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There goes Alberta, griping about equalization again. But hold that eye-roll. This is not another vaporous tirade about the province being forced to shovel billions of dollars eastward on a never-ending gravy train.

To recap: the Alberta government pays nothing into equalization, but the province’s residents pay a lot, in the form of federal taxes.

Rather than simply regurgitating shopworn myths, Alberta last week put forward a series of thoughtful proposals on how to modernize the equalization program to cut its costs and, more importantly, boost economic growth.

Any reforms cannot endanger the constitutionally mandated goal of equalization, which is to ensure that all provinces are able to “provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”

But the formula to achieve that goal has changed many times in the last six decades; it can and should change again.

Alberta’s proposals draw a connection, rightly, between the equalization program and the biggest public policy challenge facing Canada: how to increase economic growth rates.

It’s not only smart politics on the part of the province to underscore the nationwide benefits of equalization reform, but its proposals reflect solid economic thinking, as well.

At the moment, equalization’s structure rewards high-tax policies and discourages pro-growth measures.

The current, complicated formula calculates the fiscal capacity of the provinces, using average tax rates. Those average tax rates are then applied to various tax bases to determine a province’s fiscal capacity (or ability to raise revenues). It’s that theoretical ability, not actual tax revenues, that determines a province’s equalization payments.

That structure creates an obvious incentive for equalization-receiving provinces to increase tax rates. If a small province raises its corporate tax rate, that tax base will inevitably shrink a bit. That’s a critical point, since equalization payments are derived from fiscal capacities, which in turn are influenced by the size of a tax base. A smaller tax base means a smaller fiscal capacity – and higher equalization payments.

A large province such as Quebec has even more of an incentive, since a tax increase on its part will also inflate the national average tax rate, increasing its equalization payment in a second way.

To address this problem, Alberta proposes a simplified way of calculating equalization, basing it on each province’s per capita gross domestic product. That (rather than dozens of individual tax bases) would be the yardstick for payments.

Certainly, that approach would be much simpler, although it too would create fiscal oddities. British Columbia, for instance, would likely start receiving equalization payments, because of income it derives from its property-tax base that wouldn’t be adequately accounted for under a GDP formula.

Still, a GDP-based approach to equalization would be easier to understand and fairer than the current formula.

Alberta also properly questions the method used to calculate the size of the equalization pool. Since the Harper government’s changes in 2009, increases in the overall size of equalization have been linked to economic growth, rather than to changes in the fiscal capacities of the provinces.

The change was intended to constrain the growth of equalization, but in recent years it has acted as a floor rather than a ceiling, with more being spent than needed to simply bring poorer provinces up to the national average. Alberta estimates that $2.3-billion could be saved in the current fiscal year if that 14-year-old rule were to be scrapped.

Even bigger savings would be possible under a more radical proposal from Alberta: to compensate poorer provinces for only part of their fiscal shortfall. It suggests that poorer provinces receive payments that would level them up to just 95 per cent of average per capita GDP. It argues this would create an incentive for those provinces to close the remaining gap through pro-growth policies.

Such a change would necessarily be contentious, and might be open to a constitutional challenge if taken too far. But it is an idea worth examining as Canada looks for ways to galvanize economic growth in the coming decades.

The federal Liberals are proposing to lock in the current formula until 2029. It would be a mistake to keep equalization as it is in place for the rest of the decade. Alberta’s proposals should jump-start debate, today.

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