Fiscal and the Future of Selected Proceedings from the Conference – September 28-29, 2006

Fiscal Federalism and the Burden of History Garth Stevenson*

Can anything be done to end the Foreword In September of 2006, Queen’s Institute of intergovernmental disputes over fiscal Intergovernmental Relations hosted Fiscal Federalism federalism? Thousands of Canadians have and the Future of Canada, a conference organized by probably asked themselves this question since Sir the then IIGR Director Sean Conway, Peter Leslie and John A. Macdonald’s offered “better

Christian Leuprecht. Given that several of the terms” to a discontented Nova Scotia in January conference presentations dealt with the future of 1869, an initiative which provoked perhaps equalization and given that the 2007 federal budget will outline the Harper government’s preferred future predictable complaints (and demands for for equalization, the Institute felt it appropriate to compensation) in the legislative assembly of 1 publish these contributions in working paper format . Although the fiscal structure of the prior to the federal budget. Canadian state has actually changed beyond recognition over nearly a century and a half, the Appropriately this working paper series begins with continuity of provincial discontent with our brief summaries of the two commissioned reports on intergovernmental fiscal arrangements, and of the equalization and territorial formula financing – one rhetoric with which it is expressed, is certainly from the Council of the ’s Advisory Panel impressive. Only the weather has been as durable on Fiscal Imbalance and the other from the federal a source of Canadian unhappiness, and even that Expert Panel on Equalization and Territorial Formula Financing. These will be followed by analyses by may decline in importance with global warming. other conference participants whose contributions will relate to these two proposals as well as to the larger The controversy over “fiscal imbalance” fiscal federalism issues now in play. The views which has persisted for much of the first decade expressed in these working papers are those of the of the twenty-first century, and the seemingly authors, not those of the Institute of Intergovernmental associated, although actually distinct, problem of Relations. how to redesign the system of equalization payments, would probably not surprise Sir John, As the only organization in Canada whose mandate if he could look down upon our present is solely to promote research and communication on discontents. The sheer size of the numbers the challenges facing the federal system, we are pleased to introduce these working papers into the involved, even when adjusted for inflation, might public debate on equalization and fiscal imbalance disturb his thrifty Scottish soul, and the growing irrelevance of the constitutional distinction Thomas J. Courchene between “direct” and “indirect” forms of taxation Acting Director might be somewhat unexpected. Fundamentally, February 2007 though, the politics of fiscal federalism and intergovernmental relations are pretty much the * Department of Political Science Brock same as they were when the herds of buffalo Unviersity. roamed across the unfenced prairies between the Red River and the Rockies and when rafts of pine timber still floated past the Parliament Buildings on their way to the busy seaport of Quebec. The problem of fiscal federalism is two-fold,

Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 6 1 Garth Stevenson, Fiscal Federalism and the Burden of History although the distinction between its parts is not calculation (admittedly rough since yields depend always obvious. In the first place, both the federal on rates of taxation and responsibilities can be and provincial (to which some might add the interpreted in ways that involve varying degrees municipal) levels of government should have of expense) one could then decide which tax access to enough revenue to carry out their sources should be provincial, which federal, and responsibilities effectively and without financial which divided between the two levels of strain. This happy situation, if and when government. achieved, is referred to as one of vertical balance. In the second place, the disparity in the resources The economic disparities that lead to available to different at the same horizontal imbalance between provinces, which level should not be so great that it exposes some are more pronounced in Canada than in some Canadians to hardship depending on where they other , obviously complicate the live, and ideally not so great that it influences search for an ideal system. A specific kind of their decision about where to live. This happy, taxation, or taxation in general, will yield far and even more elusive, situation is referred to as more revenue per capita in a rich province than in one of horizontal balance. a poor one, while the financial resources needed to carry out provincial responsibilities in an Ideally, both kinds of balance should be adequate manner will be pretty much the same for achieved with a minimum of intergovernmental both. Therefore to achieve a semblance of transfers, since accountability and responsibility horizontal, as well as vertical, balance it will be are greater when decisions about spending money necessary to relax the rule that intergovernmental are made by the same government that has to grants should be kept to a minimum. If we make raise it. Accountability would also benefit, one this concession, however, it should be fairly easy suspects, from making the system simpler and to estimate a level of grants to the poor province easier to understand than it is at present. that would bring its per capita revenue up to the Additionally, each level of government should level of its more fortunate neighbour. In fact have access to suitable kinds of revenue, meaning Canada’s system of equalization, which has mainly taxation, which are neither inefficient nor existed for half a century and been inequitable, and which have little or no impact constitutionally entrenched for the latter half of outside the borders of the territory for which that that period, is supposedly intended to do so, more government is responsible. or less.

While it is easy to state these various Given these general principles, why is it so requirements, it is far more difficult to achieve difficult to achieve a distribution of revenues, them, particularly since they are not always whether from taxes, grants, or a combination of compatible with one another. If all the provinces both, that is satisfactory to all the provincial or states in a federation were equally prosperous, governments? A cynic might say that provincial and thus had equal capacities to raise revenue politicians have nothing to gain, and much to from their own resources in proportion to the size lose, by appearing to be satisfied. Even aside of their populations, the problem of horizontal from the old aphorism that the squeaky wheel imbalance would, by definition, not exist. If in gets the grease, it is far easier and more addition the economies of the provinces or states convenient to attribute the deficiencies of one’s were similar enough to one another that the highways, hospitals, universities or schools to the various possible sources of revenue and their distant federal government, which is generally relative importance did not vary significantly inhibited by constitutional propriety and self- from one province to another, the achievement of respect from responding to the verbal abuse that vertical balance with minimal recourse to is thrown in its direction, than it is to repair the intergovernmental transfers would be a fairly deficiencies. Blaming other provincial simple exercise. It would merely be necessary to governments is more hazardous, since they are match sources of revenue and their potential to more likely to take offence, and since their co- yield revenue with an estimate of the resources operation may be required subsequently in the needed to carry out the constitutional endless battle to win concessions from “Ottawa”. responsibilities of each level. On the basis of this However, even that may be more convenient than

Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 6 2 Garth Stevenson, Fiscal Federalism and the Burden of History admitting that the source of the province’s federalism provides a good example to support all problems might lie within its own borders, or of these observations. The constitution of 1867 even within the walls of its legislature. Thus it is was designed for an economy based on unlikely that provincial grumbling over fiscal agriculture and natural resources, and a society in federalism would ever cease, even if the system which social services were mainly provided by were to approach perfection. the Catholic Church in Quebec and by private charities elsewhere. It included complex This having been said, it does not follow that provisions related to public finance, of which the efforts to improve the system are pointless. following were the most important: In sections 91 Accountability, simplicity, efficiency, equity, and and 92 the provinces were restricted to “direct” fairness as between the various governments of taxation, which was not expected to be of major our federation are goals worth pursuing, whether importance, giving Parliament the exclusive right or not those who would benefit from progress to impose “indirect” taxes, of which the customs towards these goals appear to be grateful. But to tariff was then the most important. Section 109 understand the current state of fiscal federalism gave the provinces ownership of natural and the direction in which it should go, one must resources, above and below ground, and access to understand where it came from. This paper will any revenues from that source. (Unlike the United begin with a sketch of the origins and States, Canada would follow the English common development of the institution which we call law principle that mineral resources, even under fiscal federalism, will consider recent proposals privately-owned land, belong to the Crown, i.e. for reform, and will conclude by suggesting how the province.) Section 111 transferred existing the system might be improved. The paper will provincial debts to the central government. deliberately avoid the question of whether Section 118 provided for modest federal subsidies municipal government should be recognized as a to the provinces. There were also a number of third order of government with guaranteed access financial provisions referring uniquely to a to certain kinds of revenue, not because the specific province, setting a pattern that would be question is unimportant, but because it should be followed as new provinces were added to the the subject of another paper. original four.

HOW WE GOT HERE The most significant developments between In his book Politics in Time, Paul Pierson 1867 and the end of the twentieth century, reminds us that ongoing policies are a type of significant in the sense that they make a lasting institutions, that institutions are the product of contribution to path dependence, may be listed as long processes of change, and that their current follows: situation is the result of many incremental changes over time. At any given time institutions 1869: “Better terms” for Nova Scotia establish or policies rarely correspond closely, in their the precedent that additional grants to any characteristics or their effects, with the intentions province may be made at the discretion of of their founders, even if the founders had any Parliament. long-term objectives to begin with, which is not always the case. Pierson also suggests that the 1887: The Judicial Committee of the Privy timing and sequence, or ordering, of various Council authorizes a provincial developments, changes, and decisions affects the corporation tax in Bank of Toronto v. outcome, or the shape and consequences of the Lambe.3 institution or policy at any point in time. In addition he suggests that the choices made over 1907: After consultation with the provinces, the time may lead in the direction of additional constitution is amended to replace choices at a later date, and may close off (or at Section 118 with a new allocation of least make unlikely) choices and options that statutory subsidies. British Columbia is might otherwise have been pursued. He refers to dissatisfied with the outcome, but the this tendency as path dependence. 2 precedent that the provinces will be consulted before any significant The incremental development of Canadian amendment to the constitution is

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established. 1957: Equalization payments, similar to the 1917: Federal income tax is imposed for the adjustment grants recommended by first time. It is widely assumed to be a Rowell-Sirois, begin, but they will be temporary expedient to pay for the war, allocated by the federal government which the British and its allies according to a formula fixed by appear to be losing. Parliament and not by an Australian-style independent commission as Rowell- 1927: The Maritime provinces begin to receive Sirois had recommended. Initially they special subsidies on a regular basis, are paid to all provinces except Ontario. allegedly to compensate for the damage done to them by federal economic 1957: The federal government begins to subsidize policies. provincial programs of universal hospital insurance, the beginning of what will 1930: The three western provinces carved out eventually be the largest single item of of the Hudson Bay Company’s territories public expenditure in Canada. (which had been annexed by Canada in 1869) are given control over their lands 1959: Quebec, which has prevented its and resources, placing them in the same universities from accepting the federal position as the other provinces. grants paid to universities in the other provinces, agrees to pay comparable 1937-9: The Rowell-Sirois Royal Commission grants itself, in return for which the recommends that the provinces cease federal tax on corporation income in imposing income, corporation and estate Quebec is reduced, with a corresponding taxes. In return the federal government increase in the provincial tax. will (again) take over all their debts, will pay “Adjustment Grants” to the less 1962: The tax rental system is formally interred, affluent provinces, and will assume with the provinces now free to impose various additional responsibilities. The any level of income and corporation tax, recommendations are not implemented. but the federal government will continue to collect those taxes on behalf of any 1942: For the duration of the war (and in practice province that wishes it to do so. More somewhat longer) the provinces “rent” significantly, the federal government their power to impose income, promises to reduce its income tax corporation and estate taxes, in return for incrementally over the next five years, additional subsidies. At the same time the allowing the provinces to occupy an federal government introduces the increasing share of the field. This practice of deducting personal income tax reinforces the principle, which arguably at the source of income. dates from 1954, that the level of federal taxation is negotiable at the behest of the 1943: The Judicial Committee of the Privy provinces. Council authorizes a provincial sales tax, which is rather dubiously 1965: Federal legislation allows any province to alleged to be “direct”, in Atlantic Smoke “opt out” of health insurance and an Shops v. Conlon.4 Eventually every assortment of other shared cost programs, province except Alberta will have a retail meaning that federal grants to the sales tax. province will be terminated and replaced by reductions in federal direct taxation 1954: Quebec imposes a personal income tax and within that province, provided the the federal government agrees that the province agrees to continue a comparable amounts paid can be credited against the program. As anticipated, Quebec “opts liability to pay federal tax. This out” of all the programs but no other effectively ends the tax rental system. province takes advantage of the

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legislation. 1991: The federal government introduces a 1967: The federal government begins to pay Goods and Services Tax (GST) to replace grants to the provinces for post-secondary the archaic indirect tax on manufactured education, rather than making grants goods and urges the provinces to directly to the colleges and universities. harmonize their retail sales taxes with the GST. Only Quebec agrees to do so, and 1977: The federal grants in aid of health also to collect the GST within Quebec on insurance and post-secondary education behalf of the federal government. are replaced by a singularly complex arrangement known as Established 1996: Five years later a new government Programs Financing (EPF) which reaches agreement with Newfoundland, consists of tax abatements and cash Nova Scotia and New Brunswick grants in roughly equal proportions. whereby those provinces will abolish Federal income and corporation taxes are their retail sales taxes in return for reduced so that the provinces can sharing the proceeds of the GST, which is increase their own taxes by a like fixed at a level of 15 per cent in those amount, but since this opportunity will three provinces, compared to 7 per cent provide greater benefits for some in the other provinces. In return they are provinces than for others, the abatements promised a subsidy of $961 million over are sweetened with “associated four years. equalization” for those that require it. At the same time Quebec retains its existing 1996: EPF, or more precisely the cash portion abatements as a result of the of it, is replaced with a single block grant arrangements made in 1959 and 1965. In known as the Canada Health and Social addition the provinces receive annual Transfer (CHST) The federal government cash grants such that the combined per continues to claim that the tax abatements capita yield of the tax abatement and the made almost two decades earlier should grant will be approximately the same for be counted as part of its contribution to each province. To achieve this, the poorer health care and post-secondary education, provinces which benefit less from the a claim disputed by the provinces and by abatement receive larger per capita cash almost everyone else. Eight years later payments than the richer provinces. CHST will be replaced with two block grants, the Canada Health Transfer 1982: Federal responsibility to make (CHT) and the Canada Social Transfer equalization payments “to ensure that (CST) provincial governments have sufficient revenues to provide reasonably This is an admittedly selective list, and some comparable levels of public services at might say that the list should be reasonably comparable levels of considerably longer. In particular, there have taxation” is entrenched in the been several major changes in the formula for constitution. At the same time, another calculating equalization payments since 1957, provision allows provincial indirect taxes with the formula used to calculate the revenue on natural resources. base becoming increasingly complex and comprehensive. The standard against which 1991: In Reference re. Canada Assistance Plan, provincial revenues are assessed has been the Supreme Court of Canada rules that variously based on the two richest provinces the federal government can unilaterally (1957-62 and 1964-7), the average of all reduce or otherwise alter its payments to provinces (1962-4 and 1967-82), or the average a provincial government (in this case for of the five provinces closest to the overall the Canada Assistance Plan) without average (1982 to 2007, although not strictly seeking or receiving the consent of the adhered to after 2004). provincial government.5

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Likewise there have been numerous changes evolved through a series of incremental changes, in the system whereby the major direct taxes (on most of them at the behest of the federal incomes and corporations) are shared between the government although some of them in response to two levels of government. Up to and including complaints by one or more provinces. Second, 1977 the changes mainly took the form of there has hardly ever, in 1867 or later, been any reducing federal taxes so that the provinces could serious effort to treat all the provinces alike or occupy a larger share of the revenue source in according to a fixed set of principles and question. After 1977 this practice was standards. Third, the changes have made the abandoned, largely because of a series of fiscal system increasingly complex and difficult to deficits at the federal level which lasted until understand, which has reduced accountability and almost the turn of the century. Instead, the had a detrimental effect on the quality of public provinces have been allowed increasing debate about fiscal federalism. Fourth, since the flexibility in imposing their taxes, in an effort to changes have been made in response to short- prevent them from collecting the taxes on their term problems or concerns, it is impossible to own behalf, so that the relationship between identify any consistent purpose or direction provincial and federal taxes has become behind the evolution of fiscal federalism or increasingly tenuous, and the paperwork imposed indeed any consistent set of outcomes, apart from on the taxpayer increasingly onerous. Why the making the system more complex and increasing federal government wishes to continue collecting the elements of asymmetry among the provinces. taxes for the provinces is not entirely clear, but it Fifth, most of the changes have resolved one has largely succeeded in its objective. Only problem but at the expense of creating one or Quebec collects its own personal income tax (as it more new problems. has done without interruption since 1954) and only Quebec, Ontario and (since 1981) Alberta The untidy and seemingly directionless collect their own corporation taxes. However, at evolution of Canadian fiscal federalism tends to the end of the twentieth century the provinces confirm Pierson’s generalizations about the slow stopped calculating their provincial income tax as and incremental way in which institutions evolve, a percentage of the federal tax, forcing their long- as well as their failure to conform to any long- suffering taxpayers to do all the mathematical term goals and expected outcomes that might calculations twice. The federal government have existed at the beginning. The conclusions of continued to collect the taxes for them the preceding paragraph also give credence to the nonetheless. concept of path dependence. Path dependence occurs because the costs of changing an existing These incremental changes in policy have pattern of behaviour appear to be greater than the taken place, of course, against a massive costs of staying the same, even when staying the backdrop of social and economic change, same has obvious disadvantages. It is particularly including a nearly ten-fold increase in the characteristic of fields, such as federal-provincial population, the shift from an economy largely of relations, in which change requires co-ordinating self-employed farmers and fishers to an the behaviour of several distinct actors. industrial, and now increasingly post-industrial, economy of wage and salary earners, the All of the characteristics of Canadian fiscal development of the welfare state, and in recent federalism outlined above–incrementalism, years a rapidly aging population. In the process of asymmetry, excessive complexity, short-term all these changes the major items of state orientation, and the tendency of one “solution” to expenditure have shifted dramatically since the create a new problem–became evident at a very Second World War from infrastructure and early stage in its development. To some extent defence to health care, education, welfare and they were inherent in the fiscal provisions of the pensions. Interest on the substantial public debt, British North America Act, and they were of course, also accounts for a large share of state decisively and perhaps irreversibly reinforced by expenditures at both levels. the “better terms” given to Nova Scotia when the ink was scarcely dry on the original document. A few conclusions can be drawn from the One of the early students of Canadian fiscal history summarized above. First, the system has federalism, James Maxwell, asserted long ago

Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 6 6 Garth Stevenson, Fiscal Federalism and the Burden of History that the “better terms” of 1869 “made a breach in the constitution not yet repaired.”6 While If vows of abstinence were rarely observed Maxwell had a valid point, the constitution itself for long, federal remorse more typically took the encouraged such a breach with its very complex form of special arrangements for Quebec, or else fiscal arrangements and its plethora of provisions efforts to withdraw (more or less) from existing applying to particular provinces. programs and hand them over to the provinces. Rapidly escalating and unpredictable costs Two other major instances of path provided another motive to proceed in the latter dependence arose from decisions made in the direction. Efforts to do so were constrained, middle decades of the twentieth century. First, the however, by the continuing belief in the wartime tax rental agreements, taking effect in Department of Finance that the federal 1942, created a lasting bias in favour of government must collect a sufficiently large integrating or “harmonizing” the federal and amount of taxation to pursue Keynesian fiscal provincial systems of direct taxation, a bias that policy, even though such policy was no longer was reinforced by the then-fashionable Keynesian being (if it ever had been) seriously pursued. The approach to macro-economic policy. Of course result of these conflicting pressures and motives the simplest way to set the stage for Keynesian reached the reductio ad absurdum of EPF, which, policies would have been for the provinces to complex as it was, had perforce to be vacate the major fields of direct taxation, as superimposed over the “opting out” arrangements recommended by the Rowell-Sirois Commission. made a dozen years earlier for Quebec. How This was politically and perhaps constitutionally many persons, if any, actually understood EPF is impossible, and Keynesianism was eventually a question that it would perhaps not be tactful to discarded anyway, but the ghost of the idea has ask. A few years after it came into force Donald lingered on in the notion that the federal V. Smiley, the most influential Canadian government should collect taxes for the provinces federalism scholar of his generation, introduced (or vice-versa as in the case of Quebec and the his last book with the following confession: “In GST) even if no discernible purpose is served particular, I have nothing to say about fiscal thereby. The fact that American federalism gets federalism–a subject which I once tried to along perfectly well without such a practice is comprehend but which, I am now convinced, is rarely if ever acknowledged. so complicated that one should either cultivate it as a full-time specialty or leave it alone entirely.”8 Second, the postwar development of shared Despite its dysfunctional absurdity, the ghost of cost programs, (in defiance of the Rowell-Sirois EPF has lingered on through several subsequent Commission, which had disapproved of them on shifts in fiscal arrangements. The fact that the grounds that they lacked efficiency and federal government almost three decades later accountability) entangled a whole host of new was still counting the all but forgotten “tax issues with the already complex politics of fiscal points” given up in 1977 as part of its federalism. These programs were particularly “contribution” to the costs of health care is a resented in Quebec, where they seemed to classic instance of path dependence. threaten that province’s original understanding of . In 1957 no less an authority than THE “FISCAL IMBALANCE” DEBATE Pierre Elliott Trudeau, then a free-lance Between 1984 and 1996 two federal intellectual, pointed out that federal spending in governments, and two ministers of finance, areas of provincial jurisdiction raised the question systematically pursued the goal of reducing the of whether the federal government should more federal deficit, which had risen to a dangerous appropriately give up some taxing room to the level by the end of the Trudeau years.9 Immediate provinces.7 However, subsequent governments success was not possible, but a combination of (including to some extent his own) found the tax reform (mainly the introduction of the GST in temptation to spend in these areas hard to resist, 1991), reductions in program spending (most particularly since these types of expenditures dramatically in the Martin budget of 1995), and a seemed to interest and attract Canadian voters revival of the North American economy that more than the equally important subjects coincided with the election of President Bill enumerated in Section 91 of the constitution. Clinton in 1993 eventually brought the series of

Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 6 7 Garth Stevenson, Fiscal Federalism and the Burden of History deficits to an end. By 1997 the federal deficit had to fulfill their responsibilities.”11 This was not disappeared, and over the next few years federal particularly surprising for two reasons. First, budgetary surpluses were unexpectedly large. there is a tendency in polls to respond positively This achievement, inevitably, was viewed as to any proposition that sounds fairly plausible, being partly at the expense of the provinces, since especially if the respondent is not well-informed funds that had been channelled through them about it. Second, health care, the most expensive accounted for a large share of the reductions in provincial responsibility, was at this time the program spending. Nonetheless, the provinces main preoccupation of Canadian voters, while also benefited from the improvement in the North some of the most important and expensive federal American economy, so that by 1996-97 only responsibilities, such as national defence, external three provinces still had significant deficits, one aid, immigration, employment insurance, and of which was Prince Edward Island with its 0.4 programs for indigenous peoples, touch the per cent of Canada’s population.10 Unfortunately average voter less directly and have, to put it the two other exceptions were Quebec and politely, less popular appeal. In fact it is probably Ontario, which together account for about five- surprising that the percentage expressing eighths of the population. agreement with the statement was not higher.

Quebec’s sovereignist government, The commission completed its investigations disappointed in its objective of winning more promptly than is usual for such bodies, and independence for Quebec and approaching the the Séguin report appeared in the spring of 2002. end of the eight years that seems to be the normal The report claimed that “Fiscal imbalance has life span of Quebec governments, sensed a been one of the major issues of the Canadian politically potent issue in these facts, and the federation since the mid-1990s”, or in other issue of “fiscal imbalance” was born. More words since the major cuts to fiscal transfers in precisely, the Quebec government appointed a the federal budget of 1995. It cited a study by the Commission on Fiscal Imbalance on May 9, Conference Board which predicted that in the 2001, including four distinguished academics absence of major fiscal reform Quebec would among its seven members. To give it a bipartisan continue to have deficits every year for the next flavour a former Quebec Liberal minister, Yves two decades, while federal surpluses would Séguin, was appointed as chairman. The choice of escalate each year to reach the astonishing level the commission’s name seemed to suggest that its of nearly $90 billion by 2019-20. This bizarre conclusions had been determined in advance, an prediction was based on the assumption that impression reinforced by the contents of a federal spending would increase by only 2.1 per discussion paper entitled “Fiscal Imbalance: cent per year, while provincial spending was Problems and Issues” which it released when its projected to increase at a more credible rate of 3.6 investigations had scarcely begun. However, in per cent. (The annual increase in revenues was an effort to demonstrate that the issue was neither projected to be almost the same at both levels: 3.2 inspired by partisan politics nor unique to per cent for the federal government and 3.1 per Quebec, the commission consulted a respected cent for the provinces.) The very low anticipated conservative research organization, the rate of increase in federal spending was entirely Conference Board of Canada, which endorsed the attributed to a rapid decline in the cost of view that a “fiscal imbalance” existed. The servicing the federal public debt, a trend based on Séguin commission also sponsored a survey of the dubious assumption that the federal public opinion across Canada on the question. government would use all of its surpluses to Finally, the commission held public hearings, reduce the size of the debt. In fact the report although only in Quebec. predicted, very questionably, that the federal debt would virtually disappear within two decades, In the Canada-wide survey of public opinion, even though the federal level of government has 66 per cent of those polled (and 71 per cent of never been free of debt since it assumed the then- respondents in Quebec) agreed with the existing debts of the provinces in 1867. proposition that “the federal government has too much revenue for the responsibilities that it has The Séguin report blamed the present and while the provincial governments lack revenues future fiscal imbalance on three factors:

Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 6 8 Garth Stevenson, Fiscal Federalism and the Burden of History imbalance between spending responsibilities and significantly alter the Canadian system of fiscal sources of revenue, inadequate intergovernmental federalism. It proposed that the CHST be transfers, and the federal tendency to use its abolished and replaced by a new division of tax “spending power” in areas of provincial room between the two levels of government. This jurisdiction. The last of these factors would seem might take the traditional form of giving the to be more a consequence than a cause of the provinces a larger share of the income tax, but the federal government’s greater affluence, but the commission expressed a preference for a federal commission argued that it was a cause because it relinquishment of the GST in favour of the distorted provincial priorities, had a destabilizing provinces. It also recommended reforming effect by making provincial budgets vulnerable to equalization by basing it on a ten-province federal decisions, and tended to take the form of standard, eliminating the ceiling and floor on highly visible short-term projects rather than equalization payments, and improving the ongoing contributions to routine expenditures. calculation of tax bases, particularly by None of this was entirely new since very similar measuring capacity to raise property taxes on the complaints had been frequently made by the basis of assessed value. Finally, it recommended provincial governments, with Ontario taking the that Quebec continue its interminable campaign lead as often as Quebec, since at least as far back against the legitimacy of the federal spending as the 1950s. (The Séguin commission itself power and that it continue to demand an noted examples of such complaints over the unconditional right to opt out of shared cost preceding few years, but did not pursue the programs, receiving financial compensation in history of the issue further back than 1997) . return.12

In its extended analysis of the three factors, In response to the Séguin report Stéphane the report predictably devoted considerable Dion, who was then the federal minister of attention to health care, an almost obsessive intergovernmental affairs, denied that there was a preoccupation of Canadians at that time, as a vertical fiscal imbalance at all. Dion questioned large and rapidly growing burden on provincial the methodology of the Conference Board’s finances. ( It predicted that education spending, calculations on which Séguin had relied. Quite on the other hand, would grow much more rightly, he doubted the usefulness of any effort to slowly, as would spending on most of the major calculate financial data two decades in advance of federal responsibilities.) The report claimed that the facts. He pointed out that recent federal the Canada Health and Social Transfer (CHST) surpluses had been small in relation to the deficits by which the federal government shares the costs of the not so distant past and also in relation to of both health and post-secondary education, was the size of the federal debt, that all governments inadequate in size, subject to arbitrary and faced financial pressures, and that the provinces unpredictable changes, and (more questionably) had the constitutional authority to increase their that it “penalizes the less affluent provinces”. tax revenues if necessary. Also, the fact that some (Soon afterwards, Ontario would not only deny of them had reduced taxes indicated that they the last of these assertions but would claim were not really suffering.13 exactly the opposite) Equalization, the other major federal transfer to the provinces, was also In the following year the Quebec Liberals criticized in practice, although strongly supported returned to office, continuing the Quebec in principle. The main complaints in this regard tradition whereby no governing party since the were that it was based on a five-province standard Quiet Revolution has won more than two general (excluding resource-rich Alberta from the elections in succession. Yves Séguin became calculation), that it was subject to a ceiling, and minister of finance, a position he held until 2005. that the tax bases used to calculate equalization In March 2004 the National Assembly were poorly defined and incomplete. Thus it was unanimously adopted a motion calling on the alleged that Quebec received a much smaller federal government to recognize the existence of equalization payment than it should receive. the fiscal imbalance and to take measures to counteract its effects.14 The Séguin commission made a number of recommendations that would, if implemented, In September 2004, however, Prime Minister

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Paul Martin, largely defused the “fiscal provincial revenues in relation to GDP since the imbalance” issue, at least in its original form, by 1990s, largely because of federal tax reductions. unveiling what was billed as “A 10-year plan to It also pointed out, as Stéphane Dion had done strengthen health care”, reversing the cuts to earlier, that the provinces had access to virtually federal health care spending which he had every significant source of revenue and that their imposed as minister of finance almost a decade share of total state revenues exceeded that of the earlier and promising increased funding for health subnational governments in any other federation. care in future.15 As part of this package the CHST Simultaneously with the release of this document was divided into a Canada Health Transfer and a a long-overdue increase in military spending, Canada Social Transfer, with the former partly in response to the war in Afghanistan, scheduled to increase significantly in size over made allegations that the federal government had the next decade. This initiative deprived vertical more revenue than it needed increasingly difficult fiscal imbalance of much of its importance as a to sustain. political issue, at least outside of Quebec and to some extent even there. Yves Séguin was At the same time, the budget implemented a dropped from the Quebec cabinet in a shuffle a Conservative election promise by reducing the few months later. However the Council of the GST from seven to six per cent, with a further Federation, a permanent interprovincial body reduction promised later. If the government was recently established at the initiative of Quebec’s daring the provinces to raise their sales taxes by a Liberal Premier Jean Charest, appointed an comparable amount, and thus help to redress the Advisory Panel on Fiscal Imbalance to alleged vertical fiscal imbalance, there were investigate the issue in 2005. (predictably) no takers. Was this merely a lack of courage, or a tacit admission that the vertical A NEW GOVERNMENT AND A SERIES OF fiscal imbalance was a myth? REPORTS The issue of fiscal imbalance was given a The issue of horizontal fiscal imbalance, new lease on life by the federal Conservative meaning fiscal disparities among the provinces leader, Stephen Harper, who promised during the themselves, proved to have both a broader appeal election campaign of 2005-06 to do something and a longer shelf life, although, almost by about it if his party was elected to office. This definition, it is an issue on which consensus promise received some of the credit for the among the provincial governments is virtually Conservative victory, and particularly for the impossible. This issue had not been entirely unexpected election of ten Conservative members ignored by the Séguin report, but that report was of Parliament from Quebec. primarily concerned with vertical fiscal imbalance, possibly in the hope that concentrating Yet, after he became Prime Minister, Harper on the latter issue would facilitate a broad and his minister of finance, Jim Flaherty, began coalition among the provincial governments to to soft-pedal the issue, despite the fact that put pressure on “Ottawa”. However, the financial Flaherty had held the same office in the circumstances of the various provinces are so provincial government of Ontario a few years different from one another that a concerted earlier. A lengthy document released with campaign on any fiscal issue, however defined, Flaherty’s first budget in 2006, which promised makes little sense. Alberta can hardly make a to maintain the increases in health care funding serious claim to be in need, and does not do so. promised earlier by the Liberals, convincingly For the eight provinces that depend, to varying refuted most of the arguments in the Séguin degrees, on equalization payments, a campaign report.16 It asserted that Quebec’s deficit was around the issue of equalization is probably more expected to disappear in the current fiscal year, likely to bear fruit than one on the more nebulous that the fiscal balances of the federal and issue of vertical fiscal imbalance. provincial levels of government had followed very similar trends since 1995-96, that federal Thomas J. Courchesne, one of Canada’s transfers for health care were growing faster than leading economists, has suggested that Quebec provincial spending on health care, and that shifted its attention from vertical to horizontal federal revenues had declined more rapidly than balance because it calculated that, as the principal

Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 6 10 Garth Stevenson, Fiscal Federalism and the Burden of History recipient of equalization, it would get about half premiers of Newfoundland and Labrador and of any additional equalization forthcoming from Nova Scotia. This provided that any revenues the federal government, but only about a quarter received by those provinces from offshore oil and of any additional funds made available by gas would have no effect on the size of their surrendering tax room to the provinces.17 But substantial equalization payments. (Saskatchewan there were other reasons as well why the issue of and British Columbia, which would have horizontal imbalance began to occupy the centre benefited from a similar arrangement for their of the stage, almost before the ink was dry on the non-renewable resources, received nothing in Séguin report. First, Ontario in 2003 elected a return.) Newfoundland and Labrador would also Liberal provincial government headed by Dalton receive a payment of $2 billion to retire a portion McGuinty. The new premier charged that Ontario of its debt.20 This politically-motivated as a rich province was being unfairly agreement, which seemed like a return to the era discriminated against in the allocation of federal of “better terms” before formal equalization was funds, particularly the block grants for health and established, bequeathed a political hot potato to post-secondary education. His government began Stephen Harper, who had further muddied the a campaign for “fairness”, complete with its own waters himself by an ill-advised promise that non website. McGuinty also complained on more than renewable natural resource revenue bases would one occasion that Ontario and Alberta taxpayers be excluded from the calculation of the contributed most of the revenue that supported equalization formula.21 the equalization program, and that Ontario taxpayers could not afford to make the program 2006 saw the publication of three major any more generous.18 While more subtle than reports on fiscal federalism, one of which was Premier Mitch Hepburn’s complaint in the 1930s devoted entirely to equalization while the two that Ontario was “the milch cow of the others devoted considerable attention to it. A ”, the message was essentially the fourth report, on the economic prospects and same. financial needs of Canadian cities, appeared early in 2007. The first off the mark, in March 2006, Second, in 2004 the federal Liberal was the report of the Advisory Panel on Fiscal government announced controversial changes in Imbalance, which bore the rather unfortunate title the equalization program, described as “A New Reconciling the Irreconcilable.22 Co-chaired by Framework for Equalization”, almost Robert Gagné, an economist nominated by the simultaneously with the more popular increases Premier of Quebec, and Janice Gross Stein, a in health care funding.19 Although the Liberals political scientist nominated by the Premier of implied that the new approach would make Ontario, the five-member panel also included a equalization more generous, the reality was that a Conservative senator from Nova Scotia, a former cap was placed on the amount of equalization to Deputy Minister of Intergovernmental Affairs be paid each year, with a fixed rate of increase in from Alberta, and a former Minister of Finance subsequent years. This was similar to the from the Northwest Territories. Like the Séguin arrangement for health and social transfers, but commission, it argued that vertical fiscal totally unprecedented for equalization. The press imbalance was a genuine problem, although its release promised that the allocation of this fixed forecasts regarding federal surpluses were amount among the provinces would eventually be considerably more conservative than Séguin’s. determined by the recommendations of a “panel However, it did not recommend any transfer of of experts”, rather than by the formula that had tax room to the provinces. Instead it proposed been in use for more than twenty years. Pending changes to the CHT and CST which would the receipt of those recommendations, it would be abandon the fiction that the tax abatements of on a per capita basis, which seemed to make little 1977 were part of the federal contribution, sense if the purpose of the program was to increase the size of the cash grants, give the same counteract horizontal fiscal imbalance. per capita cash grant to each province, and thus remove the unequal treatment of rich provinces of Finally, Prime Minister Martin, about a year which Premier McGuinty had complained. before leaving office, made an ill-advised agreement known as the Atlantic Accord with the As regards equalization, the panel suggested

Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 6 11 Garth Stevenson, Fiscal Federalism and the Burden of History a more generous formula which would be based as provincial capacity to raise revenue. It was on a ten-province rather than the five-province lukewarm at best towards the inclusion of non- standard established in 1982 and would include renewable natural resource revenues in the all revenue from natural resources in the equalization formula, although not totally calculation. This would end the special rejecting the idea. It also drew attention to the arrangements Martin had made with financial needs of municipal and local Newfoundland and Labrador and Nova Scotia, as government, a topic that raises constitutional well as the fixed yearly amount imposed by the sensitivities on the part of provincial governments “New Framework”. Overall the total amount of and was thus largely ignored by the other reports. equalization paid would increase by more than 50 Finally, it suggested that provinces should be per cent, with Quebec benefiting the most from discouraged from competing with one another to the change. The Advisory Panel also proposed reduce taxes. more generous financial treatment for the northern territories and the establishment of a Finally, to complete the series of reports, the permanent First Ministers’ Fiscal Council for Conference Board weighed in early in the new consultation and liaison among the governments. year with a document entitled Mission Possible: Successful Canadian Cities.25 This report argued The second report, only two months later, that the large cities were the sources of most of was that of the “Expert Panel on Equalization and Canada’s wealth and economic growth (a claim Territorial Financing” appointed by the Liberal that might be disputed in some parts of Alberta) government a year earlier and headed by Al and that they needed more taxing powers, and O’Brien, a former Deputy Treasurer in the more access to the revenues collected by higher government of Alberta.23 The panelists also levels of government, in order to carry out their included Fred Gorbet, a former Deputy Minister responsibilities. It was favourably received in of Finance in the federal government. As its name Toronto, where Mayor David Miller had been suggested, this panel had narrower terms of repeating the same argument for some time. reference than the Advisory Panel on Fiscal (Toronto has since launched a campaign, Imbalance. It too recommended returning to the complete with a website and signs on TTC ten-province standard for equalization. However, vehicles, to have one percentage point of the GST it suggested that only 50 per cent of non- transferred to the city.) Whether by coincidence renewable natural resource revenue should be or not, the federal government announced exactly included in the formula rather than 100 per cent, a month later that it would make a massive an option that would make the equalization financial contribution to improving transportation program significantly less expensive for the infrastructure in the GTA, including a long- federal government. Responding to a suggestion discussed extension of the TTC subway. in the Séguin report, the panel also recommended basing the calculation of the residential property Meanwhile the provincial governments tax base on market value assessment, a procedure continued to express very divergent views about that would reduce equalization payments to fiscal federalism. The premiers of all ten British Columbia but increase them to every other provinces met to discuss equalization in Montreal recipient province. in April 2006 and in Toronto in February 2007. In June 2006 Flaherty met with his provincial Two more months elapsed before the counterparts at Niagara on the Lake to discuss the appearance of the third report, commissioned by a same subject in the light of the O’Brien report, moderately left of centre think tank, the Canadian which had just been released. The meetings Centre for Policy Alternatives, and written by an accomplished nothing other than to indicate that economic consultant named Hugh Mackenzie.24 there was no prospect of consensus among the Rather gloomily entitled The Art of the provinces. Ontario, traditionally the richest Impossible, this report attracted less attention than province but now a distant second behind affluent the other two but added some fairly new ideas to Alberta, continued its campaign for “fairness” in the debate on fiscal federalism. It suggested that, the allocation of funding for social programs, and as in Australia, equalization payments should be shocked most of the other provinces by opposing based on a calculation of provincial needs as well any increase in equalization payments.26 Premier

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McGuinty expressed dissatisfaction with the three parties in the Quebec election campaign of report of the Advisory Panel on Fiscal Imbalance, March 2007. However, the Bloc Québécois which he had helped to establish, and continued members of Parliament had threatened in to claim that Ontario’s contributions to federal September 2006 to bring down the minority revenues exceeded by $23 billion, or almost federal government after the presentation of the $2000 per capita, the benefits it received from budget if federal payments to the provinces were federal spending. not increased by $12 billion per annum, including $3.9 billion for Quebec.29 André. Boisclair, the Newfoundland and Labrador, which has leader of the Parti Québécois, briefly mentioned surrendered the unenviable distinction of being the same figure of $3.9 billion in his televised the poorest province to Prince Edward Island debate with the other party leaders on March 13, without losing any of its customary truculence, 2007. Federalists could presumably take comfort was mainly concerned to ensure that its offshore from the fact that it was a more modest request oil and gas revenues would continue to have no than Dalton McGuinty’s $23 billion. impact on its equalization payments, as promised by former Prime Minister . Premier The Harper government’s second budget, Danny Williams, who at one point in 2004 had presented on March 19, 2007, was awaited with ordered the Canadian flag removed from eager anticipation, particularly since the provincial government buildings as a symbolic provincial election in Quebec was to occur a protest against the federal Liberals, denounced week later. As anticipated, “Restoring Fiscal the O’Brien report, whose recommendations Balance for a Stronger Federation” was a major would have resulted in a net loss to his province. theme of the budget.30 More specifically, it Although bearing a Conservative label himself, adopted selected recommendations from the he warned that the federal Conservatives would Séguin and Gagné/Stein reports, while the lose all three of their Newfoundland and Labrador O’Brien report had the greatest influence on the ridings if they cancelled the Atlantic Accord.27 proposals for equalization. From Séguin was taken the idea that the property-tax base for the Saskatchewan, a significant producer of oil, calculation of equalization entitlements would be argued that non-renewable resource revenues based on market value. As proposed by the should not be taken into account in calculating Gagné/Stein report, there was a promise of equal equalization. Alberta, which has no direct per capita cash payments for the CST and the interest in the equalization formula since no CHT, although the latter would not take effect for conceivable formula could make it a recipient of seven years (after the expiration of the Martin equalization, took the same position.(This has government’s ten-year plan for health care been a time-honoured, albeit irrelevant, theme in financing) and was thus a promise of dubious the discourse of Alberta governments, and has value, especially coming from a minority apparently convinced most Albertans that their government. The CST would also be formally provincial government, rather than the federal divided into three component parts, ostensibly one, bears the costs of equalization.) In March earmarked for welfare, post-secondary education, 2007 Alberta’s new Minister of Finance, Lyle and child care. As suggested by O’Brien, Oberg, unexpectedly announced that the province equalization would be based on a ten-province no longer had any objection to the equalization standard, for the first time since 1982, but with formula suggested in the O’Brien report, which only half of non-renewable resource revenues he predicted would be adopted in any event. entering into the calculation. There were also However, Premier Ed Stelmach overruled his improvements in the financing formula for the minister a few days later and declared that northern territories, as recommended by both Alberta’s position had not changed.28 Gagné/Stein and O’Brien. The changes in equalization would remove British Columbia Premier Jean Charest of Quebec, who for from the list of recipient provinces starting in various reasons was well-disposed towards the 2007-08. Equalization payments to new federal government, was generally restrained Newfoundland and Labrador and Nova Scotia in his comments. In fact the “fiscal imbalance” would decline, while payments would increase issue was largely and surprisingly ignored by all substantially: from $5.539 billion to $7.160

Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 6 13 Garth Stevenson, Fiscal Federalism and the Burden of History billion in the case of Quebec and from a provisions of the budget that would particularly negligible $13 million to $226 million for benefit his province or territory, although in the Saskatchewan. Manitoba, New Brunswick and case of Alberta about all that could be said in that Prince Edward Island would receive small regard was a reminder that Al O’Brien had once increases. For the first time in history, Quebec been the Deputy Treasurer of that province.)31 would receive more than half of all the money The ghost of “better terms” still haunts the distributed in equalization payments. corridors of Ottawa.

Two other features of the budget that might Both Premier McGuinty and Premier Charest make Canadian federalism more rational and proclaimed themselves reasonably satisfied with more intelligible should be mentioned. First, the the budget, and Gilles Duceppe of the Bloc government promised not to launch any new Québécois indicated that he would not force an shared cost programs in areas of provincial election after all, since Quebec had received, jurisdiction without the consent of a majority of according to his calculation, about 80 per cent of the provinces, a promise that had been made, what it asked for.32 Although an editorial in Le sincerely or otherwise, by the Liberal government Devoir grumbled that the budget was “too little in the Social Union Framework Agreement of too late” to resolve the fiscal imbalance, its staff 1999. Second, the provinces and territories that cartoonist, Michel Garneau, produced a drawing had not already assumed full responsibility for of a perspiring Jean Charest being carried across labour training programs (British Columbia, the finish line on the back of Stephen Harper and Newfoundland and Labrador, Nova Scotia, Prince exclaiming “I’ve found my second wind!”33 Edward Island and Yukon) would be required to Saskatchewan and Newfoundland and Labrador do so, receiving appropriate fiscal compensation expressed disappointment that non-renewable in return. resource revenues would continue to be included in the equalization formula. However, nothing is ever simple in Canadian fiscal federalism and this budget was no A MODEST PROPOSAL exception to the rule. Although the budget In fairness, the provisions for fiscal promised “comparable treatment for all federalism in the 2007 budget somewhat Canadians”, there were a host of special improved the chaotic situation bequeathed to provisions for particular provinces. The provinces “Canada’s New Government”, as it calls itself, were promised that the shift to per capital grants by its Liberal predecessors. (They could hardly for the CHT and CST would not reduce grants to have made it much worse.) The ten-province any of them. Newfoundland and Labrador and standard for equalization, the change in the Nova Scotia were promised that they could method of calculating the property tax base, and continue to operate under the previous the equal per capita grants for the CST and CHT equalization system for the duration of their are all major steps in the direction of fairness, offshore accords, which would continue in force, although the absurdly long delay in the date but that they could opt into the new equalization proposed for implementing the change to the regime permanently at any time they chose to do CHT, as well as the feeble excuse for the delay, so. Furthermore, all provinces were promised make that promise of no more than symbolic “the greater of the Equalization entitlements importance. If it is ever actually implemented, the under the formula based on a 50-per-cent change to per capita grants will presumably mark exclusion rate and the amounts they would the final interment of the pretence that the tax receive under the same formula based on full abatement of 1977 should still be counted as part exclusion of all natural resource revenues”, a of the federal contribution to health care. provision of particular interest to Saskatchewan. O’Brien’s fifty per cent solution to the problem of This enabled the Prime Minister to state, in a whether or not to count resource revenues in the letter to the premier of Saskatchewan, that “Our equalization formula, while hard to defend on any Equalization plan fully meets our commitments logical grounds, is a pragmatically reasonable on the exclusion of natural resource revenues.” compromise on an issue where consensus was (In fact every premier and territorial government clearly impossible. The division of the CST into leader received a similar letter highlighting the three parts, although not really binding the

Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 6 14 Garth Stevenson, Fiscal Federalism and the Burden of History provinces actually to spend the money as In return, the GST should be completely designated, will give taxpayers some idea of what transferred to the provinces, which could then they are paying for. integrate it with their provincial sales taxes, as Newfoundland and Labrador, New Brunswick Incremental changes in fiscal federalism, and Nova Scotia have already done. The often accompanied by long delays and special provinces could share the proceeds with their side deals, will likely remain the normal municipalities if they so wished. Alberta, which Canadian practice for the foreseeable future. has never had a provincial sales tax, might choose Nonetheless, it may be worthwhile to conclude by to transfer the GST entirely to its municipalities. sketching a more radical set of reforms which Canada’s cities could thus benefit from this tax might increase transparency and accountability without raising constitutional concerns about and would have other benefits as well. federal intrusion in a field of provincial jurisdiction. This change would cost the federal First, the corporation income tax should be government about $32 billion a year, so that the levied exclusively by the federal government. combination of the two changes in taxation would Given the reality of corporate power in the mean a net loss to the federal government of market economy it is questionable whether this about $13 billion. tax is really “direct” in any sense that John Stuart Mill would have recognized. Transferring it To make up at least part of this loss, the CST entirely to the federal level would eliminate the should be phased out. This would remove the need for the abstruse calculations which are used federal government and its spending power from to allocate the income of corporations that do three fields of provincial jurisdiction, while business in more than one province among the preserving the federal role in financing health provincial governments. It would also eliminate care which most Canadians, for better or for the arrangement whereby the federal government worse, seem to consider essential. The CST will presently collects the tax on behalf of seven cost the federal government about $9.5 billion in provinces. In addition, it would simplify 2007-08, and is projected to rise to more than $12 equalization by removing the corporation tax base billion in 2013-14 as a result of an annual from the formula. Most important, it would end increase of three per cent per capita that is the competition among the provinces to promised in the budget. The reduction of federal attract investment by lowering their corporation spending by this amount would not quite cover tax rates, a problem identified in the Mackenzie the net loss to the federal government of the two report. This change would cost the provinces suggested changes in taxation, but there would about $19 billion a year. probably be some reduction in the cost of equalization by removing corporation tax from the formula, even though the GST would be added to the formula.

ENDNOTES 3. (1887), 12 A.C. 575.

4. (1943), A.C. 550. 1. This episode is discussed in Garth Stevenson, Ex 5. (1991), 2 S.C.R. 525. Uno Plures: Federal-Provincial Relations in Canada 1867-1896 (Montreal and Kingston: McGill-Queens University Press 1993), 110-115. 6. J.A. Maxwell, “Better Terms” in Garth Stevenson (ed.), Federalism in Canada: Selected Readings (Toronto: McClelland and Stewart 1989), 392-401 at 2. Paul Pierson, Politics in Time: History, Institutions, 396. The article was first published in 1933. and Social Analysis (Princeton: Princeton University Press 2004) For a thoughtful analysis of the theory and its implications, see Shu-Yun Ma, “Political 7. Pierre Elliott Trudeau, “Federal Grants to Science at the Edge of Chaos? The Paradigmatic Universities” in his Federalism and the French Implications of Historical Institutionalism”, Canadians (Toronto: Macmillan 1968), 79-102. International Political Science Review, 28:1 (January Although Trudeau wrote this article in 1957, it is 2007), 57-78.

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significant that he chose to publish it again when he 22. Advisory Panel on Fiscal Imbalance, Reconciling was a candidate for the leadership of the Liberal the Irreconcilable Ottawa: Council of the Federation Party. 2006)

23. Expert Panel on Equalization and Territorial 8. Donald V. Smiley, The Federal Condition in Formula Financing, Achieving a National Purpose: Canada (Toronto: McGraw-Hill Ryerson 1987), xi. Putting Equalization Back on Track (Ottawa: Department of Finance 2006) 9. See Geoffrey Hale, The Politics of Taxation in Canada (Peterborough: Broadview 2002), 187-190, 201-202, 225-227. 24. Hugh Mackenzie, The Art of the Impossible: Fiscal Federalism and Fiscal Balance in Canada (Ottawa: 10. Karin Treff and David B. Perry, Finances of the Canadian Centre for Policy Alternatives 2006) Nation 1996 (Toronto: Canadian Tax Foundation 1997), 2:1-2:20. 25. Paul Waldie, “Cities must have more economic clout, report says”, The Globe and Mail, February 6, 11. Commission on Fiscal Imbalance, A New Division 2007. of Canada’s Financial Resources (Quebec 2002), 11- 12. 26. Paul Samyn, “McGuinty Breaks Ranks with 12. The recommendations are in Commission on Premiers”, The National Post, April 13, 2006. Fiscal Imbalance, op. cit., 131-156. 27. Daniel Leblanc, “The Rock proves a hard place for 13. Stéphane Dion, “An Artificial Consensus”, open Harper”, The Globe and Mail, October 16, 2006. letter sent to newspapers on October 11, 2002. 28. Steven Chase, “Confrontation looms over 14. Cited in “Déséquilibre fiscal”, La lettre du Parti equalization plan”, The Globe and Mail, March 15, Québécois, 17:9 (19 mars 2004). 2007.

15. Prime Minister of Canada, “A 10-year plan to 29. Daniel Leblanc and Steven Chase, “Bloc demands strengthen health care” (September 16, 2004) $12 billion in transfers to back Tories”, The Globe and Accessed from the prime minister’s web site on Mail, September 22, 2006. November 5, 2004. 30. Details that follow are from Canada, Department of 16. Canada, Department of Finance, Budget 2006: Finance, Budget 2007: Restoring Fiscal Balance for a Restoring Fiscal Balance in Canada, Focusing on Stronger Federation, accessed from the department’s Priorities. web site on March 19, 2007.

17. Thomas J. Courchesne, “Variations on the 31. All the letters were available on the prime federalism theme”, Policy Options, 27:7 (September minister’s web site, March 19, 2007. 2006), 46-54. 32. Kathleen Lévesque, Robert Dutrisac, Antoine 18. See Dalton McGuinty, “Fairness for all-including Robitaille, “Un progrés pour le Québec, selon les Ontario”, The National Post, April 13, 2006. chefs”, Le Devoir, 20 mars 2007.

19. Canada, Department of Finance, A New 33. “J’ai trouvé mon deuxième souffle!”, Le Devoir, 20 Framework for Equalization, n.d. Accessed from the mars 2007. Department of Finance website on June 9, 2006.

20. Atlantic Accord Atlantique, The Agreement. Accessed from the web site of the government of Newfoundland and Labrador on February 15, 2007.

21. “PM promised six times, Williams says”, The National Post, January 24, 2007.

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