This sees to be a particularly nutty day in regard to federal transfers. The G&M is reporting that Premier Klein has said he will take Alberta out of Equalization if resource revenues are part of any new formula.
This is a bit confusing and I really do wonder what he maybe thinking about. The article indicates he has ask for legal options.
The various comments by readers, available on the G&M website, clearly indicate that most people don't know much about the Equalization program or its workings.
This has also been evident when the G&M reported on Premier McGuinty's concerns that any move by the federal government to fix the so-called "fiscal imbalance" throught the Equalization program was grossly unfair to Ontario. In fact it would also be unfair to Albertans also but Premier Klein and Alberta are currently awash in provincial revenues.
The main confusion seems to be over whether or not provincial governments make direct discretionary contributions to the Equalization program.
THEY DO NOT.
Equalization is a federal program. This means that payments or transfers to provinces under the program are strictly a federal matter. The federal Act that authorizes the program is the Federal Provincial Fiscal Arrangements Act.
If anyone would care to have a look here's the link to the Act and its regulations. In effect the detailed calculation required to determine a provinces entitlement to a payment or transfer under the Equalization program are detailed in the Act and its regulation.
It really is less complicated than some Parts of the federal Income Tax Act. But it is still not too much fun to struggle through.
So back to the confusion or maybe I should be referring to it as the misunderstanding.
If the province governments don't contributed directly to funds transfered under the Equalization program, where do the funds come from?
They come from the federal governments general revenues which are collected uniformly across the country from all taxpayers from a number of sources. To see exactly what the sources are check the federal public accounts here.
Taxes & duties of all kinds account for about 84% of total federal revenues and the most important single source, accounting for approximately 45% of total revenues, is the personal income tax.
Just to be clear, the federal government does not directly impose taxes or any other revenue raising mechanism on any provinces' upstream oil or natural gas production.
The unwinding of the fiscal features of the National Energy Program in 1984 repealed all the federal taxes that had been directly imposed on upstream production. Thus the Petroleum and Gas Revenue Tax, the Natural Gas and Gas Liquids Tax, the Export Tax on Heavy Crude etc. were all killed.
The federal government does impose corporate income taxes on all companies regardless of the sector of the economy in which they may earn income.
In order to understand McGuinty's concerns, and I think Klein's, you need to look at federal revenues from the point of view of who pays them - in other words in which provinces do the taxpayers live.
This type of information isn't as readily available on any government site but it is possible to determine a pretty good approximation of the provincial origin of federal revenue using CRA sources and provincial public accounts.
My estimate of the source of federal revenues on a provincial and territorial basis can be seen in the Table below.
Ontario accounts for about 42% of all federal revenues but they receive no Equalization payments. They do receive other federal transfers such as the Canada Health Transfer (CHT) and the Canada Social Transfer (CST). Both the CHT and CST are allocated to all jurisdictions on a per capita basis.
The Table was constructed using the latest tax data generally available which unfortunately for me was 2003. Government will have more up-to-date information i.e. they will have some information now on the distribution of 2004 taxes but it is likely too soon for 2005 in particular for personal and corporate income taxes.
For 2005 and on I would expect to see Alberta become a relatively more important source for federal revenues because of the provinces expanding economy. Alberta hasn't received any Equalization payments since 1964.
So McGuinty's concern is that even though his province is the major source for federal revenues, if the federal government uses the Equalization program to give provinces some of the federal surpluses, then Ontarians will have paid for most of the federal largess, but get nothing.
Premier Klein seems less concerned in general about having Albertans pay for the federal government to give other provinces its taxpayers money by way of Equalization as long as the sharing isn't too much -i.e. the share isn't determined by including resource revenues.
This latter part I'll have to explain by going through how Equalization is determined -to be continued.
Technorati Tags: Canada, Equalization, Federal Provincial Relations, Fiscal imbalance