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Who Pays for Equalization?

Recently, I've been reading articles about equalization that suggest it is "paid by Alberta and Ontario". I've been seeing this not only on blogs, but even in articles in the mainstream media. However, it is not really true.

Equalization is explained on a government website and in a blog post I wrote a few months ago. The monies are paid according to a formula that's based on the "fiscal capacity" of each province (with various politically-motivated adjustments, such as the Atlantic Accord). You'll have to click the links to learn more about the formula.

But where does the money come from? It doesn't just come from Alberta and Ontario. Like all other expenditures, equalization money comes from the general revenues of the federal government. That means that it comes out of the funds raised from taxpayers across the country, even regular people in the provinces that receive equalization.

How much does each province pay? The "fiscal capacity" numbers that are used to compute equalization benefits actually can help us answer this question. Fiscal capacity is a measure of the per-capita ability of the province to raise tax revenues based on a bundle of different tax types. Perhaps it is reasonable, therefore, to assume that federal tax revenues from each province are proportional to each province's fiscal capacity, and each province's population.

I haven't found a table of fiscal capacity numbers, but the Finance Department's website has a graph. Eyeballing those numbers, and multiplying by population, I was able to come up with these estimates of what proportion of federal revenues come from each province (population in brackets, territories excluded):

  • PEI: 0.3% (0.4%)
  • NB: 1.6% (2.4%)
  • NL: 1.2% (1.6%)
  • NS: 2.3% (2.9%)
  • MB: 2.9% (3.7%)
  • QC: 20.6% (23.7%)
  • BC: 12.2% (13.2%)
  • SK: 2.9% (3.1%)
  • ON: 39.7% (38.9%)
  • AB: 16.2% (10.1%)

Caveat: These numbers could be off by quite a bit if the tax bundle used to estimate provincial fiscal capacity is very different from the taxes Ottawa actually collects. For example, if the fiscal capacity formula includes natural resource revenues that are collected only by provinces, this would skew some numbers, particularly Alberta's. That is, Alberta's tax base may be a lot stronger when it comes to provincial revenues than it is for federal revenues. I don't know.

Anyway, assuming that these numbers actually are right, and do represent province-by-province contribution to federal revenues, we can go on to determine how much each province pays for equalization. In 2004-05, total equalization was pegged at $10.744-billion. Below is each province's share of contribution to equalization:

  • PEI: $31M
  • NB: $176M
  • NL: $129M
  • NS: $244M
  • MB: $311M
  • QC: $2,218M
  • BC: $1,315M
  • SK: $317M
  • ON: $4,283M
  • AB: $1,751M

Here's how much each province received:

  • PEI: $277M
  • NB: $1,326M
  • NL: $762M
  • NS: $1,313M
  • MB: $1,607M
  • QC: $4,155M
  • BC: $652M
  • SK: $682M
  • ON: $0
  • AB: $0

Therefore, the net for each province was:

  • PEI: +$246M
  • NB: +$1,150M
  • NL: +$633M
  • NS: +$1,069M
  • MB: +$1,296M
  • QC: +$1,937M
  • BC: -$663M
  • SK: +$365M
  • ON: -$4,283M
  • AB: -$1,751M

A couple interesting things to note:

  • BC actually got back less than it would have saved if there was no equalization program at all
  • Nearly 44% of the contribution to equalization revenues comes from "have not" provinces

But remember that these numbers are based on a bunch of assumptions and estimates, and are particular to 2004-05.

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