Equalization Formula

… a core term used in Governance and Institutions and Atlas100

Definition

Édison Roy-César (reference below) describes Canada’s equalization formula as the mathematical formula to determine which provinces are eligible for the transfer and the amount of each eligible province’s payment.

Contrary to the common perception in some parts of Canada that equalization “transfers money from rich provinces,” equalization is a federal program financed entirely from federal general revenues.

Roy-César writes:

“Equalization is a federal transfer payment program that was first introduced in 1957 and is designed to reduce the differences in revenue-generating capacity across Canada’s 10 provinces. By compensating poorer provinces for their relatively weak tax bases or resource endowments, Equalization helps to ensure that Canadians residing in provinces have access to a reasonably similar level of provincial government services at reasonably similar levels of taxation, regardless of which province they call home. Another federal transfer program, Territorial Formula Financing, serves a similar purpose for territorial governments.

“Equalization is financed entirely from Government of Canada general revenues. The provinces are uninvolved in the transfer except to the extent that they may qualify for Equalization payments; provincial governments do not contribute financially to the Equalization program, and each province’s ability to raise tax revenues is unaffected by the transfer. There are no conditions on the use of Equalization payments or the standards that should be achieved by the Equalization-receiving provinces. Instead, the provinces make decisions on behalf of their residents, and they are accountable to voters for the services they provide.

“The mechanism for determining the total amount of Equalization payments, as well as the amount that each eligible province receives, has undergone numerous changes in recent years. The two most recent series of reforms occurred in 2007 and 2009.

“… The total amount of Equalization payments in 2013–2014 is $16.1 billion, an increase of 24.6% from 2007–2008.1 At present, six provinces are eligible for the transfer: Prince Edward Island, Nova Scotia, New Brunswick, Quebec, Ontario and Manitoba. Quebec is the largest recipient of an Equalization payment, accounting for 48.6% of the total amount of Equalization payments in 2013–2014. While Quebec’s large share of Equalization payments is mostly due to its greater population relative to other Equalization-receiving provinces, the province’s proportion of the total amount has risen considerably since amendments were made to the Equalization formula in 2007, in large part because of changes to the formula’s measurement of property tax revenues.”

The formula

Roy-César writes:

“The basic structure of Equalization is relatively straightforward. On a per capita basis, Equalization assesses a province’s ability to generate own-source revenues and compares that fiscal capacity to the average fiscal capacity for all provinces. With the exception of user fees (fees for the use of public services), all provincial government revenue sources are allocated to one of five categories: personal income taxes, business income taxes, consumption taxes, property taxes and natural resource revenues.

“Save for natural resource revenues, the Equalization formula estimates fiscal capacity in each of the four remaining revenue categories by determining the amount of per capita revenue that each province could generate if all provinces had identical tax rates. Because of the wide range of natural resources and royalty structures across the provinces, actual resource revenues are used to measure fiscal capacity instead of creating a national average tax rate.

“To determine which provinces are eligible for Equalization – and, if so, for how much – each province’s per capita fiscal capacity in all five revenue categories is compared to the average fiscal capacity of the 10 provinces. If, according to the formula, a province has a below-average ability to generate own-source revenues, then it is eligible for an Equalization payment to make up the difference. If a province’s revenue-generating ability exceeds the 10-province average, then it is not eligible for an Equalization payment.”

In his article, Roy-César describes the complexities introduced into the equalization formula in 2007 and 2009 in response to the dramatic increases in resource revenues in oil-producing provinces.

Atlas topic, subject, and course

Federalism (core topic) in Governance and Institutions and Atlas100 Governance and Institutions.

Source

Édison Roy-César (2013), Canada’s Equalization Formula, Library of Parliament Research Publications, at http://www.lop.parl.gc.ca/content/lop/ResearchPublications/2008-20-e.htm, accessed 4 September 2016.

Page created by: Ian Clark, last modified 5 September 2016.