One Plus Two Equals Seven; Equalization Payments Hurt My Brain
July 26th, 2006 | by MadHacktress |I wanted to write about equalization payments but I haven’t learned enough about the process yet to form a coherent thought. I like to be able to not only express my opinion but also to relate some information and insight in to the topics that I write about. Equalization payments, their calculation and impact is a complicated matter.
There are currently 33 factors used to calculate the “national average” for equalization payments, up from the original three factors defined in the Tax Rental Agreements (corporate income tax, personal income tax, and succession duties). What all of these 33 factors are, I don’t know and have not been able to find mention of them online.
The national standard - the magic number which the Federal Government ensures each province has on hand to provide to its residents, per capita - is calculated based on 33 marker categories of the five so-called middle-class provinces. These consist of all of the provinces between Quebec and the Pacific, with the exception of Alberta (apparently the only “high-class” province in the nation).
A series of calculations are needed in order to reach the magic number. Here’s a bit more detail:
A frame of reference is built by calculating average tax rates (based on the 5 provinces) for each of the 33 revenue generating categories. This hypothetical set of taxes is then taken and applied to each province to see how much revenue they could generate if they used this common tax model. The next step is to find out how much cash this works out to, per person in the province (this is where some provinces make out much better than others).
Each province is then gone over, category by category to see where they compare to the national average. In some categories provinces will be over the national averages and in some they will be under. These positive and negative values are added up to give the total per capita entitlement for the province. If they come out with a net value that is over the national average (such as Ontario has for all of history) then they receive no equalization payment.
Before leaving office, Paul Martin made a commitment to increase the funding to the equalization program by 33 billion dollars over 10 years. This established a new floor for payments and he indicated that payments would never dip below 10 billion dollars again.
Since in 2004-2005 the “natural” course of equalization would have only caused 8.9 billion dollars to be doled out to the provinces who receive payments, that extra 1.1 billion was distributed to the provinces based on a slightly different formula - this meant that provinces such as P.E.I. and New Brunswick, which receive higher per capita payments (because of smaller populations) ended up making out better than other provinces.
The big winner in 2004-2005 was Saskatchewan which, because of another special calculation within the program that included some sort of retroactive calculation received 586 million dollars in extra equalization actually ended up being equalized to higher-than-Ontario standards. This is a one-time thing for Saskatchewan, however.
In 2005-2006 the equalization payments made were 10.9 billion, 2.0 billion of that was the “extra” equalization payments made under the new calculation. In coming years this new formula will significantly change the way that equalization works. In the 10 years following 2003-2004 payments will rise some 65.2%, compare to a 7.8% rise between the previous ten years.
The program is reviewed every five years, automatically, and can be changed by the government at any time. At least until 2007-2008 under the current formula the payments seem to no longer be strictly concerned with actually equalization the fiscal capacity of the provinces since some provinces receive part of the “extra” cash that is used to top up the program to Paul Martin’s 10 billion plus 3.5 percept per year floor.
There are other side deals included in the equalization payments program, agreements (the “Atlantic Accords” between the Federal Government and Nova Scotia and Newfoundland) regarding the collection of taxes and revenues from offshore oil resources (which technically belong to the Federal Government but which it allows to be collected by these provinces). Additional stipulation include such details as a change between the dollar-for-dollar reduction in equalization payments when revenues are generated from non-renewable resources. Newfoundland, Saskatchewan, Quebec and Nova Scotia all benefit from this “Generic Solution” as it is termed. This solution allows those provinces to keep 30 cents on the dollar from non-renewable resources in their territory.
An Expert Panel released a Key Issues paper this spring which gives summary and recommendations regarding the future of the program. I am currently working my way through reading (and, hopefully, understanding) this document now. When I have a better grasp on things I’m sure that I’ll have more to say on the subject and, probably just about when I feel that I actually understand the whole process, the Federal Government will change it all on me.
Entry Filed under: General, Pure Opinion
I ain’t touching this one with a 10 foot pole… :-P
It’s the third-rail of Canadian politics if you will.
K
Pee on it… I dare you!!