Decentralization, Provincial Tax Autonomy and Equalization in Canada · 2016-03-29 · Equalization...
Transcript of Decentralization, Provincial Tax Autonomy and Equalization in Canada · 2016-03-29 · Equalization...
1June 2008
Decentralization, Provincial Tax
Autonomy and Equalization in Canada
2
Overview
What are the interrelationships/connections
between the high degree of tax
decentralization and provincial tax autonomy
in Canada, on the one hand, and Canada’s
Equalization program, on the other?
• Decentralization
• Tax AutonomyEqualization
3
Three Themes
The origins of Canada’s Equalization program are
closely tied to tax decentralization. The program has
helped make decentralization acceptable to provinces
with lower fiscal capacities.
The degree to which fiscal disparities can be equalized
in Canada is limited (constrained) by the high degree
of tax decentralization
The substantial variation among provincial tax
systems in Canada poses significant challenges in
terms of fiscal capacity measurement and the
determination of equalization payments
4
The Canadian Constitution allows for a high
degree of decentralization
The Constitution Act gives provinces
• primary responsibility for (what have turned out to be)
some of the most important expenditure areas: social
welfare, health care, education, etc.
• access to, and full discretion over, most major revenue
sources: personal and corporate income taxes, sales
taxes, estate taxes, natural resource taxes and
royalties, property taxes, etc.
5
A defining feature of the evolution of the Canadian
federation in the postwar period is a gradual by persistent
decentralization of fiscal responsibilities
Federal and Provincial-Local Shares of Government
Expenditure, Excluding Inter-Governmental Transfers
20%
30%
40%
50%
60%
70%
80%
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Sh
are
of
To
tal
Provincial-Local
Federal
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From its beginnings in 1957, the Equalization program has
helped to make tax-decentralization acceptable to revenue-
poor provinces
The Equalization program was launched in 1957
in conjunction with a major tax decentralization
for personal and corporate income taxes and
inheritance taxes.
Without the program, the devolution of tax shares
to provinces would not have been acceptable to
revenue-poor provinces.
As tax decentralization progressed, the
Equalization program has continued to play a
central role in making decentralization acceptable
to provinces with lower fiscal capacities.
7
Tax Decentralization
Canada is one of the most tax-decentralized federations in
the world.
Tax Revenue of State and Local Government Sub-Sectors as
Percentage of Total Tax Revenue, 2005
2.1%
14.8%
8.5%
24.0%21.4% 20.1%
25.1%
38.4%
3.0%
9.4%
5.0%7.8%
14.1%
15.6%
8.4%
1.1%
0%
10%
20%
30%
40%
50%
Mex
ico
Austra
lia
Austri
a
Belgi
um
Ger
man
y
Uni
ted
State
s
Switz
erla
nd
Can
ada
Perc
en
t o
f T
ota
l
Local Government
State/Province/LänderGovernment
Source: OECD Revenue
Statistics, 1965 - 2006
State/Province/Länder
and Local government
revenues are shown as a
percentage of total tax
revenues, including
revenues of federal
government, social
security funds (separate
government sub-sector)
and supranational
governments.
29.0%
40.7%
34.2%
17.8%
29.2%
17.9%
3.2%
46.8%
8
Provinces and municipalities together raise significantly
more revenue than the federal government
Federal, Provincial, and Local Government Shares of Own-Source
Revenue: 1961 to 2006
42.5%
46.2%
11.2%
0%
10%
20%
30%
40%
50%
60%
70%
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Sh
are
of
To
tal
Ow
n-S
ou
rce
Re
ve
nu
e
Federal
Provincial
Local
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Tax Autonomy
Canadian provinces have the highest degree of tax
autonomy among state-level sub-central governments
in the OECD federations
Tax-Autonomy of State/Province/Länder Governments, 2002
8683
4636
10
1110
7
5464
9098
0%
20%
40%
60%
80%
100%
Ger
man
y
Austri
a
Austra
lia
Belgi
um
Switz
erla
nd
Can
ada
Perc
en
t o
f S
tate
Reven
ue
Full discretion on rates andreliefs
Rates and reliefs set bycentral government
Tax sharing arrangement
Full or partial discretion onrates only
Other
Source: “Fiscal Autonomy of Sub-
Central Governments”, OECD
Network on Fiscal Relations Across
Levels of Government, 2006.
10
Tax Differences Among Provinces
Canadian provinces have access to virtually all tax fields, including some not available to the federal government.
Provinces have full discretion over the choice of tax bases and tax rates, although they are able to freely participate in federal-provincial income and sales tax harmonization agreements.
The result is a set of provincial tax regimes with some commonalities but which generally differ significantly among one another.
11
Even for income taxes there are growing
differences among provinces
Traditionally, the greatest degree of
commonality has been in the area of personal
and corporate income taxes.
But even here, there is a trend towards
greater differences.
New tax collection arrangements with the
federal government give provinces the
flexibility to choose their own rate structures
and their own tax credits for personal income
taxes.
12
Personal and corporate income tax regimes
differ significantly
There are differences in statutory rate
structures, overall effective tax rates, and tax
reliefs to individuals and firms.
Statutory Tax
Rates
Average
Effective Rate
NL 10.57% to 18.02% 8.98%
PEI 9.80% to 16.70% 7.41%
NS 8.79% to 17.50% 8.03%
NB 9.68% to 17.84% 7.63%
QUE 13.21% to 19.82% 9.61% <-- High
ONT 6.05% to 11.16% 7.91%
MAN 10.90% to 17.40% 8.25%
SASK 11.00% to 15.00% 7.43%
ALTA 10.0% 6.59%
BC 6.05%-14.70% 5.48% <-- Low
Personal Income Tax: 2006
Average
Effective Rate
NL 9.9%
PEI 14.0% <-- High
NS 10.9%
NB 11.8%
QUE 7.4% <-- Low
ONT 10.9%
MAN 9.7%
SASK 11.7%
ALTA 7.5%
BC 7.4%
Corporate Income Tax: 2006
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For other taxes, differences are generally
more substantial than for income taxes
General sales tax systems differ greatly across provinces.
There are important differences in
• payroll taxes,
• product specific consumptions taxes, and
• revenues derived from government business enterprises (electricity, alcohol, lotteries, casinos, etc.)
For property taxes there is a more or less common base, but rates differ by municipality and property use (residential, commercial, farm, etc.)
Resource taxes, which are a very important source of revenue for some provinces, are completely unharmonized.
14
Pre-Equalization Fiscal Disparities
Compared to some other federations, there are large pre-
equalization fiscal disparities among regions in Canada.
Per Capita Fiscal Capacity, 2008-09
$7,176
$4,909
$5,881
$5,140
$6,196
$7,365
$5,646
$8,002
$13,660
$7,481
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
NL PE NS NB QC ON MB SK AB BC
Do
llars
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Disparities in Fiscal Capacity for Natural
Resource Revenues
Natural resource are a particularly important source of
fiscal disparities in Canada
Per Capita Resource Fiscal Capacity, 2008-09
$2,070
$2
$359
$87 $96 $50$199
$2,030
$3,868
$692
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
NL PE NS NB QC ON MB SK AB BC
Do
llars
Average
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Because fiscal disparities are large, there is
a high “need” for equalization.
Fiscal Capacity Index
60
80
100
120
140
160
180
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
Nati
on
al
Ave
rag
e =
100
Quebec
Ontario
Alberta
Resource-Rich Provinces (AL,SK, BC, NL)
Non-Resource-Rich Provinces(ON, QC, MB, PEI, NS, NB)
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The Canadian Equalization program reduces
horizontal disparities only partially
-4,000 -2,000 0 2,000 4,000 6,000
Prince Edward Island
New Brunswick
Manitoba
Nova Scotia
Quebec
Newfoundland
Ontario
Saskatchewan
British Columbia
Alberta
-2,000 0 2,000 4,000 6,000
Prince Edward Island
New Brunswick
Manitoba
Nova Scotia
Quebec
Newfoundland
Ontario
Saskatchewan
British Columbia
Alberta
Pre-equalization Post-equalization
Large disparities remain after equalization, notably
between Alberta and the other nine provinces.
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Equalization
The principle of equalization is enshrined
in the Canadian Constitution:
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.
(Subsection 36(2) of the Constitution Act)
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The Equalization Program
This graph shows the basic mechanics of the program
as it has operated throughout most of its history
Equalization: Illustrative Example of Basic Mechanics
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
PE NB MB NS NL QC SK ON BC AB
Do
lla
rs P
er
Ca
pit
a
Standard
Equalization
Own-Source Fiscal Capacity
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Increasing decentralization has led to a
lowering of the standard
The Equalization standard has changed several
times throughout the history of the program.
• Examples: Top-2 province standard in 1957, 10-province
standard in 1962, 5-province standard in 1981.
With increasing decentralization, the trend has
generally been towards a lowering of the
standard.
Increasing decentralization has resulted in higher
fiscal disparities, making it more difficult (costly)
for the federal government to equalize to a given
standard.
21
Natural resource revenues have played a key role
in the history of Equalization
Relative Per Capita Fiscal Capacity, 1972-73 to 2007-08
50
100
150
200
250
1972-73 1977-78 1982-83 1987-88 1992-93 1997-98 2002-03 2007-08
Alberta
Resource-rich
provinces
Quebec
Ontario
Resource-poor provinces
22
Equalization payments for 2008-09 total
$13.6 billion dollars
Equalization Payments ($ millions)
2004-05 2005-06 2006-07 2007-08 2008-09
Newfoundland and Labrador
(NL) 762 861 687 477 158
Prince Edward Island (PEI) 277 277 291 294 322
Nova Scotia (NS) 1,313 1,344 1,386 1,465 1,465
New Brunswick (NB) 1,326 1,348 1,451 1,477 1,584
Quebec (QC) 4,155 4,798 5,539 7,160 8,028
Ontario (ON)
Manitoba (MB) 1,607 1,601 1,709 1,826 2,063
Saskatchewan (SK) 772 89 13 226
Alberta (AB)
British Columbia (BC) 682 590 459
Total 10,894 10,907 11,535 12,925 13,620
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Fiscal capacities are equalized, but provinces are left
free to choose actual levels of taxation and expenditure
The Equalization system is only meant to provide
provinces with the capacity to provide reasonably
comparable levels of services at reasonably
comparable tax rates.
But provinces are free to choose any actual level of
taxation and any actual level of expenditure they want.
Given their high degree of tax and expenditure
autonomy, provinces in fact make significantly different
choices.
24
Provinces choose to impose substantially
different tax rates…
Provincial-Local Fiscal Capacity, Own-Source Revenue, and Tax Effort, 2006-07
Fiscal Capacity Per
Capita
Own-Source Revenue Per
Capita Tax Effort
NL $6,250 $6,728 107.6%
PE $4,864 $5,162 106.1%
NS $5,637 $5,800 102.9%
NB $5,152 $5,282 102.5%
QC $6,117 $7,079 115.7%
ON $7,273 $7,310 100.5%
MB $5,519 $5,982 108.4%
SK $7,681 $8,863 115.4%
AB $12,765 $9,833 77.0%
BC $7,121 $7,073 99.3%
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… and to provide significantly different
levels of government services.
Total Expenditures of Provincial-Local Government Sector, 2006-07
Provincial-Local Government Expenditure
($ Per Capita)
Percent of Average
NL $11,051 103.7%
PE $10,002 93.8%
NS $10,564 99.1%
NB $10,045 94.2%
QC $11,931 111.9%
ON $10,107 94.8%
MB $10,842 101.7%
SK $11,625 109.1%
AB $10,751 100.9%
BC $9,664 90.7%
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Other major transfers to provinces and territories also
have important equalizing effects
Canada Health
Transfer
EqualizationWait Times Reduction
Transfer
Canada Social
Transfer
Territorial
Formula
Financing
$12.9 billion
$21.3 billion
$9.5 billion
$1.2 billion $2.2 billion
Major Transfers, 2007-08
27
The CHT and CST are equalizing because federal taxpayers
in richer provinces contribute more to the funding of these
transfers
Net Redistribution of Revenue Through CST and CHT, 2005-06
($ million)
Gross
transfer
Origin of federal revenue to fund
transfer
Net transfer
NL 488 -341 148
PEI 131 -100 31
NS 889 -658 230
NB 713 -487 227
QC 7,205 -5,789 1,416
ON 10,903 -12,082 -1,179
MB 1,114 -814 300
SK 988 -765 222
AB 2,166 -4,023 -1,857
BC 4,037 -3,575 462
Total 28,634 -28,634 0
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Equalization and Tax-Autonomy: Measuring
Tax Disparities
The high degree of tax autonomy of Canadian provinces poses important measurement challenges for equalization.
Because of the high degree of tax autonomy of provinces, the use of actual revenues is not possible in Canada.
The approach that has been used in Canada since 1967 to measure the relative fiscal capacities of provinces is the representative tax system (RTS) approach.
29
Representative Tax System
The RTS approach determines fiscal capacity by measuring the per capita revenue provinces could(potentially) raise if they implemented a typical (“representative”) provincial tax system.
Fiscal capacity is measured separately for each provincial and local government revenue source.
The fiscal capacity of each province for each revenue source is measured by applying the national average effective tax rate to the representative tax base for each provinces.
A key challenge is to define a common “representative” base for each revenue source, given that the actual tax bases of the 10 provinces may differ greatly.
30
Measuring Fiscal Capacity for Natural
Resource Revenues
Measuring fiscal capacity for resource revenues has always presented a special challenge for Equalization.
The key reason for this is that provinces generate natural resource revenues through taxes on the volume or value of the resources produced.
But while tax rates are directly applied to statutory volume or value bases, provinces are actually (though indirectly) taxing economic rent.
31
Natural Resource Bases
Volume and value bases were used in the past for Equalization purposes – as well as one economic rent base (for revenues from mining).
On the advice of an expert panel, the government moved to the use of actual revenues for natural resources in 2007. The inclusion rate for natural resource revenues was reduced to 50%.
32
Federal-Provincial Fiscal Arrangements
Issues for Canada
1. Size of the Equalization program
2. Treatment of natural resource revenues in Equalization
3. Sharing of Alberta’s resource rents
4. Transfer of further tax room
5. Use of the federal spending power
6. Tax harmonization
7. Reassignment of tax fields
33
Federal-Provincial Fiscal Arrangements
Issues (cont’d)
1. Size of the Equalization program
2. Treatment of natural resource revenues in Equalization
3. Sharing of Alberta’s resource rents
4. Transfer of further tax room
5. Use of the federal spending power
6. Tax harmonization
7. Reassignment of tax fields
8. Use of the federal spending power