Serve the provinces a bigger piece of tax pie

TheStar.com – opinion/editorialcartoon
Published On Fri Dec 17 2010.   Ken Boessenkool

The coming days will see the annual meeting of provincial and federal finance ministers.

If the past is any guide, this meeting will quickly degenerate into provinces begging the federal government for more money to fund their own programs. This makes sense: Wouldn’t we all want to spend someone else’s money?

And as we move toward the expiry of the health accord — which governs the largest federal transfer to the provinces — in 2014, the begging will get more intense.

Not surprisingly, the provinces want the health accord to continue mostly because that accord sets a growth rate for federal transfers that is larger than growth in the economy.

This seems foolish.

In the first place, there is only one taxpayer. Whatever government is spending more money, that one taxpayer pays.

In the second place, why can’t we aspire to a system where provinces raise enough taxes to pay for provincial programs, while the federal government raises enough money to pay for federal programs?

If we better aligned spending with revenues, voters could hold provincial governments responsible for delivering provincial programs that they are responsible for.

It would do away with the fiscal illusion of spending another government’s money.

It would also eliminate the incentive for one government to blame another government for failing to fund something they should pay for themselves.

To be fair, a better alignment between provincial revenues and expenditures has been a long-standing request from Alberta and Quebec. Yet those two provinces are not enough to carry the day.

Which is why the increasingly autonomous stance of Ontario is so interesting. Starting with Bob Rae’s “Fair Share,” though Mike Harris’s greater alignment with Alberta than Ottawa, and now Dalton McGuinty’s fight for “fiscal fairness” and equal per-capita grants, Ontario has been looking out more for its own interests. This suggests that it might be amenable to a better alignment of provincial revenues and spending rather than relying on Ottawa’s ability to fund transfers.

And so rather than asking for Ottawa to boost transfer payments, perhaps the provinces should ask Ottawa to lower or eliminate some federal taxes so that the provincial governments could collect those taxes themselves?

Or, to be more precise, perhaps the provinces should ask the federal government to give them the GST instead of federal cash transfers.

The federal government could do this without making any provinces any worse off by making sure that the GST is equalized across provinces — in short, bringing a provincial GST into the equalization program.

Or to put it another way, the federal government could give the provinces the GST and eliminate the same amount of federal transfers without making any province any worse off than it is now.

And they would almost certainly be better off tomorrow.

Federal transfers have been very unreliable. Transfers have gone up steadily under the current government. But they went down when the previous government had to deal with a federal deficit — which is precisely the situation Ottawa faces today.

GST revenues, on the other hand, have been remarkably steady in one direction — up. The GST has grown on average by just over 5 per cent since it was introduced — which has been much more stable than the path of federal transfers.

Some may argue that we don’t want to have 10 jurisdictions creating a GST “tax jungle.”

But the federal government could easily continue collecting the GST across Canada. This would be much cheaper for provinces than setting up their own GST administrations.

And by doing this the federal government could insist on a common GST tax base across provinces. This is what is done for provincial income taxes — the federal government (largely) determines the tax base, and the provinces determine the rate.

So instead of going to Ottawa begging for more money, the provinces should go to Ottawa and ask to take over the GST.

This would be easy in those provinces that have already harmonized their provincial sales tax with the GST. But it would be relatively straightforward for provinces that haven’t — they would just have two separate sales taxes.

The result would be a steady and stable provincial revenue source for the provinces to use for health care and other programs they are responsible for.

This would mean greater alignment between how much the provinces spend and what they raise from their taxpayers in revenues.

This win-win situation would result in greater accountability to taxpayers — if provincial governments wanted more revenues for health care, they could go cap in hand to their voters rather than to the federal minister of finance.

And future provincial finance ministers could then focus on things other than begging for another government’s money.

Ken Boessenkool is an executive fellow at the School of Public Policy at the University of Calgary and author of “Fixing the Fiscal Imbalance: Turning GST revenues over to the provinces in exchange for lower transfers,” which was published by the School of Public Policy this week.

< http://www.thestar.com/opinion/editorialcartoon/article/908490–serve-the-provinces-a-bigger-piece-of-tax-pie >

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