The equalization system is poorly understood at the best of times. And pre-election positioning does not qualify as the best of times, at least when it comes to discussing the nuances of federal fiscal policy.
Both Prime Minister Justin Trudeau and Opposition Leader Erin O’Toole managed to muddy the waters last week during swings through Alberta.
First up was the Prime Minister, who was asked about Alberta Premier Jason Kenney’s criticism of equalization. (The province plans to hold a referendum that could be used as a pry bar to change the program.) “When it came time for renewal, we just rolled over the very things that he had negotiated as part of Stephen Harper’s cabinet,” Mr. Trudeau said. “The fact that he’s now railing against means that he can probably explain better what he disagrees with his younger self on.”
Time travel paradoxes aside, what Mr. Trudeau said is not, strictly speaking, wrong. It’s just misleading.
Imagine protesting to a landlord that it was too cold in winter, and that they needed to crank up the heat. And then imagine that a few months later, you complained that, in the middle of a heat wave, it was too hot. Wait a minute, the landlord retorts – you were the one that asked to turn the furnace on. Please have a talk with your younger self.
In essence, Mr. Trudeau is that landlord. It’s true that, in 2009, the Harper government did alter the rules to limit the size of equalization outlays, which were exploding because of the outsized growth in Alberta’s economy. While complicated, those rules essentially tied increases in federal equalization expenditures to economic growth, rather than to changes in the fiscal capacities of the provinces. When Alberta was booming, those rules acted as a ceiling. But since 2017, Alberta’s economic woes mean that the economic-growth rule acts as a floor, potentially adding billions to Ottawa’s equalization expenditures in coming years. (Alberta wants that rule scrapped, the cost of equalization reduced, and the excess redirected to the fiscal stabilization program, which directly benefits the province.)
So yes, the rule is the same – but the economic environment, and hence the effects of that rule, is much different. As with the hypothetical furnace, a changed climate can mean a decision has stopped making sense.
A day later, Mr. O’Toole had his own equalization equivocation, saying that Albertans “consistently pay more than their fair share” when it comes to equalization. In doing so, he tip-toed toward the canard that Alberta somehow (and unfairly) is required to fund equalization. That is simply not true: Equalization is a program of the federal government. Alberta, the province, pays exactly nothing. Taxpayers who live in Alberta (along with taxpayers who live anywhere else in the country) do contribute, by obeying the law and paying the income taxes they owe. And yes, Albertans on average pay higher taxes – because they have, on average, higher incomes.
So, it’s not clear what Mr. O’Toole would change to make things fairer. Should Albertans stop paying their federal taxes? Have lower federal tax rates applied to them? Or perhaps reduce their incomes?
It’s a truism that tax rates can be too high. Who would work if income tax rates were 100 per cent? The trick is in determining the point of diminishing returns (or, more technically, what the peak of the Laffer curve is). A recent C.D. Howe study takes a look at Toronto’s land transfer tax and concludes that proposals to increase the city’s rate for high-end homes would be counterproductive, because of the spillover to Ontario, which also charges a land transfer tax. Ontario will lose more revenue than the City of Toronto gains, the study argues.
The optimal combined rate for the land transfer tax for homes worth more than $2-million is 4.98 per cent, the authors say. Currently, the combined rate is 5 per cent – meaning that it has already edged into diminishing-returns territory. The study goes on to argue that even the current rate of land transfer tax is a problem, since it is highly distortionary and a relatively costly way of collecting revenue.
Pay me later: The Parliamentary Budget Officer has released its estimates for the added expense of extending the work-sharing program, which pays Employment Insurance benefits to employees who reduce their working hours to avoid layoffs. The PBO concludes that the extension will cost $593-million over the next three years (including, interestingly enough, substantial administration costs of $48-million).
But that tab won’t come due for years. The two-year premium rate freeze, instituted because of the coronavirus, means that EI rates will already increase at their legislated maximum through 2024. It’s not until 2025 that there will be room to further increase rates – at which point, contributions will have to increase to pay the bill for the extension of work-sharing.
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