Fear of Sharing

All of this equalization talk has Preston Manning worried. While Alberta Premier Ralph Klein would have just told the rest of us to keep our grubby hands off Alberta’s wealth, Manning and his co-author Fred Kerr take 1200 words to explain to us that Alberta is already sharing as much as it can.

Let’s take a walk though their oped in the Globe and its three principal arguments:

1. Albertans’ per capita contribution to equalization is by far the highest in the country.

The federal government collects consumption, income and other taxes from individuals and corporations across Canada. Naturally, it collects more revenue in provinces whose economies are vigorous than it does in provinces whose economies are weak. Ottawa then redistributes significant revenues to the governments of less affluent provinces through the equalization program, to enable them to provide social services to their people roughly equivalent to those available in the rest of the country.

Ontario Premier Dalton McGuinty cites the $23-billion net federal fiscal contribution made by the people of Ontario, and argues that this is excessive. But, for 40 years (even when oil prices have been low), Albertans’ net federal fiscal contribution per person per year has been more than triple that of Ontarians.

Any suggestion that Albertans have not been contributing their fair share to equalization and should be contributing an even higher percentage is itself unfair.

Manning deserves credit for not misrepresenting the Equalization program as a direct cash transfer from the Alberta government to the “have-nots”, something that Klein loved to do. The equalization program is federal and is funded out of federal revenues. If anything the equalization program is funded by high income taxpayers across the country not just Alberta. So Alberta pays more into equalization to the extent that it has a greater than average share of high income earners.

But “three times that of Ontarians”?!? Where did that number come from? McGuinty’s claim of the $23 billion gap for Ontario has been debunked by Hugh Mackenzie in work done for the CCPA’s Alternative Ontario Budget. Manning and Kerr’s claim cannot be right, and without any evidence to back, we should assume that it is wrong. Neither Alberta’s GDP per capita nor its federal taxes per capita are three times that of Ontario.

The big challenge with the federal equalization program is that the imbalance among the provinces is due to resource royalties, and the federal government does not have access to this tax base (except in the territories). Alberta’s $5 billion surplus in 2004/05 would have been a $5 billion deficit were it not for resource royalties. These royalties allow Alberta to have tax rates lower than other provinces (a driving force behind tax competition among the provinces) while paying top dollar for public sector workers and having zero public debt. Manning and Kerr sidestep these points.

2. The benefits of the current boom in the petroleum sector are already distributed far more broadly than most people think.In 2006, $108-billion in revenue will flow into the petroleum sector in Canada as a result of record high oil prices.

The portion of this revenue that is most visible to the public — because it is most frequently mentioned by the media and the politicians — is the portion that flows into the coffers of the Alberta government. In 2006, this will amount to almost $20-billion — about $14-billion in royalties, $3-billion in taxes, and $3-billion from the sale of drilling rights.

But what about the other $88-billion? The Canadian petroleum industry will send about $5-billion to Ottawa in federal income taxes in 2006 and another $2-billion to $3-billion to the treasuries of other hydrocarbon-producing provinces such as British Columbia, Saskatchewan, Nova Scotia and Newfoundland. It will spend $11-billion on debt and equity financing charges, and another $23-billion on administrative and operating expenses.

Note that Manning and Kerr have now shifted the unit of account to Canada as a whole. It is true that other provinces have oil and gas, but Alberta has the lion’s share. What is interesting are the numbers cited: $20 billion to the Alberta treasury versus $5 billion to Ottawa and $2-3 billion to other provinces (who also pay income taxes to Ottawa).

This large discrepency is the essence of the problem. Manning and Kerr are right in pointing out that not all of Canada’s oil and gas revenues are in Alberta and not all of the royalties go to the Alberta government. But a huge chunk does, and that money distorts the ability of provinces to deliver comparable programs at comparable rates of taxation.

3. The investment of $100-billion in the oil sands will generate more tax dollars for the federal government than the Alberta government, and almost as many person years of employment outside Alberta as within the province.

Huh? Did they not just break down the percentages in the last section? And were not those percentages phenomenally lopsided in favour of Alberta. This is fishy (oily?).

The study comes from the Canadian Energy Research Institute, whose funders include the Government of Alberta, other federal and provincial governments and the oil industry.

The CERI study estimated the impacts of $100-billion invested in oil-sands development over a 20-year period through to 2020.

Even if oil prices were to level off at half their current level, this investment will lead to:

6.6-million person years of employment, 44 per cent of it outside of Alberta. Of the 1.7-million person years of employment generated in Canada outside of Alberta, 1 million would be in Ontario alone.

Federal government tax revenues of $51-billion, making Ottawa (not Alberta) the largest recipient of government revenues generated by oil-sands development.

I have a deep skepticism around input-output models, the technique used by CERI. They tend to be highly sensitive to the assumptions made and these assumptions drive the conclusions.

In any event, here are the job creation numbers from the report: 5.4 million person years of employment created in Canada, of which 3.6 million is in Alberta, 1 million in Ontario and the rest (737,000) in other provinces. Interestingly, 1.1 million jobs, more than in Ontario, would be created outside of Canada.

In terms of the economic impacts, the study finds increased Alberta GDP of $634 billion out of a total GDP increase of $789 billion for all of Canada. In other words, 80% stays in Alberta. (Remember these numbers are all 20-year totals.)

In terms of government revenues, Ottawa will get $51 billion in increased tax revenues and Alberta $44 billion. But missing from the oped is the breakdown: most of Alberta’s increased revenues ($26 billion) are from royalties, while the feds get zero. The reason why Alberta gets less total revenues is because Alberta has no sales tax and low income taxes. Alberta will only collect $6 billion in corporate income taxes compared to $16 billion for Ottawa, with a similar breakdown for personal income taxes.

But this is precisely the problem: Alberta can provide low taxes because of the huge amount of resource royalties it receives. Manning and Kerr do a good job in distorting that fact, better than Ralph Klein could have done, but in the end their argument is not convincing.

Equalization, as a federal program funded out of federal revenues, can only “equalize” so much. To go further, the provinces should set up a resource-revenue sharing pool that would redistribute some (but not all) of resource royalties so that provinces are on a more equal footing. A University of Alberta economics professor, Paul Boothe, made such a suggestion in 1998 in the CD Howe Benefactor’s Lecture (though he wanted to replace equalization with the sharing pool).

Somehow, I don’t think Alberta will go for it.

3 comments

  • Alberta Pays Its Fair Share and More in Canadian Federation” 
Analysis shows requiring additional payments to other regions would be “unfair”

    Calgary , AB – Strong energy demand and prices have resulted in significant fiscal and economic gains for oil- and natural gas-producing regions, especially Alberta , and to calls for the province to contribute more to other regions in the interests of ‘equalization.’

    However, the net fiscal contributions by Alberta to Ottawa and to other regions are already far higher than those of Ontario or B.C., the two other net-contributing provinces, according to an economic analysis by researchers at the Institute of Sustainable Energy, Environment and Economy (ISEEE) at the University of Calgary. Moreover, Alberta ‘s net fiscal contributions have historically been far higher than one would expect given its population and relative income position.

    U of C economists Dr. Robert Mansell, ISEEE Managing Director, and Dr. Ron Schlenker, ISEEE Research Associate, looked at all federal programs that transfer dollars among regions of the country, and they compared the total net fiscal contributions and benefits for each region.

    Their analysis shows that over more than four decades (1961 to 2002), the net federal fiscal contributions of Albertans have averaged about $2,500 per person per year (or $10,000 per year for a family of four), compared with $758 for each Ontario resident and $428 for each B.C. resident – the other two provinces with positive net federal fiscal contributions during this period.

  • Thanks for this update, “Adam Smith” – perhaps you should read my posts on Adam Smith. … Sorry for the delay in your comment appearing — it got caught up in WordPress’s spam filter.

    I suppose this explains the “three times that of Ontario” quote by Manning and Kerr.

    Alas, for there to be “have-not” provinces, there must be “haves”. My point is that the real problem in federalism right now is the imbalance among provinces themselves with regard to resource revenues.

    In recent years, Alberta has been able to finance about two-fifths of its budget expenditures through resource royalties. This means Alberta is able to have the lowest income taxes in Canada, no sales tax, no provincial debt, and can pay top dollar to attract public service professionals like doctors, nurses, teachers, etc.

    Alberta is creating a climate of tax competition because of its unique situation. My preference would be for a resource-royalty sharing pool among the provinces, so that all Canadians can benefit from resources. Why should Alberta, out of pure dumb luck, be able to drive decisions in other provinces, particularly when what is boosting Alberta’s revenues — high oil prices — actually hurts other provinces (like Ontario and its manufacturing base)?

    And don’t forget that the government of Canada, decades ago, financed much of the research for how to get oil from the tar sands. And don’t forget that one of the reasons why we have an Equalization program is because Alberta and Saskatchewan flirted with bankruptcy during the Great Depression?

    Equalization can only do so much because it is a federal program funded out of federal revenues. Provinces have exclusive access to resource royalties as a tax base. Since this is the cause of the distortions above, it is hard to reconcile as long as the feds do not have access to the resources base (outside the territories, that is).

    Thanks for dropping by.

  • thats right adam smith alberta is best for doing its fair share

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