Ottawa should surrender GST to the provinces and be done with transfers

The federal government does many things poorly. Consider military procurement. It took decades for Ottawa to buy replacement helicopters for the Sea Kings. It has spent decades not buying a new fighter jet, and as for that great deal the British offered us on some used submarines …

One reason for the misery on many First Nations reserves is that the federal government is responsible for delivering services to First Nations. Veterans are quick to tell you how badly they are served by Veterans Affairs. Ottawa manages the commercial fishery so well that some species are virtually extinct and fishermen are at war with other fishermen.

Provincial governments do a much better job of providing services. For more than 150 years they have schooled our children, cared for the sick and the poor, built roads and plowed them, and kept the peace.

But the Parliamentary Budget Officer released a report last week that concludes that, while federal finances are relatively sound, for provincial governments “the current fiscal policy is not sustainable over the long term” because of “ever-increasing health care costs due to population aging.”

That’s why, as we wait, and wait, and wait for Finance Minister Chrystia Freeland to provide us with the autumn fiscal update – the federal government hasn’t delivered a proper budget since March, 2019, though all the provinces managed to this year – voters should be demanding that Ottawa stop collecting so much tax money, and let the provinces raise the revenue instead. One way might be to hand over the Goods and Services Tax.

The federal government raises somewhere around $40-billion in GST annually, about 12 per cent of its revenues. It transfers more than $50-billion annually to the provinces to pay for health and social programs. If Ottawa surrendered the GST to provincial control, while reducing health and social transfers to provinces by $40-billion, then the swap would be revenue-neutral.

The country would run much better if Ottawa got out of the sales tax business. For one thing, the federal government would be unable to blackmail provincial governments into meeting so-called national standards. There shouldn’t be national standards. Quebec is not Alberta.

Speaking of Alberta, transferring the GST would finally give it a provincial sales tax, and Albertans wouldn’t even mind, since the transfer would increase provincial autonomy. (Provinces with harmonized federal and provincial sales taxes would simply convert to one large provincial tax.)

Ted Morton, a former Alberta finance minister, knows that imposing a provincial sales tax “is the third rail of Alberta politics, political suicide, etc. etc,” as he wrote in the Calgary Herald in April. “Too bad, get over it. We have no choice."

A provincial GST would bring stability and predictability to provincial finances that are too dependant on boom-and-bust oil revenues, he argued. And the transfer would end federal-provincial bickering over finances, “by achieving what economists call ‘own-source revenues.’ It enhances democratic accountability by allowing voters to know which level of government is taxing them for what public services.”

Not every province would benefit equally from a GST transfer. New Brunswick, for example, has an older population than the national average and higher health care costs, along with a less secure economic base.

“If all that was transferred to provinces was tax points, then that transfer would be more valuable to the richer provinces than to the poorer provinces,” said Craig Brett, an economics professor at Mount Allison University who researches public economics.

Ideally, Prof. Brett would like to see a needs-based equalization program, rather than the current model, which funds equalization-receiving provinces based on their revenues.

If Ottawa were to transfer the GST to the provinces, it would also need to rejig the $20-billion equalization program to compensate poorer provinces for any relative revenue disadvantage.

But the many upsides would make that effort worthwhile. And for those who argue the federal government needs to use tax revenue to bend provincial governments to its will for the sake of national unity, the best way to promote unity would be for Ottawa to leave the provinces alone.

It’s time for the feds to give the provinces the fiscal tools they need to do their jobs, and focus instead on not buying an airplane.

Know what is happening in the halls of power with the day’s top political headlines and commentary as selected by Globe editors (subscribers only). Sign up today.