Let’s fact check a few common misconceptions on equalization and transfer payments.
The terms “equalization” and “transfer payments” have been floating around in the news recently. The sheer volume of information thrown at us makes it difficult to figure out what is fact and what is misinformation.
The kind of misinformation we see about equalization often falls into two categories:
- Manipulated content is information presented with the goal of convincing people to adopt a certain position based on opinion.
- Incomplete content lays out only part of the issue to fit a specific narrative. The incomplete content isn’t wrong, but enough information is left out that the meaning of the statement does not align with reality. (Basically anything found on a “meme”.)
So how do we as citizens make sense of all this material and make informed decisions?
There is no magic solution. But there are guidelines we can follow to help us figure out the foundational facts we need to know. There are specific elements to look for when it comes to finding reliable information. Look for credible source material that is supported by other sources. It is also important to note if the source material contains a bias or if it presents an opinion. You should also check how recently the material was published. (For more tips on finding reliable information, see CPLEA’s “Is it reliable?” tip sheet and video.)
What follow are a few common misconceptions about equalization along with facts to clarify them.
Misconception: “The equalization program was created to punish rich provinces.”
FACT | Equalization is a simple concept that becomes complicated when you look at the details of how it works. The basic principle behind the program is that Canadians should receive roughly similar levels of provincial government services regardless of where we live. Some provinces have a greater ability to raise revenues and therefore provide services compared to other provinces. To even things out, the federal government makes equalization payments to provinces with below average ability to raise revenue and provide services.
Misconception: “All our federal taxes are going to other provinces.”
FACT | Currently, four provinces do not receive equalization payments: Alberta, British Columbia, Saskatchewan, and Newfoundland and Labrador. These provinces account for about 35% of federal taxes received. But not all this money goes into the equalization program. Equalization is one of six main types of transfers from the federal government to the provinces. Other types of transfers include the Canada Health Transfer and the Canada Social Transfer. Visit the Government of Canada’s website for more details on these programs.
Misconception: “Alberta writes a cheque for equalization payments to other provinces.”
FACT | It is incorrect to say that the richer provinces are sending money to the poorer provinces. Provincial governments do not make equalization payments. The federal government makes the payments out of federal tax revenue. It’s more accurate to say that higher income earners, regardless of where they live, are funding the program. That being said, a high-income earner in a province that receives equalization payments pays more in federal taxes (and therefore contributes more to the equalization system) than a low-income earner in a province that does not receive equalization payments.
According to government data, the total value of equalization payments in 2021-2022 will be just under 21 billion dollars. This will be paid to Quebec, Nova Scotia, New Brunswick, P.E.I. and Manitoba.
Misconception: “The equalization formula benefits provinces that are too lazy to maximize their resources.”
FACT | A province’s entitlement to equalization is based on a formula. A Canadian Library of Parliament research publication explains how the formula works. We have summarized the main points:
- The formula assesses a province’s per-capita ability to generate revenues (that ability is called ‘fiscal capacity’) and compares that fiscal capacity to the average fiscal capacity for all provinces. Provincial government revenue sources other than user fees are allocated to one of five categories: personal income taxes, business income taxes, consumption taxes, property taxes and natural resource revenues.
- The formula estimates fiscal capacity in the personal income tax, business income tax, consumption tax and property tax categories by determining the amount of per capita revenue that each province could generate if all provinces had identical tax rates. Natural resource revenues are treated differently – actual revenue numbers are used rather than estimates based on a national average. Either half or none of a province’s resource revenues are included in the calculation, whichever results in the higher equalization payment. How natural resource revenues are treated has been the subject of political compromise.
- A province’s fiscal capacity in all five revenue categories is compared to the national average of all the provinces. Provinces below the average receive an equalization payment, and those above the average do not.
- Changes in the overall amount of equalization are linked to changes in Canada’s gross domestic product.
- The program includes a ‘fiscal capacity cap’ that is designed to eliminate the possibility that an equalization receiving province with actual resource revenues might end up with higher actual fiscal capacity after equalization than a province that was not eligible for an equalization payment in the first place.
- To reduce constant payment fluctuations, the amount a province receives is calculated on a three-year weighted moving average. A receiving province is paid 50% of what is calculated for the current year plus 25% of what is calculated for each of the two prior years.
For those who enjoy playing with the numbers, Finances of the Nation created an online equalization simulator tool. The explanatory article by economist Dr. Trevor Tombe further explains the mechanics of equalization.
Misconception: “A referendum on equalization will allow Alberta to pull out of the program.”
FACT | Equalization is enshrined in section 36 of Canada’s Constitution Act, 1982. And one province cannot unilaterally change the Constitution. So the short answer is no.
If a province proposes to change the Constitution, the Supreme Court of Canada says the federal government and the provinces have a “duty to negotiate” if the issue is a constitutional crisis threatening the breakup of the confederation. (See LawNow’s The Quebec Secession case article.) Experts’ opinions differ on this issue. The Centre for Constitutional Studies provides a more detailed explanation of the process. Although clear referendum results in Alberta would arm the government with a “statement”, constitutional dialogue can start at the first ministers’ table without the need for a costly referendum.
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Disclaimer
The information in this article was correct at time of publishing. The law may have changed since then. The views expressed in this article are those of the author and do not necessarily reflect the views of LawNow or the Centre for Public Legal Education Alberta.
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