Equalization payments
From Wikipedia, the free encyclopedia
Equalization payments are cash payments made in some federal systems of government from the federal government to state or provincial governments with the objective of offsetting differences in available revenue or in the cost of providing services.
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[edit] Canada
In Canada, the federal government makes payments to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity" — their ability to deliver government services. Currently Ontario and Alberta are the only provinces that do not receive equalization payments. Some economists have suggested that Saskatchewan and British Columbia will join the ranks of the "have" provinces (i.e., those provinces that do not receive equalization payments) in the near future.
Equalization payments do not involve wealthy provinces making payments to poor provinces; rather, the funds for equalization payments come from the federal treasury. Thus a wealthy citizen in New Brunswick, a "have not" province, pays more into equalization than a poorer citizen in Ontario, a "have" province. Because of Ontario's greater population and wealth, however, the citizens of Ontario as a whole do pay more federal taxes and thus their total contribution to equalization is greater than that of New Brunswick.
Equalization payments are one example of what are often referred to in Canada as transfer payments, a term used in other jurisdictions to refer to cash payments to individuals (see transfer payments). Unlike conditional transfer payments such as the Canada Health Transfer or the Canada Social Transfer, the money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee equal levels of health care, education, and welfare in all the provinces.
Today the total amount of the program is around 11.7 billion Canadian dollars per year.
The payments have the added benefit of promoting national unity. Quebec, the most populous of the "have not" provinces, is by far the largest single recipient of the payments. When BC and Saskatchewan are removed, approximately 70% of the 10 million Canadians residing in "have not" provinces are in Quebec.
[edit] Equalization payments in Canada – 2006-07
($ millions)
| NL | PE | NS | NB | QC | MB | SK | BC | Total | |
|---|---|---|---|---|---|---|---|---|---|
| Regular | 632 | 291 | 1,386 | 1,451 | 5,539 | 1,709 | 13 | 260 | 11,282 |
| Adjustment* | 54 | - | - | - | - | - | - | 199 | 254 |
| Total | 687 | 291 | 1,386 | 1,451 | 5,539 | 1,709 | 13 | 459 | 11,535 |
| Per capita | $1,334 | $2,102 | $1,475 | $1,927 | $725 | $1,445 | $13 | $107 | - |
Notes:
Totals may not add due to rounding.
* For those provinces where there is a decline from the amount they had been advised of in November 2005, a one-time adjustment will be made to offset this decline.
Source: Canadian Department of Finance, accessed 11 August 2006
[edit] Sources of fiscal capacity
The fiscal capacity of the provinces is determined by measuring their revenue from 33 different sources. Those sources are:
- Personal income taxes
- Business income taxes
- Capital taxes
- General and miscellaneous sales taxes
- Tobacco taxes
- Gasoline taxes
- Diesel fuel taxes
- Non commercial vehicle licenses
- Commercial vehicle licenses
- Revenues from the sale of alcoholic beverages
- Hospital and medical insurance premiums
- Race track taxes
- Forestry revenues
- New oil revenues
- Old oil revenues
- Heavy oil revenues
- Mined oil revenues
- Third-tier oil revenues
- Heavy third-tier revenues
- Natural gas revenues
- Sales of crown leases
- Other oil and gas revenues
- Mineral resources
- Water power rentals
- Insurance premiums
- Payroll taxes
- Provincial-local property taxes
- Lottery ticket revenue
- Other games of chance revenues
- Miscellaneous provincial-local taxes and Revenue
- Shared revenues: Offshore activities/Newfoundland
- Shared revenues: Offshore activities/Nova Scotia
- Shared revenues: Preferred Share Division
[edit] History
The basics of equalization payments have been around since Canadian Confederation when the federal government had most of the taxation powers. The federal government would make transfer payments to the provinces to cover their needs. There was no obligation that these transfer payments had to reflect the amount collected in each province and thus wealth was always redistributed.
A formal system of equalization payments was first introduced in 1957. The idea was based on the proposals of American economist James M. Buchanan and they were introduced mainly to help the struggling Atlantic provinces who were seeing low rates of growth and high rate of emigration to central Canada.
The original program had the goal of giving each province the same per capita revenue as wealthy Ontario. Five years later this goal was reduced to ensuring each province had revenue that equaled the national per capita average. In 1967 the system was redesigned to work with every government revenue scheme with the exception of energy, this gave Canada by far the world's most generous system of equalization payments.
The Canada Act 1982, which created a new constitution, included the rights of the poorer provinces to equalization payments in the Constitution Act, 1982, and it is unlikely that this provision will be amended.
In 2004, the federal government and the provinces agreed to a new formula for equalization payments that increased the funding given to "have not" provinces. Some "have not" provinces accepted the deal reluctantly however, complaining of insufficient money and a new per capita formula to be introduced in 2005-06 that will award cash based on population size.
[edit] Criticisms
Equalization payments have mostly been criticized by leaders of the wealthy provinces. Premiers of oil rich Alberta and Ontario with its large manufacturing base have both criticized the drain on local finances. However, money collected for equalization payments are under federal jurisdiction and would be collected regardless of whether or not the province is a 'have' or 'have not' province. The difference is whether the provincial government receives money back from the federal treasury. Thus, citizens in Alberta and Ontario are not necessarily taxed more.
Some economists also believe that they have contributed to the Maritimes' longstanding economic sluggishness.
Normally, under the equalization scheme, for every dollar increase in a province's treasury, its equalization payments go down a dollar. However, if a province loses a dollar for every dollar it makes from the sale of its energy reserves, there's no incentive to develop them at all.
[edit] Australia
In Australia a similar system operates whereby horizontal fiscal equalisation operates to compensate States which, due to influences beyond their control (e.g. a small population spread over a large area) have a greater need for government spending or a lower capacity to raise revenue.
