Financing Federalism: The Canadian Experience - PowerPoint PPT Presentation

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Financing Federalism: The Canadian Experience

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Financing Federalism: The Canadian Experience Bev Dahlby Department of Economics University of Alberta and Tony Morehen Alberta Finance Government of Alberta – PowerPoint PPT presentation

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Title: Financing Federalism: The Canadian Experience


1
Financing FederalismThe Canadian Experience
  • Bev DahlbyDepartment of EconomicsUniversity of
    Alberta
  • and
  • Tony Morehen
  • Alberta Finance
  • Government of Alberta

2
Outline
  • Description of federal and provincial
    governments expenditure responsibilities and tax
    powers.
  • Description of the evolution of the
    federal-provincial fiscal arrangements since WW
    II.
  • Description of the main elements of federal
    grants to the provinces and tax collection
    agreements.

3
(No Transcript)
4
Federal Constitutional Responsibilities
  • Defence
  • Criminal justice
  • Old age security
  • Unemployment insurance
  • International trade and treaties
  • Regulation of trade and commerce
  • Aboriginal issues
  • Monetary policy

5
Provincial Constitutional Responsibilities
  • Education
  • Health
  • Social welfare
  • Civil law
  • Municipal government
  • Gambling, liquor
  • Natural resources (oil and natural gas, mining,
    and forestry)

6
Shared Constitutional Responsibilities
  • Income support
  • especially the Canada Pension Plan and Quebec
    Pension Plan
  • Environment
  • Law enforcement
  • Agriculture

7
Table 1
  • Table 1 shows the allocation of expenditures by
    the federal and provincial-local government
    sectors in Canada in 2002.
  • There are significant overlaps or
    interdependencies in the spending
    responsibilities of the two levels of government,
    e.g. Unemployment insurance (federal) and welfare
    (provincial).

8
Tax Powers
  • The federal government has the power to raise
    revenues by any mode or system of taxation.
  • The provincial governments are empowered to levy
    direct taxation within the province.
  • Provinces are not able to levy tariffs on
    imported goods.
  • This is the only effective constitutional
    limitation on provincial tax powers.

9
Table 2
  • Both the federal and provincial governments levy
    taxes on the most important tax bases
  • personal and corporate income taxes, sales and
    excise taxes, and payroll taxes.
  • The provinces have exclusive control over
    property taxes and resource revenues, such as oil
    and gas royalties.

10
Major Provincial Tax Rates, 2003
11
The Federal Spending Power
  • The courts have determined that the federal
    government can offer conditional grants to the
    provinces to promote national programs in areas
    of provincial jurisdiction, such as Medicare,
    post-secondary education, infrastructure or
    labour market development .
  • This is referred to as the federal spending
    power.

12
Government Borrowing
  • The provincial governments can borrow to finance
    deficits.
  • The federal government is not responsible for
    provincial government debt.
  • Although there are annual meetings of federal and
    provincial finance ministers to discuss their
    upcoming budgets, budgetary policies (including
    borrowing) by the federal and provincial
    governments are largely uncoordinated.

13
General Characteristics of the Canadian Federal
System
  • The provinces have extensive tax powers and
    jurisdiction in the most important expenditure
    areas--health, education, and social assistance.
  • There is a high degree of overlap in federal and
    provincial taxes and expenditure programs.
  • The federal government has the right to make
    grant to the provinces in areas of provincial
    responsibility.

14
Reasons for Federal-Provincial Fiscal Arrangements
  • Mismatches between expenditure responsibilities
    and the revenue generating capacity of the
    provinces
  • Unequal fiscal capacities among the provinces.
  • Federal governments desire to promote
    expenditures in some areas of provincial
    jurisdiction.
  • Overlapping tax bases -- the need for
    harmonization.

15
Types of Federal Transfers to the Provinces
  • Block Transfers
  • Equalization Grants
  • The Canada Health and Social Transfer
  • Cost-Shared Grants
  • Labour market development agreements
  • Young offenders
  • Disabled persons
  • Farm disaster assistance
  • Detailed information available at
  • www.fin.gc.ca/activty/fedprov-e.html

16
History of Federal-Provincial Fiscal Relations
  • Taxation
  • Pre-World War II
  • a Royal Commission described the tax system as a
    tax jungle
  • World War II
  • all income taxes transferred to the federal
    government
  • Post-World War II
  • Quebec opted to collect its own income taxes
  • tax collection agreements signed with the
    provinces
  • tax points transferred to the provinces

17
History of Federal-Provincial Fiscal Relations
  • Equalization
  • The equalization program established 1957.
  • The Constitution was amended in 1982 to require
    the federal government to make equalization
    grants to ensure that provinces can provide
    reasonably comparable levels of services at
    reasonably comparable levels of taxation.
  • Equalization grants are financed out of the
    federal governments general revenues.
  • The program is renewed every five years and is
    scheduled for renewal in April 2004.

18
History of Federal-Provincial Fiscal Relations
  • Health, Education, and Social Assistance
    Transfers
  • Hospital Insurance 1957 Medicare, 1968
  • Canada Assistance Plan (welfare programs), 1966
  • Established Programs Financing (combined health
    care and post-secondary education grants and a
    tax point transfer), 1977
  • Canada Health and Social Transfer, 1996-97
  • Canada Health Transfer (CHT) and Canada Social
    Transfer (CST), 2004.

19
The Equation for Calculating Equalization Grants
  • A provinces fiscal capacity is calculated using
    a Representative Tax System.(RTS)
  • A provinces equalization entitlement for a
    particular tax base is calculated as follows
  • Eij tsj(Bsj - Bij)
  • where Eij the per capita equalization entitlement
    for province i with respect to tax base j
  • tsj is the standard tax rate for tax base j
  • Bsj is the standard per capita tax base j
  • Bij is the per capita tax base j in province i
  • i 110, j 134

20
The Equalization Standard
  • A five-province standard is used to calculate the
    standard tax bases.
  • This is the average per capita tax bases in
    British Columbia, Saskatchewan, Manitoba,
    Ontario, and Quebec.
  • A province with deficient fiscal capacity
    receives a payment from the federal government
    equal to the sum of its Eijs over 34 revenue
    sources.
  • Provinces with adequate fiscal capacities
    (Ontario and Alberta) do not receive payments and
    do not directly contribute to financing the
    grants.

21
The Impact of Equalization on the Fiscal
Capacities of the Provinces
22
Problems with the Equalization Program
  • The federal government has imposed ceilings on
    entitlements and changed the formula for
    calculating the grants.
  • Variations in fiscal need are not taken into
    account, as in Australia.
  • The formula may affect the fiscal decisions of
    the recipient provinces
  • rate equalization effect
  • base equalization effect
  • discourages development of resource projects

23
The Canada Health and Social Transfer (CHST)
  • The Canada Health and Social Transfer (CHST) was
    established in 1996-97 to provide block funding
    for provincial health, post-secondary education
    and social assistance programs.
  • It replaced the Established Programs Financing
    (health and post-secondary education) and Canada
    Assistance Plan (social assistance) programs.

24
How the CHST Works
  • The federal government arbitrarily sets the value
    of the cash to be transferred to the provinces.
  • The value of the tax points transferred to the
    provinces in 1977 is then calculated.
  • The total value of cash plus tax points is
    allocated among provinces on an equal per capita
    basis.
  • Each provinces cash transfer is equal to its
    allocation of tax plus cash minus the value of
    its tax points.

25
CHST Calculation for 2002-03
  • National
  • Cash 19.1 billion
  • plus
  • Tax Point Transfer 16.1 billion
  • equals
  • Total Entitlement 35.2 billion
  • Albertas CHST Grant
  • (based on Albertas 9.9 share of Canadas
    population)
  • Total Entitlement 3.5 billion
  • less
  • Tax Point Transfer 1.9 billion
  • equals
  • Cash Transfer 1.6 billion

26
Major Federal Transfers to the Provinces and
Territories, 1982-2002
27
Federal Transfers to the Provinces and
Territories, in 2003-04
28
Major Federal Transfers
29
Federal Transfers as a Percentage of Provincial
Revenues
30
Recent Developments
  • The current CHST will be split into a Canada
    Health Transfer (CHT) and a Canada Social
    Transfer (CST), effective April 1, 2004.
  • The Equalization program ceiling was removed,
    effective 2002-03.
  • The total increase in federal transfers by Cdn
    20 billion over five years.

31
Tax Collection Agreements (TCAs)
  • Under the TCAs, the federal government collects
    personal and corporate income taxes on behalf of
    the provinces.
  • Quebec collects its own personal income taxes,
    while Quebec, Ontario and Alberta collect their
    own corporate taxes.
  • Federal and provincial personal and corporate
    income tax bases exhibit a higher degree of
    harmonization than in the United States.

32
Financing Local Government
  • Constitutionally, municipalities are creatures
    of the province.
  • Municipalities derive their revenue from
    municipal property taxes, transfers from the
    provincial governments, user fees, and business
    taxes.
  • Municipal spheres of jurisdiction
  • Safety, health and welfare of people
  • Protection of people and property
  • The enforcement of bylaws
  • Transport and transportation systems
  • Operation and maintenance of public places

33
Sources of Funding for Local Government
34
Strengths and Weaknesses of the Canadian Fiscal
System
  • Has allowed decentralization of tax and
    expenditure decisions, while maintaining
    comparable levels of public services and tax
    rates in spite of large variations in the fiscal
    capacities of the provinces.
  • Overlapping tax and expenditure responsibilities
    reduces transparency and the accountability of
    politicians to the voters.
  • Interdependencies can lead to negative fiscal
    externalities for other governments.
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