INTERGOVERNMENTAL TRANSFERS AND CANADIAN VALUES: RETROSPECT AND PROSPECT Thomas J. Courchene In this article Thomas Courchene reviews the historical rationale for and evolution of Canada’s system of intergovernmental financial transfers. One key building block, he says, was the introduction in 1954 of Quebec’s personal income tax, because this led to directly to the decentralization of Canadian income taxation and the system of equalization payments. In turn, this facilitated the role of federal cash and tax transfers in developing provincially run social programs in health, education and welfare. With this in place, the challenges on the transfer front had to do with surging energy revenues and the resulting difficulty of Ontario becoming a have-not province, initially in the 1973-82 era, and again in the current time frame. The author concludes with a set of perspectives that may come to the rescue. Après avoir retracé les fondements historiques et les éléments constitutifs du système de transferts financiers intergouvernementaux, Tom Courchene explore quelques pistes intéressantes pour l’améliorer. L’introduction en 1954 de l’impôt des particuliers au Québec, dit-il, constitue un des piliers de ce système, car il a directement entraîné la décentralisation du système fiscal canadien et permis l’arrivée des paiements de péréquation. En retour, ceci a favorisé l’utilisation des transferts en espèces et en points d’impôt fédéraux pour soutenir le développement des programmes sociaux en santé, en éducation et en sécurité du revenu gérés par les provinces. Par la suite, c’est l’essor des recettes de l’énergie qui posera problème, notamment en faisant de l’Ontario une province moins nantie, de 1973 à 1982 et de nouveau cette année. L’auteur propose en conclusion quelques pistes qui pourraient aider à solutionner l’impasse. ll is far from well on the federal-provincial fiscal rate of nominal GDP), irrespective of the likelihood that arrangements front. The equalization-receiving interprovincial fiscal disparities have, for the most part, A provinces are concerned that the combination of a been decreasing. fixed equalization pool (albeit escalating annually), on the And all of this without recognizing that the elephant in one hand, and the reality that populous Ontario has joined the room — carbon pricing and the resulting revenue allo- the have-not provinces, on the other, will significantly cation between Ottawa and the provinces — may be about reduce the value of their equalization payments. Drawing to stir. Peter Lougheed may yet be proved correct when he on analysis from Winnipeg’s Frontier Centre for Public suggested that the federal-provincial and interprovincial Policy, Alberta spokespersons have aired the concern that struggle over the revenues arising from carbon pricing may Canada’s system of federal-provincial transfers is over-equal- well overshadow the National Energy Program donnybrook. izing, with the result that the poorer provinces are able to For these and other reasons it seems appropriate, as part deliver enhanced levels of public services than can some of the federal-provincial relations theme of this issue, to pro- richer provinces (e.g., higher teacher-student ratios, more vide a historical overview of the evolution of and rationale physicians and nurses per capita). In other quarters there is for Canada’s system of federal-provincial financial relations. concern, thanks to Paul Martin’s 2004 10-year accords, that Arguably, the most appropriate starting point is the intro- health transfers are growing by 6 percent annually, while duction of Quebec’s 15 percent personal income tax (PIT) in inflation is only in the 2 percent range, and that the equal- 1954. The trigger for this action was the attempt by Ottawa in ization pool is increasing annually (currently at the growth 1951 to transfer monies directly to the universities, i.e., 32 OPTIONS POLITIQUES MAI 2010 Intergovernmental transfers and Canadian values: Retrospect and prospect bypassing the provinces. Not surpris- tial program equalized the revenues additional transfers from Ottawa to ingly, Premier Maurice Duplessis from the PIT, CIT and succession duties the provinces in the form of equalized viewed this as an unwanted intrusion to the average of the top two provinces personal income tax points. in an area of Quebec’s exclusive juris- (Ontario and British Columbia, with Thus the shift from federally fund- diction, an intrusion made possible in Ontario emerging as the only non- ed, federally regulated/administered large measure by Ottawa’s superior equalization-receiving province). programs to shared cost programs under access to revenues. In order to counter Hence, Canada’s formal equalization provincial design and administration, this, Quebec realized that it also needed program clearly finds its origins and and finally to autonomous provincial additional revenue sources. Hence its rationale in accommodating the programs funded by effectively uncon- introduction of the PIT and that tax’s Quebec PIT. While equalization is typi- ditional grants and equalized tax-point role as the symbol of provincial auton- cally viewed as benefiting only the transfers is not only a model for decen- tralized federations every- All of this without recognizing that the elephant in the room where, but is witness to the — carbon pricing and the resulting revenue allocation creative ability that between Ottawa and the provinces — may be about to stir. Canadians and their govern- ments can bring to the gov- Peter Lougheed may yet be proved correct when he ernance of our federation. suggested that the federal-provincial and interprovincial At this juncture several struggle over the revenues arising from carbon pricing may further observations are in well overshadow the National Energy Program donnybrook. order. First, suppose that a federal country operates a omy, created as much as a bulwark receiving provinces, a case can be made progressive income tax and uses the pro- against the exercise of the federal that equalization also benefits the rich ceeds to provide expenditures that are spending power as an instrument to provinces. This is so because, without roughly equal per capita. While similarly generate revenues, per se. an equalization program in place, situated citizens (e.g., same income, However, the implications of the Ottawa would not have ended up same family composition) will pay iden- Quebec PIT turned out to be both dra- transferring anywhere near as much in tical amounts of taxes no matter where matic and far reaching. The first of these the way of tax room to the provinces they reside, it will nonetheless be the was the decision by the federal govern- that it eventually did. More to the case that provinces with higher-income ment, as part of the 1957 Tax Sharing point, the traditional have-not residents will find that their residents Agreements, to offer all the provinces provinces would have stood in the way. (but not the provinces themselves) are the option of levying their own taxes (or A third and truly transformative paying more to Ottawa than they are receiving an abatement or reduction in implication arising from the above receiving from the equal per capita federal tax) equal to 10 percent of the analysis draws from the writings of expenditures. This is the inevitable and federal PIT, 9 percent of the federal cor- Claude Forget. He points out that, appropriate consequence of the opera- porate income tax (CIT), and 50 percent prior to the Quebec PIT, if the tions of an income tax system, progres- of succession duties, with the federal provinces wanted a new program in an sive or even proportional. I would government agreeing to collect the area of exclusive provincial jurisdic- hazard a guess that it is this natural oper- provincial taxes free of charge. Because tion, the obvious route was to amend ation of the PIT (and CIT, etc.) that these provincial revenues from piggy- the constitution and transfer this accounts for much to the “excess contri- backing on federal taxes were to be allo- power to Ottawa. This was what bution” that Ontario (earlier) and cated across provinces on the basis of the occurred for unemployment insurance Alberta (now) claim that they are mak- derivation principle (i.e., on the basis of in 1940 and for old age pensions in ing to the financing of the federation. what was actually raised in each 1951. However, the key spending pro- Yet, the reality is that individual province), they generated very different grams that came after the Quebec PIT Albertans and Ontarians are treated per capita revenues across provinces. and the above-noted associated devel- identically to similarly situated Nova opments, namely hospital insurance, Scotians. A related observation is that no his led to a second key implication medicare, post-secondary education province ever transfers any of its own- T of the Quebec PIT: in order to and social assistance, were provincially source revenues to Ottawa or to its sister compensate for these per capita differ- administered programs with federal provinces, although one often hears ences in this federal move toward tax cost sharing. Moreover, while the cost comments from various quarters that sharing, Ottawa inaugurated Canada’s sharing initially took the form of con- seem to imply this. formal equalization program, also as ditional grants, these eventually part of the 1957 quinquennial rework- became unconditional and, to a con- ow that the funding of equaliza- ing of the fiscal arrangements. This ini- siderable degree, were replaced by N tion has been broached, a third POLICY OPTIONS 33 MAY 2010 Thomas J. Courchene observation is in order. Because the rev- combined with those of other have- nd all of these were a prelude to enues subject to equalization in the not provinces with a low or zero oil A the infamous National Energy 1957 version of equalization (PIT, CIT tax, brought the total to the above- Program (NEP) in the fall of 1980, and succession duties) were shared with noted 75 cents.