounting.

It's a transfer of wealth from Alberta to Quebec. Nothing more, nothing less. That's the intent of the program, and it functions as intended.

[finboy]

My understanding, albertans on average make more, and therefore pay more into the equalization scheme via income tax. The provinces are looked at from benefits they are capable of providing, and are determined to be have or have not provinces. The pool is then divided up and sent to the provinces so that service levels are closer to equal between all provinces.

The rub is that Quebec has some caveats that don’t get added into their equation considerations that would change the funding the get, and no one in power wants to change that because of the voting power Quebec has. Because of this, albertans pay more due to their income levels (even with the downturn), and Quebec continues to get higher federal funding. The latest Quebec government claims they want to ween themselves off transfer payments, no one believes it because politicians don’t turn down free money to buy votes. Here is an older article that explains how Quebec and Manitoba sell hydro power for below cost, and how it benefits their equalization outputs.

https://www.google.ca/amp/s/national...rs-at-work/amp

Changing our representation/voting structure could have helped even things out, but Trudeau is a lying coward so it’s business as usual. If you hop onto reddit, it breaks down by political lines pretty clearly, with people supporting conservative viewpoints not agreeing with taking more from individuals who earn more to subsidize the governments (and by an extension, the citizens in that province). Where as people who are in favour of redistribution will highlight that they prefer all Canadians get access to the same services across Canada. Usually one side will bring up Manitoba and Quebec gaming the system, to which the other side will bring up alberta being anhave not province at one point, and Saskatchewan being a have not province more recently. At the end of the day, it’s really a moot point because no federal government (liberal or conservative) wants to rock the Quebec boat.

[dirtsniffer]

Kenney is going to rock the boat. What we need to do is follow Quebec's lead and consider separating

[HiTempguy1]

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Kenney is going to rock the boat. What we need to do is follow Quebec's lead and consider separating

I think you give Kenney too much credit. He is a staunch nationalist in the sense of unity.

Brian Jean, however, has been making some noise lately. Not that he or Brad Wall matter anymore.

As previous threads have shown, just like Brexit, no one would.be willing to deal with the decade of pain for the future prosperity of our province. Imagine dumping Canada, chopping tax rates, and being very aggressive in acquiring investment in the province. A pipe dream (uhg) but what a nice one.

[dirtsniffer]

We don't need to separate. AFAIK, once we vote to consider separating the feds are required to negotiate what we would need in order to stay. Basically a bluff but the feds have to play ball.

like fixing equalization and guaranteeing market access for our products.

[04Terminator]

Maybe I can be of some use here. I worked for the CRA many years ago, and am now an auditor for a provincial government.

Simply, the transfer system is the way Ottawa sends money to the provinces for roads, hospitals, schools, services and things such as that. On top of those transfers, Ottawa also sends an equalization payment to provinces that lag behind on their own fiscal ability to provide equitable government services to Canadians.

The source of funds to Ottawa for those transfers are varied, I don’t have the report in front of me, but last year, about $140 billion was from personal federal income taxes, $50 billion was from “other taxes and duties”, and about $40 billion from corporate federal taxes.

There is no actual physical transfer from one province to another, or sharing of resource revenue (check any provincial budget).

The typical source of argument is that a particular region or province contributes more through these personal, other, or corporate taxes to the federal government, than they get back in transfer payments. This is true, the government typically runs a deficit, provides strictly federal services, and not all provinces qualify for equalization payments.

The regional argument is arbitrary in my opinion, as any area with higher average income and employment, though paying the same federal income tax rates, will pay more than they receive. Not just on the provincial level. From the transfers that Alberta receives from Ottawa, it will spend more per-capita on more remote regions. Similar to Ontario, and the Greater Toronto Area. They have very high relativec income, and contribute more than all Alberta residence do to Ottawa in taxes, but the Ontario government spends less per-capita on that region then perhaps more remote places.

No doubt the system is not perfect, but I really do not perceive it as unfair.

The other argument is that fiscal capacity calculations are unfair, such as Alberta and Quebec using a subsidized industry's income sources, instead of market value in the calculation, but that sounds reasonable to me as well.

[suntan]

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Maybe I can be of some use here. I worked for the CRA many years ago, and am now an auditor for a provincial government.

Simply, the transfer system is the way Ottawa sends money to the provinces for roads, hospitals, schools, services and things such as that. On top of those transfers, Ottawa also sends an equalization payment to provinces that lag behind on their own fiscal ability to provide equitable government services to Canadians.

The source of funds to Ottawa for those transfers are varied, I don’t have the report in front of me, but last year, about $140 billion was from personal federal income taxes, $50 billion was from “other taxes and duties”, and about $40 billion from corporate federal taxes.

There is no actual physical transfer from one province to another, or sharing of resource revenue (check any provincial budget).

The typical source of argument is that a particular region or province contributes more through these personal, other, or corporate taxes to the federal government, then they get back in transfer payments. This is true, the government typically runs a deficit, provides strictly federal services, and not all provinces qualify for equalization payments.

The regional argument is arbitrary in my opinion, as any area with higher average income and employment, though paying the same federal income tax rates, will pay more than they receive. Not just on the provincial level. From the transfers that Alberta receives from Ottawa, it will spend more per capita on more remote regions. Similar to Ontario, and the Greater Toronto Area. They have very high income, and contribute more than all Alberta residence do to Ottawa in taxes, but the Ontario government spends less per capita on that region then perhaps more remote places.

No doubt the system is not perfect, but I really do not perceive it as unfair.

The other arguemnt is that fiscal capacity calucalations are unfair, such as Alberta and Quebec using a subsidized industry's income instead of market value in the calcualtion, but that sounds reasonable to me as well.

This is mostly totally wrong.

The formula for equalization basically uses GDP/person as the criteria for levelling. Provinces with high GDP/person relative to the average such as Alberta will never get equalization payments. Conversely, Quebec will always get payments because their GDP/person is very low.

Also consider that the whole program is utterly arbitrary, therefore Ontario recently received extra equalization even though the formula said that they would receive less.

[Buster]

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Maybe I can be of some use here. I worked for the CRA many years ago, and am now an auditor for a provincial government.

Simply, the transfer system is the way Ottawa sends money to the provinces for roads, hospitals, schools, services and things such as that. On top of those transfers, Ottawa also sends an equalization payment to provinces that lag behind on their own fiscal ability to provide equitable government services to Canadians.

The source of funds to Ottawa for those transfers are varied, I don’t have the report in front of me, but last year, about $140 billion was from personal federal income taxes, $50 billion was from “other taxes and duties”, and about $40 billion from corporate federal taxes.

There is no actual physical transfer from one province to another, or sharing of resource revenue (check any provincial budget).

The typical source of argument is that a particular region or province contributes more through these personal, other, or corporate taxes to the federal government, then they get back in transfer payments. This is true, the government typically runs a deficit, provides strictly federal services, and not all provinces qualify for equalization payments.

The regional argument is arbitrary in my opinion, as any area with higher average income and employment, though paying the same federal income tax rates, will pay more than they receive. Not just on the provincial level. From the transfers that Alberta receives from Ottawa, it will spend more per capita on more remote regions. Similar to Ontario, and the Greater Toronto Area. They have very high income, and contribute more than all Alberta residence do to Ottawa in taxes, but the Ontario government spends less per capita on that region then perhaps more remote places.

No doubt the system is not perfect, but I really do not perceive it as unfair.

The other arguemnt is that fiscal capacity calucalations are unfair, such as Alberta and Quebec using a subsidized industry's income instead of market value in the calcualtion, but that sounds reasonable to me as well.

I think you may have gotten something right in there. I'll do some digging to see if I can find it.

[04Terminator]

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I think you may have gotten something right in there. I'll do some digging to see if I can find it.

I was close. 143 billion personal federal tax portions, 43 billion federal corporate tax portion, 51 billion "other".

https://www.fin.gc.ca/afr-rfa/2017/r...apport-eng.asp

[dirtsniffer]

If I remember correctly, each Albertan pays $12,000 to the federal government in income tax each year, of that, only $6,000 per person is sent back to the province.

[msommers]

Probably a bit dated (Jan 2012) but worth going through if you're really curious.

"Alberta and 'Equalization': Separating fact from fiction or Sorting out some implications and options in Canadian Fiscal Federalism" by Melville L. McMillan, Professor, Department of Economics, University of Alberta

http://business.ualberta.ca/Centres/...pril2final.pdf

[suntan]

That paper is wrong.

Again, the only thing that matters is GDP/person. Taxable base/person is not the correct measure.

[KRyn]

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That paper is wrong.

Again, the only thing that matters is GDP/person. Taxable base/person is not the correct measure.

Sources?

[suntan]

Source of what? Read their paper. They just go in with the assumption that tax base per person is what is used for equalization. The fact is that the program is completely arbitrary, and that the feds just pick whatever process they find convenient to shuffle funds around.

[01RedDX]

.

[sexualbanana]

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My understanding, albertans on average make more, and therefore pay more into the equalization scheme via income tax. The provinces are looked at from benefits they are capable of providing, and are determined to be have or have not provinces. The pool is then divided up and sent to the provinces so that service levels are closer to equal between all provinces.

Right. So I'm not wrong in understanding what equalization is, nor am I wrong in how it's distributed. With that being the case, I would say that I don't have a problem with equalization payments since that is part of what happens in a democratic country and some of my federal tax dollars will go to things that I'll never ever see the benefit from. However, where it goes awry is when the beneficiaries of programs like this fail, or refuse, to hold up their end of the bargain - even if, in the end, it could benefit them in terms of more money from the program.

[davidI]

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That paper is wrong.

Again, the only thing that matters is GDP/person. Taxable base/person is not the correct measure.

I do not believe that is correct. My understanding after extensive reading on the subject is that there is a formula (of which nominal GDP growth is a part) to calculate "fiscal capacity". I personally don't have a problem with the general concept of equalization (it's essentially the same as having progressive tax rates which I believe to be good for society). My main issue is with the formula and that it a) excludes hydro revenues from Crown Corporations (I've been unable to find clear details on this but I understand since Crown Corporations don't typically pay out any royalties (since the revenues go to the crown anyways) they don't get counted like hydrocarbon resource royalties are); and b) rewards province with inflated PST and bloated government.

Also, those who have pointed out that equalization transfers are not a direct transfer are correct. Essentially, Albertans pay more federal tax per capita (at the same % tax rates of everyone else) but the issue is that those Federal Revenues are then distributed in a way where Alberta receives back transfers of less than what we pay in. It is sort of an issue of semantics but since it's a point defenders of equalization often use to challenge any criticisms of the program it's worth pointing out.

The below articles point out some of the issues:
https://business.financialpost.com/o...-yes-heres-how
https://business.financialpost.com/o...o-longer-works
https://nationalpost.com/opinion/pet...ollars-at-work

The below paper gives a good outline of the system. I have not found anything similar that is more current as there have been some tweaks since it was published in 2012 but it still covers the general concepts:
http://ideefederale.ca/documents/Equalization.pdf

[HiTempguy1]

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I do not believe that is correct

No, you refuse to acknowledge the bottom line. Anything else is window dressing, mental gymnastics, and semantics.

[davidI]

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No, you refuse to acknowledge the bottom line. Anything else is window dressing, mental gymnastics, and semantics.

The right of a province to receive an equalization grant for a given source of revenue or tax base is determined by applying the following formula:

REj R = POPj * ATRR {STANR } - (FCjR/POP)

where REj R = right to equalization of a province j, for the tax base R,
POPj = population of province j,
ATRR = average tax rate applied to the tax base R according to the RTS, FCj
R = tax base R of a province j,
STANR = average per capita tax base R at the national level.