Subsection 36(2) of the Constitution Act, 1982, states the following: "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."
The vast majority of the debate around equalization since 1982 has focused on the term “reasonably comparable levels of public services” but in the near future we may have to consider paying a little more attention to the other side of the equation “reasonably comparable levels of taxation”.
This raises a question: Should someone in Nova Scotia earning $100,000 a year pay $10,000 more in taxes than someone earning the same amount in Alberta, or $7,000 more than someone in British Columbia, for “reasonably comparable levels of public services”?
According to a Ernst & Young, a person earning $100,000 in 2011 will face a personal tax bill of $31,310 in Nova Scotia, compared to $27,400 in Ontario, $26,490 in Alberta and $25,450 in British Columbia.
Personal income taxes are only part of a person’s overall taxes. In Atlantic Canada, residents pay an effective provincial sales tax equating to approximately 5 per cent of income -- a higher effective rate than all other provinces. Alberta residents are lucky enough to pay no provincial sales tax at all. The person earning $100,000 in Nova Scotia will pay at least $5,000 per year in sales tax -- much more than if they lived in Saskatchewan, Alberta or British Columbia.
The only area where places like Nova Scotia and Prince Edward Island get a break is property tax. Because of lower property assessments, households in Nova Scotia pay about $600 less than those in Alberta (median expenditure).
There are two reasons why this might start to matter in the near future. One, the provinces with little or no oil and gas or mining industries for the most part have higher budget deficits and will face more pressure to raise taxes further to address their fiscal challenges. This will widen the gap between higher taxed and lower taxed jurisdictions.
Second, the higher taxed jurisdictions are increasingly competing for skilled immigrant workers. These people have a choice where to live in Canada, and if they have to pay $10,000 more in taxes in one jurisdiction versus another, it invariably will influence their decision. New Brunswick used this rationale when it cut its personal income tax rates back in 2009, but that tax reduction has likely been a major contributor to the provincial government’s current $600-million deficit.
Most Canadians take it for granted that people will pay more taxes if they live in Nova Scotia compared to British Columbia or Alberta. Further, people will say the lower taxed jurisdictions have a higher cost of living -- mainly driven by the higher cost of housing. However, according to data compiled by FP Markets, for the most part the higher taxed jurisdictions also have the lowest levels of discretionary income (household income left over after all essential spending).
This is not a call for the federal government to transfer even more wealth from the have provinces to the have-not provinces to allow for greater harmonization of effective tax rates. It is, however, another example of why Canada needs strong regional economies. In a fiscal union such as Canada, a weak economy in the Maritimes, Quebec -- and even Ontario -- is bad news for the whole country.
David Campbell is an economic development consultant and columnist based in Moncton. He also authors a daily blog on economic issues in Atlantic Canada which can be found at www.davidwcampbell.com.