Friday, June 21, 2002
The National Post

Equalization program called ‘help that hurts’

Think-tank study: Policy rewards have-not provinces that keep taxes high

By Jon Bricker

Canada’s system of equalization payments rewards the “have-not” provinces for keeping taxes high and actually runs counter to its stated aims, according to a study released yesterday.

The study, by the Atlantic Institute for Market Studies, found that on average, personal income tax is about 33% higher in the poorer provinces than in the so-called “have” provinces.

Provincial sales taxes are 50% higher and capital taxes are 200% higher, the study found.

And while the Constitution provides for equalization to ensure provinces can deliver services at “reasonably comparable levels of taxation,” the study’s author said his findings suggest Canada’s $10.5-billion equalization program may be doing exactly the opposite.

“The program isn’t working,” said Kenneth Boessenkool, who wrote the study for the Halifax-based economic think-tank.

“The question is: ‘Are taxes across the country reasonably comparable?’ and the answer is: ‘No, they’re not.'”

He said instead of bringing provincial tax rates in line with one another, equalization rewards the have-not provinces –the four Atlantic Canada provinces, plus Saskatchewan, Manitoba and Quebec — for high taxes that stifle economic activity.

The lower economic activity keeps these provinces in the “have-not” category and ensures that equalization funds continue to flow to the provincial government.

“In simple terms, provinces that get equalization get compensated for bad tax policy. They get compensated for decreased economic activity.”

While many critics have long described equalization as unfair to the richer provinces, Mr. Boessenkool said his study provides some of the first evidence that equalization may be hurting the poorer provinces as well, by keeping economic activity down and taxes high.

He called the equalization program, “help that hurts.”

“If you’re sitting in Atlantic Canada, your tax rates are higher than they should be because of this program.”

The study also found that the bigger have-not provinces received the most incentives to keep taxes high, because they have the greatest influence on the equalization payment formula.

Quebec, for instance, generally had higher taxes than Manitoba and Saskatchewan, which, in turn, had generally higher taxes than the Atlantic provinces, the study found.

Some questioned the study’s findings yesterday, however, saying it fails to establish a causal link between equalization payments and high taxes in Canada’s have-not provinces.

Paul Hobson, an economics professor at Acadia University in Nova Scotia, described the link between equalization and taxes as a “myth.”

He said poor provinces have higher taxes, not because of equalization, but because they have lower average incomes and a smaller tax base.

“Equalization simply does not make these provinces charge more,” Mr. Hobson said.

On the contrary, he said, equalization promotes fairness, by preventing have-nots from raising taxes even higher than those in have provinces with comparable levels of service.

“A citizen living in rural Newfoundland should surely be able to enjoy similar benefits from government as a citizen living in Markham, Ont., or Athabasca, Alta., or northern British Columbia or Vancouver,” he said.

But Mr. Boessenkool said he was not calling for the equalization program’s cancellation, just for more debate on problems with the current scheme.

“It’s a design issue,” he said. “Clearly, the program also does some good.”

“The question is, can we redesign the program so that these [negative] incentives don’t exist?”

“This program may be retarding economic growth in these regions, which may be an explanation for why they’ve been poor for so long,” he said. “Perhaps it’s time to re-evaluate the entire program.”

jbricker@nationalpost.com