Equalization payments in Canada
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In Canada, the federal government makes equalization payments to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity"—their ability to generate tax revenues. A province that does not receive equalization payments is often referred to as a "have province", while one that does is called a "have not province". In 2013–14, six provinces will receive $16.105 billion in equalization payments from the federal government.
Equalization payments are based on a formula that calculates the difference between the per capita revenue yield that a particular province would obtain using average tax rates and the national average per capita revenue yield at average tax rates. The current formula considers five major revenue sources (see below). The objective of the program is to ensure that all provinces have access to per capita revenues equal to the potential average of all ten provinces. The formula is based solely on revenues and does not consider the cost of providing services or the expenditure need of the provinces.
Equalization payments happen via the federal treasury. As an example, a wealthy citizen in New Brunswick, a so-called "have not" province, pays more into equalization than a poorer citizen in Alberta, a so-called "have" province. However, because of Alberta's greater wealth, the citizens of Alberta as a whole are net contributors to Equalization, while the citizens of New Brunswick are net receivers of Equalization payments.
Equalization payments are one example of what are often collectively referred to in Canada as "transfer payments", a term used in other jurisdictions to refer to cash payments to individuals (see Canadian transfer payments). The money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee "reasonably comparable levels" of health care, education, and welfare in all the provinces. The definition of "reasonably comparable levels", however, has been the subject of considerable debate.
In 2017-2018, the total amount of the program was roughly 18.3 billion Canadian dollars.
Recent negotiations surrounding the renewal of the program have created considerable tension among provinces. Due to the zero-sum nature of the formula, increases in entitlements for some provinces necessarily lead to decreases for others.
Regional fiscal disparities in CanadaEdit
There are significant differences in the provinces in terms of size, geography, population, and economic activity. While there has been considerable convergence in provincial gross domestic product per person and personal incomes among the regions over the last fifty years, the gap between the most and the least well-off provinces continues to be a primary economic concern.
|Prince Edward Island||6,186||146,736||42,157||33,632|
|Newfoundland and Labrador||30,100||528,676||56,935||35,345|
Quebec will receive the most from equalization payments in the 2017-2018 year. However, per capita, PEI benefits the most.
In the 2017-2018 year, the following provinces will receive equalization payments:
- Quebec ($11.081 billion)
- Manitoba ($1.820 billion)
- Nova Scotia ($1.779 billion)
- New Brunswick ($1.760 billion)
- Ontario ($1.424 billion)
- Prince Edward Island ($390 million)
The following provinces will not qualify for equalization payments in 2017-2018:
- British Columbia
- Newfoundland and Labrador
Sources of fiscal capacityEdit
The fiscal capacity of the provinces is determined by measuring their revenue from five general sources. Those revenue categories are:
- Personal income taxes
- Business income taxes
- Consumption taxes
- Up to 50 percent of natural resource revenue (see below)
- Property taxes and miscellaneous
Note: According to the Department of Finance, "provinces get the greater of the amount they would receive by fully excluding natural resource revenues, or by excluding 50% of natural resource revenues."
The basics of equalization payments have been around since Canadian confederation when the federal government had most of the taxation powers. The federal government would make transfer payments to the provinces to cover their needs. There was no obligation that these transfer payments had to reflect the amount collected in each province and thus wealth was always redistributed.
A formal system of equalization payments was first introduced in 1957. The idea was based on the proposals of American economist James M. Buchanan and they were introduced mainly to help the struggling Atlantic provinces who were seeing low rates of growth and high rate of emigration to central Canada.
The original program had the goal of giving each province the same per capita revenue as the two wealthiest provinces, Ontario and British Columbia, in three tax bases: personal income taxes, corporate income taxes and succession duties (inheritance taxes). Five years later, 50 per cent of natural resource revenues were included as the fourth tax base. At the same time, however, the standard of the two wealthiest provinces was lowered to the national average. In 1967 the system was redesigned to work with every government revenue scheme with the exception of energy; this gave Canada by far the world's most generous system of equalization payments.
The rise in energy prices and the resulting increase in provincial natural resource royalties in the late 1970s created several problems for the equalization formula. The need for amendments to the formula became clear when the traditional "have" province of Ontario qualified for equalization payments in 1978. This result went against the spirit of the system and would have led to substantial costs for the federal government; it was agreed that Ontario should be excluded from receiving payments. In 1982, the equalization standard was shifted from the national average to the average of the five "representative" provinces: British Columbia, Saskatchewan, Manitoba, Ontario, and Quebec.
The Canada Act 1982, which amended the constitution, included the rights of the poorer provinces to equalization payments. Subsection 36(2) of the Constitution Act, 1982 states that "Parliament and the government of Canada are committed to the principle of making Equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation." It is unlikely that this provision will be amended.
In 2004, the federal government and the provinces agreed to suspend the traditional formula that determined payment amounts and move to fixed funding levels, which were scheduled to grow at a fixed rate - regardless of the economic performance of the provinces.
In 2007, based on the recommendations of a federal expert panel, the program was returned to formula-driven calculations and enhanced by moving to a standard based on the national average. A fiscal capacity cap was added to ensure that Equalization-receiving provinces couldn't be raised to a fiscal capacity above that of a non-receiving province (this could potentially arise due to the partial or non-inclusion of resource revenues). This faced criticsm from Premier of Newfoundland and Labrador Danny Williams who criticsed the Conservative government of breaking their promise of not changing the current fourmula. This lead to the Anything But Conservative movement. 
In 2009, the fiscal capacity cap was modified and a ceiling and floor on aggregate payments were added.
Normally, under the equalization scheme, equalization payments go down for every dollar increase in a province's ability to raise taxes. So, for example, if a province's economy booms and the provincial government's potential income tax revenues increase, equalization payments decrease. Economist Michael Smart has argued that this gives have-not provinces an incentive to raise taxes, because any harm higher taxes do to the economy is off-set by higher equalization payments.
A have-not province also loses equalization for every additional dollar it makes from royalties off the sale of its natural resources, thereby creating a disincentive for developing those resources. To protect Newfoundland and Labrador's equalization payments, premier Danny Williams negotiated the Atlantic Accord  which provided that province with a special arrangement until 2012. Nova Scotia reached a similar arrangement with the federal government.
Former Quebec Premier Bernard Landry was critical when Quebec was receiving an extra $1.5 billion in equalization payments calling it degrading Quebec status and accused Ottawa for short-changing the province for decades by stating"Receiving equalization payments for more than 40 years in a row is clear evidence that the central government failed in redistributing real wealth,". 
Late January 2012, based on access to the uncensored version of a 2006 censored federal report by Peter Gusen, then director of federal-provincial relations at the finance department, entitled 'An Operational Expenditure Need Equalization Formula for Canada', the Toronto Star alleged that Ontario and BC were shortchanged in the equalization system because wages and cost-of-living expenses were never taken into account by Ottawa.
The originator of idea, American economist James M. Buchanan admitted that this idea had flaws and it had created a long-term effects in creating a culture of dependency on the part of the citizenry and their political leaders in provinces with relatively low fiscal capacities. 
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