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https://www.policyschool.ca/unpacking-canadas-equalization-payments-2018-19/
With all this in mind, equalization asks a simple question: How much revenue would each province raise with tax rates equal to the national average? This is a province’s “fiscal capacity”. If a province would raise less than the average amount, per person, the federal government tops it up. I illustrate the 2018/19 results below.
Total payments (in blue) add to $18.96 billion in total, and range from $70 per person in Ontario to $2,835 per person in Prince Edward Island.
A number of taxes and other information go into determining fiscal capacity. Lags in data mean 2018-19 payments use data only up to 2016-17. And to help improve the stability and predictability of payments from year to year, the formula also uses an average of the three prior years. So, the latest payments are based on 2014-15, 2015-16, and 2016-17. Here’s the results:
Notice that even the 2016-17 data reveals very high fiscal capacity for Alberta — higher than all other provinces, at $11,637 per person — even during the depths of its recent recession. That being said, the recession did have an effect. Alberta’s fiscal capacity is 19% lower in 2016-17 (the recession’s bottom) than it was in 2014-15 (its pre-recession peak). This drop largely reflects the lower household and business income associated with low oil prices, along with the drop on government resource revenues.
But why does Alberta have a deficit if its fiscal capacity is so high? Simple: its tax rates are low. To illustrate this, I plot Alberta’s actual revenue as a percentage of what could be raised if each province had tax rates equal to the current national average. Alberta is, by far, the lowest tax jurisdiction (nearly 30% below the national average) while Quebec is the highest (nearly 30% above). Alberta’s deficit is a choice, and largely unrelated to the federal equalization program.
The 2018/19 Payments
When calculating actual equalization payments, there are a few complications and important subtleties to consider beyond just fiscal capacity. And they can matter a lot.
In the first column of the following table, I display the basic results from what is “step 1” of the formula (which simply tops provinces up to the “average”). In the last column, I display the amount each province receives in 2018/19. For Ontario and Quebec, there are notable differences.
The middle four columns reflect various adjustments to the basic formula. First, there’s a “best of” feature of the formula whereby provinces are evaluated with 50% of resource revenues included and with 0% included. Whichever results in the highest equalization payment is what a province is entitled to.
Second, since the formula doesn’t count all resource revenues, there are situations where an equalization receiving province could benefit “too much” from the program. This year, and at this stage of the formula, Ontario isn’t an equalization receiving province which makes things simple: If a province receiving equalization would be made better off than Ontario, then the excess is clawed back. This is called the “fiscal capacity cap” (FCC).
To illustrate, Newfoundland and Quebec, including all revenue sources and their pre-FCC equalization, would have total per capita fiscal capacities of $10,794 and $8,990 respectively. But Ontario has total capacity of only $8,832. Thus, Newfoundland loses all its equalization entitlement and Quebec has $158 per person clawed back so it does not exceed Ontario (or $1.305 billion in total).
With all this in mind, equalization asks a simple question: How much revenue would each province raise with tax rates equal to the national average? This is a province’s “fiscal capacity”. If a province would raise less than the average amount, per person, the federal government tops it up. I illustrate the 2018/19 results below.
Total payments (in blue) add to $18.96 billion in total, and range from $70 per person in Ontario to $2,835 per person in Prince Edward Island.
A number of taxes and other information go into determining fiscal capacity. Lags in data mean 2018-19 payments use data only up to 2016-17. And to help improve the stability and predictability of payments from year to year, the formula also uses an average of the three prior years. So, the latest payments are based on 2014-15, 2015-16, and 2016-17. Here’s the results:
Notice that even the 2016-17 data reveals very high fiscal capacity for Alberta — higher than all other provinces, at $11,637 per person — even during the depths of its recent recession. That being said, the recession did have an effect. Alberta’s fiscal capacity is 19% lower in 2016-17 (the recession’s bottom) than it was in 2014-15 (its pre-recession peak). This drop largely reflects the lower household and business income associated with low oil prices, along with the drop on government resource revenues.
But why does Alberta have a deficit if its fiscal capacity is so high? Simple: its tax rates are low. To illustrate this, I plot Alberta’s actual revenue as a percentage of what could be raised if each province had tax rates equal to the current national average. Alberta is, by far, the lowest tax jurisdiction (nearly 30% below the national average) while Quebec is the highest (nearly 30% above). Alberta’s deficit is a choice, and largely unrelated to the federal equalization program.
The 2018/19 Payments
When calculating actual equalization payments, there are a few complications and important subtleties to consider beyond just fiscal capacity. And they can matter a lot.
In the first column of the following table, I display the basic results from what is “step 1” of the formula (which simply tops provinces up to the “average”). In the last column, I display the amount each province receives in 2018/19. For Ontario and Quebec, there are notable differences.
The middle four columns reflect various adjustments to the basic formula. First, there’s a “best of” feature of the formula whereby provinces are evaluated with 50% of resource revenues included and with 0% included. Whichever results in the highest equalization payment is what a province is entitled to.
Second, since the formula doesn’t count all resource revenues, there are situations where an equalization receiving province could benefit “too much” from the program. This year, and at this stage of the formula, Ontario isn’t an equalization receiving province which makes things simple: If a province receiving equalization would be made better off than Ontario, then the excess is clawed back. This is called the “fiscal capacity cap” (FCC).
To illustrate, Newfoundland and Quebec, including all revenue sources and their pre-FCC equalization, would have total per capita fiscal capacities of $10,794 and $8,990 respectively. But Ontario has total capacity of only $8,832. Thus, Newfoundland loses all its equalization entitlement and Quebec has $158 per person clawed back so it does not exceed Ontario (or $1.305 billion in total).
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