FINA Committee Meeting

37th PARLIAMENT, 3rd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Tuesday, April 20, 2004

¿

0935

The Chair (Mr. Roy Cullen (Etobicoke North, Lib.))

Mr. François Delorme (Director, Federal-Provincial Relations Division and Social Policy Branch, Department of Finance)

The Chair

Mr. Louis Lévesque (Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch, Department of Finance)

The Chair

Mr. Louis Lévesque

¿

0940

¿

0945

The Chair

Mr. Louis Lévesque

The Chair

Mr. Louis Lévesque

The Chair

Mr. Louis Lévesque

M. Nick Discepola (Vaudreuil—Soulanges, Lib.)

Mr. Louis Lévesque

The Chair

Mr. Louis Lévesque

The Chair

Mr. Louis Lévesque

Mr. Nick Discepola

Mr. Louis Lévesque

¿

0950

The Chair

Mr. Louis Lévesque

The Chair

Mr. Nick Discepola

Mr. Louis Lévesque

Mr. Nick Discepola

Mr. Louis Lévesque

The Chair

Mr. Louis Lévesque

The Chair

Mr. Nick Discepola

Mr. Louis Lévesque

Mr. Nick Discepola

Mr. Louis Lévesque

Mr. Nick Discepola

The Chair

Mr. Louis Lévesque

¿

0955

À

1000

À

1005

À

1010

The Chair

Mr. Louis Lévesque

The Chair

Mr. Louis Lévesque

À

1015

The Chair

Mr. Werner Schmidt (Kelowna, CPC)

Mr. Louis Lévesque

Mr. Werner Schmidt

Mr. Louis Lévesque

Mr. Werner Schmidt

Mr. Louis Lévesque

Mr. Werner Schmidt

Mr. Louis Lévesque

Mr. Werner Schmidt

Mr. Louis Lévesque

Mr. Werner Schmidt

Mr. Louis Lévesque

À

1020

Mr. Werner Schmidt

Mr. Louis Lévesque

Mr. Werner Schmidt

Mr. Sean Keenan (Chief, Senior Program Analyst, Federal-Provincial Relations Division and Social Policy Branch, Department of Finance)

Mr. Werner Schmidt

Mr. Sean Keenan

Mr. Werner Schmidt

Mr. Sean Keenan

À

1025

Mr. Werner Schmidt

The Chair

Mr. Pierre Paquette (Joliette, BQ)

Mr. Louis Lévesque

Mr. Pierre Paquette

Mr. Louis Lévesque

Mr. Pierre Paquette

Mr. Louis Lévesque

Mr. Pierre Paquette

Mr. Louis Lévesque

Mr. Pierre Paquette

Mr. Louis Lévesque

Mr. Pierre Paquette

Mr. Louis Lévesque

À

1030

Mr. Pierre Paquette

Mr. Louis Lévesque

Mr. Pierre Paquette

Mr. Louis Lévesque

Mr. Pierre Paquette

The Chair

Mr. Pierre Paquette

Mr. Louis Lévesque

Mr. Pierre Paquette

Mr. Louis Lévesque

Mr. Pierre Paquette

Mr. Louis Lévesque

Mr. Pierre Paquette

The Chair

Mr. Rodger Cuzner (Bras d'Or—Cape Breton, Lib.)

Mr. Louis Lévesque

À

1035

Mr. Rodger Cuzner

Mr. Louis Lévesque

Mr. Rodger Cuzner

Mr. Louis Lévesque

Mr. Rodger Cuzner

Mr. Louis Lévesque

Mr. Rodger Cuzner

Mr. Sean Keenan

Mr. Louis Lévesque

Mr. Rodger Cuzner

Mr. Louis Lévesque

Mr. Rodger Cuzner

À

1040

Mr. Louis Lévesque

The Chair

Mr. Nick Discepola

Mr. Louis Lévesque

Mr. Nick Discepola

Mr. Louis Lévesque

Mr. Sean Keenan

Mr. Nick Discepola

Mr. Louis Lévesque

Mr. Nick Discepola

Mr. Louis Lévesque

À

1045

The Chair

Mr. Nick Discepola

The Chair

Mr. Nick Discepola

The Chair

Hon. John McKay (Scarborough East, Lib.)

À

1050

Mr. Louis Lévesque

Hon. John McKay

Mr. Louis Lévesque

Hon. John McKay

Mr. Louis Lévesque

Hon. John McKay

Mr. Louis Lévesque

Hon. John McKay

Mr. Louis Lévesque

Hon. John McKay

Mr. Louis Lévesque

Mr. Nick Discepola

Mr. Louis Lévesque

Hon. John McKay

Mr. Louis Lévesque

Hon. John McKay

Mr. Louis Lévesque

Hon. John McKay

Mr. Sean Keenan

Hon. John McKay

Mr. Louis Lévesque

Hon. John McKay

À

1055

Mr. Louis Lévesque

Hon. John McKay

Mr. Louis Lévesque

Hon. John McKay

Mr. Louis Lévesque

The Chair

Hon. John McKay

Mr. Louis Lévesque

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 014

l

3rd SESSION

l

37th PARLIAMENT

---

EVIDENCE

Tuesday, April 20, 2004

[Recorded by Electronic Apparatus]

¿  (0935)  

[English]

    The Chair (Mr. Roy Cullen (Etobicoke North, Lib.)): I call the meeting to order.

    We thought it would be useful to have a briefing on the equalization program. It's an integral part of Bill C-30, and also I think the last time we met there were discussions and negotiations going on with the provinces and territories. Since then, I think we have an agreement—do we?

    Mr. François Delorme (Director, Federal-Provincial Relations Division and Social Policy Branch, Department of Finance): Well, we certainly have federal proposals—

    The Chair: We still don't have an agreement. Okay.

    With us today from the Department of Finance, federal-provincial relations and social policy branch, are Mr. Louis Lévesque, assistant deputy minister; Mr. Richard Davis, special adviser; Mr. François Delorme, director; and Mr. Sean Keenan, senior program analyst.

    So, Mr. Lévesque, perhaps you would like to start off with a presentation, and we'll then turn it over to questions of the members of the committee.

    Mr. Louis Lévesque (Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch, Department of Finance): Thank you. Merci.

    Everybody should have by now a copy of our presentation, entitled “Equalization”, and obviously,

[Translation]

which is available in both English and French.

    I will be making my presentation by switching back and forth in both official languages. I will answer questions in either one of the two languages, of course.

[English]

    My plan is to try to take you through that presentation relatively quickly. If people want to stop me as I do the presentation, I don't mind, if they have specific questions, and then after that we can turn to questions.

    The Chair: Just on that, the practice here is mostly that you go through your presentation, and we'll make a list of questions and then turn it over to you.

    Thank you.

    Mr. Louis Lévesque: That's fine by me.

    So we'll start with the first page in terms of what is equalization. In a nutshell, it's a federal transfer program, so it's legislated under federal legislation. It's unconditional. There are no particular conditions put to use. It's legislated around a five-year schedule. Every five years there's a renewal process, and I'll come to the logic and rationale for the renewal process.

    It's administered by the Department of Finance. They have a small group of people who are responsible for making monthly equalization payments according to the act and regulations, and as people know, there is a specific provision in the Constitution that obliges or commits the Government of Canada to make equalization payments, the wording of which you can find in the first line on page 2.

    Equalization provides roughly, in recent years, $9 billion to $10 billion per year to equalization-receiving provinces, and it's based obviously on both the fiscal capacity of the recipient provinces and their population.

    So on a per capita basis--and that's what you have at the bottom of page 2—it is now P.E.I. and New Brunswick that are receiving the largest amount per capita, but obviously Quebec, with its large population, is receiving the overall biggest amount. Despite the fact that it is receiving, let's say, $500 per capita, given its 7.5 million people, it is the province that receives the most in terms of overall payment.

    We currently have eight provinces that are receiving equalization payments. Saskatchewan and B.C. have been in and out of the program, depending on the years. Saskatchewan has been a consistent recipient, but in a period in the 1980s it was not a recipient province. B.C. has been receiving equalization payments over the last three or four years, in varying amounts. All of this is obviously dependent on both economic performance and the evolution of things such as natural resource prices.

    You have the chart on page 3...

¿  (0940)  

[Translation]

    The graph on top of page 3 shows the evolution of equalization payments over time.

[English]

    There are a number of features to see on that chart. One, equalization payments are generally growing, but they're quite volatile, and the latest example is that we had a significant decline in equalization payments for the years 2002-03 and 2003-04 because of data the Revenue Agency produced at the end of January.

    It's growing, but it's not growing at a rate that's out of line, that's faster than growth in GDP or federal revenues. The program is not showing signs of becoming unaffordable at all, but it's not as if the program costs are consistently declining. There's a lot of volatility, but the trend is that the program costs go up.

    If you want to go by a province-by-province basis and try to understand the logic of the program, look at the bottom of page 3. What we're trying to do...it's basically that equalization is a fiscal insurance program. What we're measuring is the fiscal capacity of provinces and we're making “deficiency payments”, or insurance payments to bring a province up to the standard fiscal capacity.

    What you see at the top of page 4 is that to establish the benchmark we're using the five “middle-income” or middle-wealth provinces. We're excluding the Atlantic provinces from the calculation of the standard and we're excluding Alberta. The end result is a standard of about $6,100 per capita in terms of a combined overall revenue we are basically committed to providing all provinces with.

    What we do, then, is we turn around—that's the bottom of page 4—and say, what is the province's own fiscal capacity? That is the yellow and the equalization payments are the red, which is the difference; that's what is necessary to take the equalization-receiving provinces to “the standard”. That's the general operation of equalization.

[Translation]

    As I was saying, it is a tax insurance program which estimates the fiscal capacity of each one of the provinces according to all of the revenue sources available respectively to each province. In the Equalization Program, we currently use 33 different revenue sources.

[English]

    The biggest one, obviously, is personal income tax. It's all linked to the actual revenues provinces raise. Provinces currently raise about $48 billion in personal income tax—that's what you have at the top of page 5—which represents a share of about 24% in terms of the revenues provinces actually raise overall, which is about $194 billion. We pay out equalization entitlements of about $4.2 billion out of that base.

    The second most important base is property taxes, both for municipalities and provinces. It accounts for about 19% of overall revenues and accounts for about $2.5 billion of equalization payments.

    So you see it really follows the logic of the major sources of revenues of provinces and municipalities. Bringing it all together, we have a total--that's probably the fiscal year 2003-04--of about $8.8 billion in equalization payments.

    Now, exactly how do we calculate that?

[Translation]

    The most fundamental and important aspect of how the Equalization Program works is the measuring of fiscal capacity.

[English]

    How do we arrive at how we measure fiscal capacity for our province in each individual tax base? We have a concept that's basically called the representative tax system approach. What we're trying to measure here in terms of fiscal capacity is how much a province could raise in any particular form of taxation if it levied average tax rates on a representative tax base. For taxes you always have to remember that a tax works with two components, two fundamental elements, the tax base and the tax rates. What equalization tries to do is say, I have to have a representative measurement of the tax base and on that I have to apply an average tax rate. That is basically how I measure the fiscal capacity of any given province.

    It's consistent with the Constitution because the whole aim is to be able to apply comparable levels of taxation to get comparable revenues to deliver comparable services, and it's grounded in the actual taxation practices of provinces and municipalities. What we try to do all the time is to capture as much as possible the legal tax base that's underpinning the provincial revenues and then the actual tax rate structure provinces or municipalities apply to that.

    It's a relatively easy exercise in some cases. For example, we have extremely good data on personal income tax. We have all the income tax data from all the provinces and the federal government, even by tax filer; we can get that information from the Revenue Agency. So it's very easy to have an exact understanding of the legal tax base and also a good understanding of the structure of the tax rates provinces apply.

¿  (0945)  

    The Chair: Before you go to page 6, I'm not sure I follow the first chart on top of page 5. You've broken down equalization in relation to the other tax bases of the provinces, but I don't understand how you do that.

    Mr. Louis Lévesque: Basically, the first two columns deal with the actual revenues of provinces. The provinces and municipalities raise in total about $194 billion in revenue.

    The Chair: I understand the first two columns; it's the second one.

    Mr. Louis Lévesque: In the second one we say how much equalization we pay in respect of the revenues on the same row. So basically what we're saying is in respect of personal income tax, we pay about $4.2 billion of equalization--$4.2 billion of about $9 billion of equalization--

    The Chair: Where do you get that?

    Mr. Louis Lévesque: These are our data. This is basically our calculation of fiscal capacity.

    M. Nick Discepola (Vaudreuil—Soulanges, Lib.): How fast did you use your calculator to arrive at $4.2 billion? Why isn't it $5.2 billion?

    Mr. Louis Lévesque: We arrived at this by calculating for all the provinces what they could raise in terms of actual revenues if they were applying average tax rates. We replicate this whole calculation for each and every one of the 33 tax bases.

    The example I was giving is personal income tax. To some extent there's a lot of computation involved in that, but there are no methodological or theoretical issues around it, because we have all the data you can ever dream of on personal income tax. We have data by individual tax filer, and we know what the tax laws are in most provinces—not in most, in all provinces—and they generally, in terms of the base, are the same as the federal government's.

    So we don't have a problem comparing the tax bases, and we don't have a problem comparing the tax rates. We can basically replicate what a province could raise if it were applying—

    The Chair: Let me just understand that.

    In other words, for the personal income tax, you're saying in terms of the fiscal capacity of the various provinces, it is basically generating $4.2 billion in--

    Mr. Louis Lévesque: In equalization.

    The Chair: —in equalization, in terms of fiscal capacity.

    Mr. Louis Lévesque: In terms of differences in fiscal capacity. It's exactly that.

    Then for property tax, they collect about $37 billion. We actually pay, to equalize fiscal capacity, about $2.5 billion.

    Mr. Nick Discepola: And what property taxes do the provinces collect?

    Mr. Louis Lévesque: It's the provinces and municipalities. Because of the constitution, all the taxation powers of municipalities derive from powers that are granted to them by provinces. In order to get an overall picture of the service level provided by provinces, you have to take into account the fact that, for example, some provinces deliver some services at the provincial level and some others deliver them at a local level. So the best way to ensure that there's a comparative level of services is to aggregate everything.

    You take into account both the provincial revenues and the local revenues, and that's consistent also with the trend over the years of the evolution of the equalization program and moving to comprehensive revenue coverage. At some point, if you want to equalize fiscal capacity, you have to take into account all possible sources of revenues of provinces and municipalities. That's basically what you're seeing here. Property taxes is one of the key elements of revenues of provinces and municipalities. There are some provinces that levy property taxes at the provincial level. There are some that don't. But in all provinces, the authority is left to establish property taxes, and the way they're established is all set by provincial legislation.

¿  (0950)  

    The Chair: I've drawn a conclusion, and this may not be correct. Would it be fair to say that if the provinces were taxing provincial income tax at the level of their fiscal capacity, we'd get rid of $4.2 billion of equalization?

    Mr. Louis Lévesque: If all provinces could raise the same revenues at the same rate, we would observe no fiscal disparities in respect of personal income tax and we would not make any equalization payments in respect of personal income taxes. There are two things underlying this. You have differences in average incomes, and you also have differences in the distribution of income.

    Basically, if you have more “rich” people.... For example, a province like Ontario has on average higher incomes and on average a higher number of high-income people. Under a progressive tax system, you raise more taxes on one person making, let's say, $100,000 a year than you raise on two persons making $50,000 a year.

    It's just the nature of progressive taxation that all provinces and the federal government apply. This is what we tried to take into account here. It's not only the differences in incomes, but also because governments have chosen to have progressive taxation, if you have more high-income people, it derives higher fiscal capacity. That's exactly what we're trying to replicate, based on the average practice of each individual province.

    The Chair: Nick, did you have anything?

    Mr. Nick Discepola: How do you arrive at the average property tax rate versus the evaluation?

    Mr. Louis Lévesque: Can I just propose to defer the discussion of property tax to later in the presentation, because property tax is one that—

    Mr. Nick Discepola: You're the one who said ask the questions whenever you want, so you're agreeing with the chair's premise—

    Mr. Louis Lévesque: That's one of the big items of the—

    The Chair: Can you cover that later?

    Mr. Louis Lévesque: Yes.

    The Chair: I was just trying to understand the chart, that's all, not to get into a theoretical discussion on property taxes.

    Mr. Nick Discepola: One principle then is that if there were no discrepancies, if everybody was within the same average rate on all these categories, we would have no equalization payments to make at all.

    Mr. Louis Lévesque: There are two things: you have to go back to base and the rates. If all the provinces had the same tax rates, that would make my job simplier in the sense that the calculation would be simpler, but there would still be equalization, because what drives equalization is the difference in capacity, which is the base.

    Now on the rate, that's the important point. The thing we definitely don't want to do is recompense low-tax effort. Alberta is not an equalization-receiving province so it's a moot point, to some extent, but if Alberta was an equalization-receiving province and decided not to have a sales tax—and they currently don't have a sales tax, and that's their choice—they would not be compensated on their equalization because of the fact that they don't have a sales tax. Or if a province decides to have a very low tax rate in some area, we're not compensating that; it's their choice. Equalization is driven off the average tax rate that provinces apply.

    What we want is basically to make payments on the basis of what is it you could raise if you were doing the same things as everybody else, not what you decide. You can do whatever you want, but we're not going to pay equalization. If, on average, sales tax, let's say, is 7% and you decide to have a 5% sales tax, equalization is not going to compensate a province for that. That's the province's decision. Equalization will be based on...on average, the sales tax rate is 7%, so the calculation implies or assumes that you are taxing at 7%.

    Mr. Nick Discepola: What if one jurisdiction decided it wanted to eliminate corporate income tax?

    Mr. Louis Lévesque: That would be the same. If you observe that provinces on average impose a 10% corporate tax rate and a province decides not to have a corporate tax rate, that's their decision not to have a corporate tax rate. But equalization would basically say that on average it's a 10% rate and you could raise that and be the same as everybody else.

    Mr. Nick Discepola: If it's higher.

    The Chair: I'm wondering if we could just carry on, because what I was trying to do was just understand the chart, which I didn't initially, and we can get back into all the questions later. I'm sorry to have disturbed everybody, but I just didn't understand the chart and was asking you to expand on that.

    Why don't we go through it then? And if we have any questions I'm sure we'll get to them later.

    Mr. Louis Lévesque: On page 6 you have a chart that looks at disparities. The argument that has been made from time to time is that equalization does not encourage economic performance, and you have increasing disparities or diversions in economic performance.

    The chart, when you look at it, doesn't confirm that at all. The chart shows that when you look at the ratio of the fiscal capacity between the provinces that are receiving equalization and the equalization standard, in fact it's basically going down, in that the differences are narrowing. Over time what we're seeing is a slow diminution of differences in fiscal capacity.

    There are big jumps in any year from year to year, and also province by province you'll see a lot of variation. But overall, there's not a systemic or a trend increase in fiscal disparities, certainly not that the data would show.

    That's the basis of equalization. As for other issues that are subject to a lot of discussion or that come up often in discussions around equalization, we thought we'd explain a couple of those.

    One, shown at the top of page 7, is the generic solution. That goes back to the point I was making before, which is that under equalization—that's what you have at the top of page 7—the whole point is we're trying to derive the program from average tax rates: not actual tax rates of a given province, but average tax rates. The idea is, you don't want to recompense or compensate a province for saying, “I don't want to have a particular tax”, or, “I want to have very low tax in that area; equalization's going to give me the difference in revenue.” We don't want that.

    Generally speaking, you want the equalization payments not to depend on the actual revenue of a province. That's what you have at the bottom of page 7.

    But as shown at the top of page 8, there are particular circumstances where it just happens that a particular province has the vast majority of a tax base. The examples would be potash in Saskatchewan or offshore oil in Newfoundland or Nova Scotia. They are the “average” in the sense that if they change the rate, there's a perfect correlation between their tax rate and the average tax rate because there's not a large other element in the country from which if they vary a little bit it doesn't change the average at all. They are the tax base.

    So you have a structural problem. When a province has a vast majority of a tax base, you get into incentive effects, because there's no way to measure what the average tax rate is outside of the province's decision. For that purpose, there's a provision in the equalization program that introduces a reduced tax-back. We reduce the rate at which we take into account the provincial revenues, so as to mitigate the incentive impacts of saying that if you tax you're basically losing it, to some extent, to equalization.

    It's really focused on the particular circumstances where one province has a vast majority of the tax base and has a major disincentive to levying revenues because they're basically losing it to equalization. There's a 70% formula that kicks in, which says if you have more than 70% of the base, we reduce the rate at which we take your revenues into account from 100% to 70%—which means there's a net gain for the province in taxing that revenue source structurally.

    That's a specific issue that has been put in going back to the early 1990s, notably in the context of the offshore accords and the situation where you have a province that has a vast majority of the given tax base.

    There's another provision in the equalization program, introduced in 1982, that is called the equalization floor. Basically it provides for a floor to declines in equalization for individual provinces. It's triggered when your decline goes above a certain threshold amount, and it has been notably beneficial to the province of Saskatchewan where because of their natural resources revenues they have very high fluctuations in their equalization.

    The one that's not mentioned in the other provisions is obviously the ceiling, because the ceiling was abolished a year ago.

    Other issues that become very much the subject of discussion are the offshore provisions of both Newfoundland and Nova Scotia. These are not direct equalization provisions, but they relate to equalization in the sense that they protect the province. They give a special payment to those provinces to “offset” the natural decline in equalization that would happen with the increase in their oil and gas revenues. These are transitional measures and declining, and they operate outside the equalization program.

¿  (0955)  

    In the case of Nova Scotia, they had a 10-year transitional arrangement where they had—and you have that at the top of page 10—a declining proportion of their offshore revenues being sheltered, from 90% to 80%, 70%, 60%, 40%, 30%, and going down to zero. At the bottom of page 10 is this generic solution I mentioned to you, where they have a 30% benefit that is guaranteed under general legislation under equalization. This really means they stopped receiving benefits from the offset provisions in 2001 and 2002, and the only thing Nova Scotia can benefit from is the generic solution. I'll come to that, but there was an issue that Nova Scotia has been arguing for quite a long time that it did not benefit as much as was intended from the equalization offset. The offset was triggered—that's at the top of page 10—in 1993-94, but then production fell off, which meant that their clock was ticking but they were not reaping a lot of benefits from their offset provision.

    Newfoundland has a different equalization offset on page 11. It's a 12-year transitional arrangement. It operates in two ways. I don't want to get into the exact mechanism--I'll let my colleagues handle that one--but the bottom line is, as you have on the bottom of page 11, it has produced significant benefits for Newfoundland up to now. In fact the benefits have exceeded the revenues they received from offshore so far. They have received own-source revenues from offshore of about $420 million and more. So any impact we have had on equalization has been more than compensated through the various offset provisions.

    That's about it for the general stuff. Now I want to get into the proposals that are on the table for renewal at a very general level, and then we can turn to questions.

    If you go back to the beginning...

À  (1000)  

[Translation]

    I said in the beginning that the Equalization Program is automatically renewed every five years. The act provides for the stopping of payments and does not allow the government to continue payments after a period of five years, which is one way of making sure that the program is reviewed systematically and continually. This is done essentially to stay in keeping with the program's main purpose. The program measures the fiscal capacity of provinces, drawn from all their revenue sources. The provinces' taxation practices change over time. Therefore, it is important to make sure that changes in provinces' taxation practices, as well as new data, be reflected periodically in the Equalization Program. This is why there is a systematic renewal process every five years, at which point we study the changes in provinces' taxation practices and decide whether or not to make changes to the program.

[English]

    To give you examples from the 1999 renewal, one of the things that happened in 1996 was that the Atlantic provinces had agreed to harmonize their sales tax with the GST. Quebec had moved to a system that was very close to the GST. So you had a major source of revenue for provinces—sales taxes—that had undergone a significant change in terms of the way provinces were collecting revenue. It was important to ensure that the way we measure fiscal capacity under a sales tax was consistent with the now changed practice of provinces, so changes were made to the measurement of fiscal capacity under sales tax in 1999.

    Similarly, under the gaming base, we were thinking of counting the revenues that provinces were deriving from lottery tickets, but we had not caught on to the evolution in terms of federal lottery terminals and casinos. These were increasingly major sources of revenues for provinces, so it was only appropriate that the equalization program be adjusted to ensure that you adjust the measurement of fiscal capacity to take account of that.

    There is an element in the renewal that's always... You have all of these tax bases and you have to look at whether or not there have been changes in provincial taxation practices or newly available ones that make it impossible or necessary to improve the measurement of fiscal capacity. This is not aimed at either enriching or reducing the program. This is aimed at saying what you're trying to do is to have a system that is representative of provincial taxation practices. If they change, you have to adjust your measurement accordingly over a period of time. In any renewal—and in this renewal I'll come to that—there is an element of adjusting your measurement of fiscal capacity in tax bases. That's always there, and I'll come to that.

    For this renewal, there was another particular element, which was the issue of stability, or lack thereof, or volatility of equalization payments. There have been a number of shocks from various sources to equalization payments in recent years, and a number of provinces have complained that it makes their budgeting much more difficult.

    Also, from a fiscal perspective the world has changed from a world where from the eighties to the mid-nineties most governments were in deficit situations. If you had a plus on equalization, it just meant that your deficit was a bit smaller. If you had a negative, your deficit was a little bit bigger. But now you're in a world where most provincial governments as well as the federal government are striving to go after a balanced budget. If you're in the mid-year and you've planned your year on the basis of the measures required to get your balanced budget and you get this big shock on equalization, there's no disagreement, everybody agrees, it's not conducive to good fiscal planning, and the system has been quite volatile.

    One of the directions that governments are taking, and it's not only the federal government but also provincial governments that ask for this, with the federal government totally in agreement, is we should strive to have a system that produces more stable payments. What you have at the bottom of page 12 is, as part of the renewal, the government is proposing to introduce a new system of making equalization payments to make the payments more stable.

    At the top of page 13 what you have in there under the yellow and the blue is the year-over-year change that you observe in the current system. What we're proposing to do is introduce a moving average system for making payments that would basically look over a three-year period and say that each and every year I'm paying the average of the past three years' determination of entitlements. Our analysis and the analysis the provinces or academics have done showed that it would reduce significantly the volatility we have observed—in fact, very significantly.

    For example, we had data from the census last fall that had the impact overall of reducing equalization payments in the year 2003-2004 by about $700 million for all the equalization-receiving provinces. If we had the moving average in place, the decline would have been $180 million in that year, and the rest would have been spread over a period of three years.

    It's not about changing the way the final payments are actually established, but it's a matter of spreading the impacts of variations, and the same for the income tax data that came in, in February.

À  (1005)  

    You have a chart. I won't try to explain it, because I've been told a number of times that people have trouble understanding it. It basically explains how the moving average would work.

    There was an issue with the moving average that provinces would “lose on average” in the implementation of that, because we would delay payment. To more than compensate for the delay in payments, a 10% increase in payments is being proposed.

    On page 14 I discuss the other stability elements. I come back to the issue of changes to tax bases. I just said a few minutes ago that as part of any renewal we need to see if changes to the measurement of fiscal capacity need to be made to ensure that we either reflect more accurately taxation practices of provinces or incorporate new data that has become available. We have to do that at every five-year renewal.

    Now I go back to Mr. Discepola's question on property taxes. The property tax base is very important for the program and has been under discussion for quite a long time.

[Translation]

    For a long time, Quebec has been saying that the current base does not reflect the actual legal base, the tax base on which property taxes are levied by municipalities and provinces. Essentially, we are talking about real market value. For a long time, Quebec has believed that it has been penalized because of this, and that we should adopt a system which only takes into account real market values.

    The federal government as well as a number of provinces agreed; however, British Columbia was opposed to this idea.

À  (1010)  

[English]

    The Chair: Could you speak a little more slowly? I'm not getting the translation.

[Translation]

    Mr. Louis Lévesque: All right. I was saying that for several years, the Government of Quebec complained of the fact that the measuring of fiscal capacity in comparison to its property taxes was inadequate.

[English]

    The Chair: There is no translation now at all.

    Mr. Louis Lévesque: I can go for English or French.

    The Quebec government has been complaining for quite awhile that the measurement of fiscal capacity in respect of property taxes is not appropriate. Quebec has been complaining that the current base does not use market values as the starting point, and because of that, obviously they are losing, in their minds, significant sums.

    B.C. has always been opposed in principle to the use of market values, because obviously with their high property values, they felt their fiscal capacity would be vastly overestimated under a system that uses market values.

    This subject, in terms of the equalization of property tax, has been under discussion for the last, I'd say, six or seven years. It was discussed as part of the previous renewal, and the discussion was continued as part of the current renewal. What has fundamentally changed from a program management perspective is that there are now data available from individual municipalities that give a good picture of market values by municipality, by province, across the country.

    The other thing is, while there are some slight differences, the experts in this area have all confirmed or have strong views that there is now a very general consistency in the application of fair market value assessments across the country. In terms of fundamental change, there is one, which is that it is now possible to construct a tax base based on the legal basis on which municipalities and provinces apply property taxes. There's now data of sufficient quality and consistency there. That's the first element.

    The second element, which is fundamental, is that you have to go back to what the representative tax system is. You have to first, as much as you can, start with the legal base. The second thing is that you also have to correctly represent the actual structure of tax rates.

    Quebec has been arguing for the longest time that once you have market values, that's the end of the story, and you should make equalization on the basis of simple market values. The federal government has consistently—and to this day, there's no change in that view—fundamentally disagreed with that. It is not sufficient to look at the legal tax base. You also have to look at the actual structure of the tax rate that is applied. I go back to the parallel. In personal income tax, it's not sufficient to look at taxable income. You have a progressive rate structure, and that's how provinces tax, which means that when you do equalization, you have to take that structure into account.

    In the case of property tax, it's exactly the opposite. It's true that provinces and municipalities apply taxes on market values, but you do observe that in places with very high market values, the rates of taxation are lower. The fundamental point here is that a dollar of market value does not translate into a dollar of fiscal capacity. You have to add a good estimation of the relationship between market values and fiscal capacity in order to build a tax base that will represent fiscal capacity correctly.

    Those are basically the proposals that have been put on the table after a long examination of this issue. The proposal on the table is one based on real market value. That is, we start with market values, but there's an adjustment made, a deflation to reflect the variations and the variability in house prices across the country.

    There's also a special adjustment that is being proposed for British Columbia. We had long discussions with academics and experts, and there was a large consensus that a straight application of a methodology based on market values would not properly reflect the particular circumstances of the housing market in British Columbia.

    The government is committed to reviewing all these items as part of the next renewal and is proposing to move with 50% of the new approach for this renewal, with a view to completing the implementation of the new tax base for the next renewal.

À  (1015)  

    There are also changes being proposed in personal income tax, going back to the sales tax example. Now all the provinces under the tax collection agreements have moved to tax on income, and there's a proposal to basically reflect, in the measurement of fiscal capacity, the move to tax on income.

    There are smaller changes made to a number of the tax bases, for hospital and medical insurance premiums, water power rentals, mineral resources, and motor vehicle licences, along the lines that we either have new data or there have been changes in provincial practices. These changes are relatively minor in their overall impacts, the big changes being the change to property tax and personal income tax.

    The government is also proposing to do two things to fix anomalies with respect to the Newfoundland offshore election. As I mentioned, there are provisions in the accord where they have a choice to make. They have two regimes of protection, and they have to choose between the two regimes. They've been complaining for quite a while that they have to make the choice before they have all the information. The Newfoundland government has been complaining about it, and it's been discussed around the equalization table. The federal government has indicated it would solve that issue and basically allow Newfoundland to make the choice once it has all the information.

    There is also a proposal to increase the benefit that Nova Scotia would receive from its offshore provisions by effectively changing the date at which the provision would start so that they receive higher benefits.

    Finally, specific amounts of $175 million have been added to the package as a proposal to increase the amount of payments in the initial year of the equalization package.

    That's probably enough. C'est assez pour le moment. I'll take your questions.

    The Chair: Thank you very much, Mr. Lévesque.

    Werner, did you want to start off?

    Mr. Werner Schmidt (Kelowna, CPC): I have to apologize, first of all, for not being on time. I was totally tied up with something else.

    I want to welcome you gentlemen here. I'm glad you're here. I think this is probably one of the bugbears that have haunted us for a long time.

    I was particularly interested in your reference to the property values in British Columbia. I happen to come from that province. Your observation was quite right that as the property values rise, the tax rates very often are adjusted downward, so that measuring them as a fiscal capacity is perhaps, if you compared rates directly, not really being comparable, and I'm glad that is being taken into account.

    All the way through, the fiscal capacity is based on a tax rate. I'd like to ask you, if you're going to use the adjustments of fiscal capacity because the province has changed the rate—in terms of British Columbia, particularly on real estate—why would you use that as your base when in fact that rate really is in the jurisdiction of the provinces to begin with? As a consequence, although I know you made the statement that you now have data that is reliable to compare one province with another and all that sort of thing, I really wonder how valid that measure is and also how reliable it is.

    You use that approach. If someone else came in and used the same formula, would they come up with exactly the same dollars you do?

    Mr. Louis Lévesque: To your last question, the answer is I hope absolutely yes, because people should be able to replicate—

    Mr. Werner Schmidt: I hope so too. But have you ever tested it?

    Mr. Louis Lévesque: Oh, yes, and the Auditor General does that too. The answer is yes.

    Mr. Werner Schmidt: The other questions are the tough ones.

    Mr. Louis Lévesque: Going back to your question at the beginning, you don't want the individual tax rate that the province or the municipality applies to play a role in equalization directly. I agree with that, and this is why the system is based on the average tax rate.

    Mr. Werner Schmidt: Is that the average tax rate across Canada?

    Mr. Louis Lévesque: Yes, across Canada.

    Mr. Werner Schmidt: Okay, carry on. I'll let you finish, and then I have another question.

    Mr. Louis Lévesque: For the tax rates, it's across Canada.

    Mr. Werner Schmidt: Right.

    Mr. Louis Lévesque: That means if you were to do the mathematics, for a province like B.C., for example, it's true that if they change the tax rate a little bit, because they are an equalization standard, they feed in the standard a little bit and that changes their equalization payment a little bit. But the effect is extremely small. For provinces like Saskatchewan or Manitoba...

    In the Atlantic provinces, it's zero, because they're not an equalization standard.

    So, really, the system is hard-wired to ensure precisely that. Your individual taxing decisions basically do not have that much of an influence on your equalization payment—a very small amount. The only situations where we have a potential risk for that are the situations I mentioned. Offshore, where you only have one province in a particular category, then obviously how do you measure fiscal capacity? They're the only ones in that area. So when they change their tax rate, their revenues go up and down. You have a significant issue there. That's a problem. But generally speaking, for things like personal income tax, corporate taxes, that is not a major issue.

    In terms of the data, we have data on overall revenues that are coming from public accounts. These are things that at the end of the day are certified to quite a degree of accuracy. We have data on municipalities, and we're working with Stats Can to ensure that we get an adequate degree of accuracy in terms of data. This is no different from a number of other taxes. In the end, what we strive to have is a certificate from the Chief Statistician of Canada that these are the best data you can have for these particular purposes. But we have quite significant ways of ensuring this consistency.

    Also, at the individual level, a municipality changing one tax rate would have a non-impact in terms of being so small. We will pick that up through the overall revenues. Then what we need is the overall assessments at the provincial level. These would have minuscule impact. So our system is not dependent on the individual decisions.

    Going back to one of the questions, why you want the system to be, generally speaking, tracking overall what provinces will do, basically on average there's no such thing as a fixed standard, such as you should deliver that amount of public services. It's all the result of decisions of all the provinces combined. The overall level of equalization reflects the political decisions, to a large extent, of all the provincial governments and the level of taxation they have.

    The way we have it, it's automatic. Basically, if all provincial governments were to decide to increase taxes and increase their revenues, there would be a slight increase in equalization. If they decrease taxes, there is a slight decrease in equalization. But it really follows the general trend; it does not follow any individual province.

À  (1020)  

    Mr. Werner Schmidt: I have one more question, a specific technical question with regard to the natural resources.

    You say you have only the one province with offshore, and that's quite true, but the royalties and other revenues from resources are not exactly unknown in Canada. There are a number of provinces that tax these natural resources. Is there no comparison at all between the revenues collected from offshore natural resource development and revenues collected from onshore natural resource development?

    Mr. Louis Lévesque: I'll just give the first part of the answer and let Sean give you more information, because there's a fundamental difference in the cost structure.

    Mr. Werner Schmidt: That notwithstanding, I'm quite aware of the cost structure. I don't want to get into a debate at this point.

    Mr. Sean Keenan (Chief, Senior Program Analyst, Federal-Provincial Relations Division and Social Policy Branch, Department of Finance): We do differentiate between each of the revenue sources. Specifically, we have a personal income tax base and a sales tax base, because those are applied differently.

    In the resource category—

    Mr. Werner Schmidt: Yes, that's what we're talking about.

    Mr. Sean Keenan: —in the oil and gas bases, we have different categories to reflect the differences in the underlying economics and taxing structures that are involved.

    For example, we have natural gas, which has its own regime, and heavy oil, which has its own regime, and light and medium oil.

    The offshore is an entirely different industry, with different economics. The Hibernia project is producing 200,000 barrels of oil a day, and most wells in western Canada produce 20 barrels a day. So the tax regime is entirely different. From a capacity point of view, it's not fair to say, “Newfoundland, you have the same capacity to generate revenues from the offshore as these onshore wells”.

    Mr. Werner Schmidt: That's not exactly what I was getting at, but that's okay.

    Mr. Sean Keenan: We do make that distinction to reflect the differences in the taxing practices.

À  (1025)  

    Mr. Werner Schmidt: Okay, thank you.

    The Chair: Thank you.

    Monsieur Paquette.

[Translation]

    Mr. Pierre Paquette (Joliette, BQ): I would also like to thank you for your presentation. It is a subject which remains a hot topic.

    On page 2 of your presentation, you say that the provinces will receive $9.6 billion for 2004-2005. In fact, there is no guarantee that in the end, it will be $9.6 billion. This year, because of what happened in Ontario, for example the blackout and the SARS crisis, $600 million in equalization was taken out of the supplementary estimates. Therefore, it is an envelope which is set aside for...

    Mr. Louis Lévesque: It is our first estimate for 2004-2005. You are completely right in saying that this amount can be increased or decreased.

    Mr. Pierre Paquette: If that amount is decreased or increased, will the moving average apply?

    Mr. Louis Lévesque: According to the proposal that has been put on the table, the moving average will not apply for 2004-2005.

    What is provided in the act and which is not mentioned in the presentation, is the implementation of a reimbursable floor. If ever payments fall lower than the average of the last four years, excluding 2003-2004, the federal government would give an interest-free loan to the provinces, equal to the difference, which they would reimburse over a period of five years.

    With respect to the implementation of a moving average, we propose a gradual introduction in 2005-2006, 2006-2007 and 2007-2008. You will find all that in the wonderful graph on page 13, which I did not explain in detail, but which gives...

    Mr. Pierre Paquette: Which explains the readjustments?

    Mr. Louis Lévesque: As you will see on page 13, for 2004-2005, there were no changes. Essentially, we would gradually phase out the current system and introduce a new system spread over a period of three years. In 2007-2008, we will have a new system with changes to tax bases and the moving average will be applied fully. It is a three-year transition towards a new system.

    Mr. Pierre Paquette: And what about the $150 million in readjustments?

    Mr. Louis Lévesque: That will apply in 2004-2005.

    Mr. Pierre Paquette: And if there's a drop?

    Mr. Louis Lévesque: It will not be affected. It is $150 million more than expected.

    Mr. Pierre Paquette: All right. My second question relates to property taxes.

    I understand that the federal government is not convinced of Quebec's arguments. I would like to know what difference this makes for Quebec. According to the documents I've read from the Quebec Department of Finance, its proposal would be equivalent to $400 million more for Quebec, each year. I would like to know how much more the change you are making would give Quebec for the upcoming year.

    Mr. Louis Lévesque: For property taxes over an entire year, Quebec's upcoming increase will be $359 million. As I was saying, it will be introduced gradually over the next three years. Therefore, in terms of inflow, by taking all of the proposed changes for renewal, there will be $1.7 billion over the next five years for Quebec. There are other changes which benefit Quebec. In tax bases and the change to the moving average, the 10% factor also benefits Quebec. Therefore, if we take all of the proposed changes, there is an expected increase of payments of approximately $1.7 billion over five years.

    You said that we did not heed Quebec's arguments. I tried to explain that Quebec had made two types of arguments.

    Firstly, Quebec said that the federal government should use real market value as a starting point in measuring fiscal capacity, since real market value is the statutory basis on which property taxes are applied, and that this was consistent with the general approach to equalizing the representative taxation system.

    In this respect, one can say that the federal government's proposition, by and large, agrees with this argument. From now on, since we have comparable and reliable data, and since provinces and municipalities generally levy property taxes on the basis of real market value in a consistent manner, it is now appropriate and possible to use property values as a starting point in measuring fiscal capacity.

    Secondly, to my knowledge, Quebec maintained and continues to argue that once we have real market values, we must use simple real market values, which means that $1 in real market value equals $1 in fiscal capacity.

    The federal government has always maintained that this was not the right approach to measuring fiscal capacity. This relates to the reasoning I explained earlier. Yes, property values are the starting point. However, although some municipalities have very high property values, their tax rates are lower. It's endogenous. It mirrors the fact that one additional dollar in property value or extremely high property values are not proportional to an increase in fiscal capacity.

    Our analysis shows that there is an “elasticity” of approximately 0.7. This means that for each additional dollar in property value, there is an increase in fiscal capacity of about 70¢.

    We also observed something else. While there is no hard data to confirm this, there is wide consensus on this matter. We consulted all the experts, in particular university professors on this issue. Therefore, we can say that if we apply this method, even with only 70%, this means that there is an over-estimation of fiscal capacity in a province such as British Columbia, which has much higher property values than the Canadian average. Therefore, an additional adjustment is proposed for British Columbia.

À  (1030)  

    Mr. Pierre Paquette: And there is but 50% of this new base...

    Mr. Louis Lévesque: Yes, $350 million have been allocated for the current renewal. Of course, the goal is to fully implement this by the next renewal. Specifically, we will have to include the non-residential part of the property tax base which includes the commercial and agricultural sector, as well as adopt a more definitive perspective on how to take into account British Columbia's fiscal capacity, and the precise correlation between property values and fiscal capacities.

    Mr. Pierre Paquette: I suppose I don't have a lot of time left, therefore I will have to prioritize.

    I believe that Quebec's position, and that of other provinces, is to use the 10-province average rather than the five-province average, which includes Alberta and the Atlantic provinces. In terms of cost, I would like to know what the adoption of the 10-province formula represents for the federal government.

    I heard that it was three or four billion dollars. I would of like to know how much more, according to your calculations, this would cost the federal government.

    Mr. Louis Lévesque: The reason why you heard of several estimates is because the cost is extremely variable. Specifically, it varies according to the changes in natural resource prices, particularly the price of oil and gas. Current estimates, which I have before me, are around $4 billion per year. We're talking about $3.5 billion for 2004-2005 and $4.7 billion for 2003-2004.

    It is now higher, because the prices of oil and gas are relatively high. Of course, the inclusion of Alberta in the standard would increase equalization payments considerably. In short, these are the type of costs we are facing.

    Mr. Pierre Paquette: Do I still have some time?

    The Chair: Not a lot.

    Mr. Pierre Paquette: It is said that disparities between beneficiary provinces and the others are diminishing. Is this cyclical? Is it related to the specific problem experienced by Ontario during recent years or is this a structural trend?

    Mr. Louis Lévesque: We can consult the data found in the presentation. Analyses spread over 20 years show that it's structural. Economic indicators, whether it be disposable income per capita or per capita GDP, are consistent with fiscal capacity indicators.

    Mr. Pierre Paquette: That's good news.

    Mr. Louis Lévesque: The data shows, for example, that among all provinces, the Atlantic provinces have posted the best relative performance, whereas Quebec, Ontario, and Saskatchewan, taken together, are about average. My data also shows that over the last 20 years, British Columbia is the province which showed the poorest relative economic performance.

    Mr. Pierre Paquette: Because of Japan.

    Mr. Louis Lévesque: I don't want to venture into explanations, but the data is clear.

    Mr. Pierre Paquette: Thank you.

[English]

    The Chair: Okay. Thank you.

    Mr. Cuzner, and then Mr. Discepola.

    Mr. Rodger Cuzner (Bras d'Or—Cape Breton, Lib.): Thank you, gentlemen, for the presentation today.

    To follow Mr. Paquette's question on the ten-province formula versus the five-province formula, could you give me an indication as to which of the provinces would be supporting the ten-province formula? Is the opposition to the ten-province formula coming primarily from the federal position?

    Mr. Louis Lévesque: I don't want to comment on the position that Ontario and Alberta will take on this. I think a pretty unanimous view of the equalization-receiving provinces would be that it would be a good thing to enrich the program to the ten-province standard. I think they have been consistent in saying that.

À  (1035)  

    Mr. Rodger Cuzner: The receiving provinces have, yes.

    Mr. Louis Lévesque: The federal position is well known in terms of the costs.

    The other element, going back to the ten-province standard, is also the volatility element. The volatility tacked on to the volatility of natural resources is really another element in the picture.

    Mr. Rodger Cuzner: Is that the crux of the federal position?

    Mr. Louis Lévesque: I think there are a series of elements.

    First, the government feels that the current program is adequate in terms of meeting the constitutional objective. The program tracks and delivers an amount of payment that allows provinces to deliver comparable services.

    The second one is that there is a huge cost associated with moving to the ten-province standard.

    The third one is, in terms of the objectives of reducing volatility, certainly, the introduction of a standard that would be highly tied or highly correlated with Alberta's resource revenues, which are highly volatile, would not be consistent with the aim or the direction of trying to make the program less volatile.

    Mr. Rodger Cuzner: Looking specifically at the offshore exemptions in the transitional agreements in Newfoundland and Nova Scotia, for Nova Scotia that transitional agreement was triggered, I believe it says, when at least four million cubic metres of natural gas were being realized. So what happened in Nova Scotia when the original agreement was negotiated? Was the amount just not big enough? Is that what justified us to go back and reset the trigger?

    Could you indicate what the difference is between the Newfoundland experience and the Nova Scotia experience?

    Mr. Louis Lévesque: I think certainly the Nova Scotian view is that they did not benefit as much as they expected. I think the facts support that contention to some extent, given the fact--and I don't have the exact production numbers in front of me—that production took place, it triggered the declining elements of—

    Mr. Rodger Cuzner: So it wasn't a voluntary trigger?

    Mr. Sean Keenan: It was in the agreement.

    Mr. Louis Lévesque: But production fell off, which means that in the years...for example, if you go to the chart on page 10, if you're going to have protection equivalent, let's say, to 90% or 80% of your production from equalization, obviously if the production in those years is very high, you're realizing a significant benefit. If the production is quite low, you're not realizing a lot of benefit.

    What happened is there was enough to be triggered, but then production fell off, which meant in the years that Nova Scotia should have reaped “the most important benefit”, production actually was quite low and they didn't reap a lot of benefits. So what is being proposed is to say in the legislation that we're not formally resetting the clock. It's just if the clock had been triggered later on, after a significant bout of production, your benefits would have been this and you'd still be entitled to two years at 50% and 40%.

    So what we're proposing in the legislation is a payment that would basically equate to what you would have gotten in the past, and we're also giving you the 20% for one year, the 50% to 30%, and 40%, which is 10% over 30% in the other year. In terms of benefits it's effectively resetting the clock. Legally speaking, we're not rewriting the whole accord in terms such that we would effectively reset the clock. We're providing a benefit equivalent to if the clock had started later, at the time when production was more important.

    Mr. Rodger Cuzner: That's fair. There doesn't seem to be any push back from the other stakeholders, from the other provinces, on that?

    Mr. Louis Lévesque: Not that I'm aware of, but if you ask me as a senior federal official, usually when you do something for one province... That's another question.

    Mr. Rodger Cuzner: Could I ask—and I think it goes back to Mr. Schmidt's question too in regard to other resource-based revenues—when we look at land base as opposed to offshore, what has been the response of the other provinces? Has Nova Scotia formally requested through discussions that their offshore revenues be exempted?

À  (1040)  

    Mr. Louis Lévesque: There are a number of variant demands around that. I think, generally speaking, what I'm aware of is that both Newfoundland and Nova Scotia have argued that under the terms of the accords they should be the principal beneficiaries of offshore resources. Newfoundland and Nova Scotia, that I'm aware of, are arguing that the operation of the equalization program, by reducing their equalization payments, is to some extent negating the impact or negating that commitment.

    The federal government does not agree with that view. The federal government's view is that the federal government has lived up to the commitments in these accords and that it was always envisaged that equalization would come down. And that's precisely why there were transitional—key word, transitional—offset provisions built in outside of equalization to provide specific benefits to those provinces. So over and above the royalties and the loss of equalization, they have transitional offset provisions. That's the general idea.

    There's a general view that the treatment of natural resources under equalization should be changed to have less onerous clawbacks. This has been discussed quite extensively, not only with the Atlantic provinces but more recently with Saskatchewan. The government is committed to a full review of the treatment of the natural resource tax base as part of the next renewal, with a view notably to see how and where the generic solution should apply and how our costs are properly measured, and all of that. So that's on for the next renewal.

    The Chair: Thank you, Mr. Cuzner.

    Mr. Discepola.

    Mr. Nick Discepola: You're now using 33 different sources of revenue in your calculations. Have those varied over the past little while? Could we get a list of those? Are there any others in the ones you've mentioned you're looking at negotiating with the provinces?

    Mr. Louis Lévesque: I'll make a general point and then pass it on to Sean. It is that with the list we're using, we're trying to mimic what provinces actually do. Basically, we do not invent that thing, in a sense. What we're trying to say is, what do provinces raise revenues from? That should be the list of things we try to equalize as comprehensively as possible, and each individual line is driven by asking, do we have a comparable base across provinces?

    But I'll let Sean—

    Mr. Nick Discepola: That's revised every five years, and you used the example of the lottery revenues, etc.

    Mr. Louis Lévesque: Yes.

    Mr. Sean Keenan: It is revised. There are no proposals this round to add additional sources or to delete sources. There's nothing in the legislation that changes the number for this renewal.

    Mr. Nick Discepola: Is the per capita reporting just on a reporting basis or are some of your calculations done on a per capita basis?

    Mr. Louis Lévesque: Generally speaking, for all the calculations one of the key tenets is equal need per capita. The program is driven by the principle that what we're trying to do is give all equalization-receiving provinces access to the same amount of revenue per capita. All of this, all the revenues that are the basis, are at some point converted to per capita equivalents. That's one of the fundamental anchors, that is to say, how you ensure equality is by providing access to the same amount of revenue per capita at comparable tax rates. That's a key element in the program.

    Mr. Nick Discepola: That's irrespective of the fact that per capita funding in some respects may not be appropriate. You can have a high cost to provide a certain level of service whether you have a hundred people or a thousand people to provide the services to.

    Mr. Louis Lévesque: That is certainly an area of a lot of discussion and debate, though it's an area where, when you start to do research, you come up with conclusions that may not be where you started initially.

    Obviously smaller provinces argue: “We have dis-economies of scales. We have to service remote areas. That's costing us more on a per unit basis, so a measurement of need on an equal per capita basis is not fair or appropriate for us.” On its face, it's a legitimate argument. Another variant of that is, we have—for example—more elderly people, or we have more young people, or we have particular characteristics.

    At a very general level, if you look at the issue of expenditure need—first things first—you're getting into a pretty complicated area at the start, because you cannot simply look at one area. You have to look at the entire spending bundle and say, “I'm spending more in this area, but I could be spending less.” Cities like Toronto, Montreal, and Vancouver have special needs, or needs that are very different, and it's not quite clear that at the end of the day they have lower costs.

    One key item in provincial budgets that plays very highly in this area is wages. When you look at a provincial budget, 50% or more of it is wages one way or the other. It's wages directly, or it's subsidies to school boards or to hospitals to pay for wages. There are significant variations in wage levels across the country.

    It goes back to the property tax argument. If you were to bring in a bunch of academics on equalization, they would say you should not compensate under equalization for differences in pure price levels. That's the basic economic theory of equalization.

    If you start along those lines and ask yourself how much a teacher earns, let's say, in Newfoundland versus how much a teacher earns in Ontario, part of the difference is Ontario is richer, but a part of it is a pure price difference—just the cost to hire a teacher—and the cost of living in Ontario is higher. In theory you should not compensate Newfoundland through equalization for the fact that the cost of living is higher in Ontario.

    We're ignoring that completely. We have a system that basically says needs are equal per capita. It's true we're ignoring the higher costs you can have in remote areas, but we're also ignoring the higher costs in very densely populated areas due either to cost of living or such things as crime management or whatever.

    The short answer to your question—or the long answer—is it's true we assume it and it's true there are arguments to the effect that in some areas it may not be appropriate. But I think it is far from clear that if you were to make a complete examination it would lead you to conclude that smaller provinces have higher per capita costs. I don't have evidence in front of me that tells me unambiguously that should be the answer. With 50% of your bill being wages, any small differences in wages that you would say are price level differences that equalization should not compensate for—there's no debate in theory about that; all academics who know about equalization would agree with that—probably would more than swamp any kinds of things we take into account for the higher costs of rural areas.

    So it's probably not a bad play, but it's not a matter where there's one answer in black and white. There are a number of issues, and if you bring them all together, it is not clear it gives you the answer from which a lot of people looking at those issues would start.

À  (1045)  

    The Chair: Okay, thank you, Mr. Discepola.

    Mr. Nick Discepola: Can I ask another question?

    The Chair: Well, a very small one, yes.

    Mr. Nick Discepola: It's not a small one, so perhaps we could come back to it.

    The Chair: The meeting is scheduled to end at 11 a.m. and I have to go somewhere else then. If you want to carry on this discussion, maybe Mr. Discepola could chair. I don't know if the officials are available past 11 a.m., but I have to go then.

    Anyway, we'll go with Mr. McKay and then see where we are.

    Hon. John McKay (Scarborough East, Lib.): I have four questions, hopefully, relatively small.

    You got into a discussion with Mr. Paquette as to whether the payment out this year is $9.6 billion versus $5.6 billion. I lost the conversation as to whether in effect Quebec was drawing on its entitlements prematurely. That was question number one.

    Question number two has to do with your chart on page 5, to help me with the understanding. On your tax base, you say that the provinces raise effectively $48 billion, or 24% of their money, on personal income tax. Yet for the purposes of equalization, it's recognized to the tune of 48%. Is that...

À  (1050)  

    Mr. Louis Lévesque: Yes.

    Hon. John McKay: Well, first I don't understand that in principle, and second I don't understand why, under “others”, which is a very significant sum of money of revenues of the provinces, i.e. 34% of their money, for equalization it only counts as 4%. That's my second question.

    My third question has to do with page 6, where you show a declining fiscal disparity, if you will, among the provinces. In other words, over time it's a good news scenario. Yet a fellow named Peter Holle in—

    Mr. Louis Lévesque: Yes, I read the stuff.

    Hon. John McKay: You saw his article?

    Mr. Louis Lévesque: Yes.

    Hon. John McKay: He argues that in effect equalization is locking in disparities rather than the other way around. I'd be interested in your comments on that. He proposes a number of solutions that seem to have as many problems attached to them as solutions. I don't need a comment on that.

    The fourth question has to do with, on the property tax base, basically Quebec argues that you should only recognize half the equation. For the purposes of fiscal disparity, from their standpoint, they want to recognize low property values but don't want to recognize higher mill rates. In B.C. the argument is exactly the opposite. They don't want you to recognize high property values, but do recognize their low mill rates. I'm not sure what the proposal is to resolve that fundamental, philosophical discrepancy.

    Mr. Louis Lévesque: Okay. First, on the $9.6 billion issue, what Mr. Paquette was saying was this is your first estimate for 2004-05 and this can be revised upward or downward. This is true. The numbers we have are our official payments in February for 2004-05. That's what we have in there. But these are going to be revised upward, downward at the end. I don't know what's going to happen. This is the latest official data for 2004-05.

    Hon. John McKay: Where does he get his $5.6 billion? Did I mishear him then?

    Mr. Louis Lévesque: I don't think I got $5.6 billion, but his point is it could go up and down to whatever number. That's true.

    Hon. John McKay: This is an estimate then.

    Mr. Louis Lévesque: This is an estimate. It's not final data.

    Why on page 5—this is a very good question—are we showing that PIT accounts for 24% of provincial revenues, yet it accounts for 48% of equalization payments. The answer is, this basically shows that there are very large fiscal disparities under personal income tax, much larger than the other tax bases. This is why personal income tax accounts for a very large portion of equalization payments. It goes back to, if the share is much higher, that's precisely because our measurement of fiscal capacity says disparities are higher.

    Going back to your point of why is it another $65 billion of revenue, you do not have on a net basis very large equalization payments. On a net basis, on all these sources, what our measurements show is there are not large fiscal disparities on those revenue sources. This is why they account for so little of the overall equalization payments.

    In terms of going back to page 6—

    Mr. Nick Discepola: ...[Inaudible—Editor]... thereabouts, give or take....

    Mr. Louis Lévesque: They can have rates of their own choosing, but our measurement of fiscal capacity using average tax rates shows that when you net things out.... The $65 billion is a series of bases. In each base you can have a lot of variations. You can have pluses and minuses, but when you add them up, a lot of them cancel out. That's basically what it does.

    Hon. John McKay: When you say 33 bases, are we really talking 33 bases, minus one, two, three, four? Really, the 29 bases are the others?

    Mr. Louis Lévesque: Yes, the 29 are the others.

    Hon. John McKay: Effectively a lottery buck is a lottery buck pretty well right across the country.

    Mr. Louis Lévesque: It could be. I don't have the numbers in my mind, but that probably is—

    Hon. John McKay: Within a gross level of generality, that is true.

    Mr. Sean Keenan: Consumption of lottery tickets, the amount that people buy per capita, is fairly standard across provinces.

    Hon. John McKay: But the real variations are in income tax and property tax.

    Mr. Louis Lévesque: There are big variations there. I don't want to mislead you, because under “others” you would have natural resources, where you would have quite wide variations between provinces. Because we aggregate them, we're kind of underestimating the variability in each line, because a plus one someplace gets offset by a minus in another place. So overall you don't seem to be looking at a big number, but it can have big numbers in any one line. It's just by aggregating them you're cancelling them out.

    Hon. John McKay: Do you put a lottery buck in with a resource buck for “others”, and then it gets averaged in that pool?

À  (1055)  

    Mr. Louis Lévesque: Not for the exact computation, but for this table under “others”, effectively that's what we have done, so there's netting out. To generate the $0.4 billion there's netting out that happens.

    Hon. John McKay: I take it that if you took your other 29 bases and you effectively tracked each, I guess even if you had 29 bases and various variations, you would still work out to 4% overall differential. Okay, I follow that.

    He hasn't done my other two questions.

    Mr. Louis Lévesque: Page 6, the question on disparity and the question regarding the arguments by Mr. Peter Holle. I won't get into anywhere near comments on his views about equalization, but the facts, the data, all the data I've seen—and I can line up economic data—show that per capita disparities are going down over a long-term trend period. To me, it's not a debatable point. This is a fact of the data. It may not be true in any given year for any one province, but if you look at the long-term trend and you look at the weighted average of something like that, there's no question.

    Now, a key word is “per capita”, because when you look at per capita, there are other things that are happening behind this, namely, people are moving. There are changes in the patterns of population, and basically what they show is that the share of population of Ontario and Alberta has been growing, and B.C., too. The share of population of the other provinces has been declining. So people move in Canada. What we measure, at any point in time in any given province, the result of all those movements is...what you observe is not an increase in fiscal disparity.

    Hon. John McKay: But is that an argument for the perverse consequences of equalization?

    Mr. Louis Lévesque: I would say the data does not support the view that disparities are growing. I would say population data does not support the view that there are no changes in population shares, or that there's no adjustment to population shares consistent with the economics. Now, going further than that, I don't think I want to do.

    The Chair: I think he has one more.

    Hon. John McKay: Is there one more?

    Mr. Louis Lévesque: One more, property tax, the way you portrayed Quebec and B.C. First, we now have data that allows us to use property values as the starting point for building a tax base. There you have Quebec, which says, yes, that's a good starting point, and you have B.C., which says, no, you should not use market values as a starting point. I think from B.C.'s perspective they do not agree to the change we're making at the philosophical level. There's no question there.

    The second step, Quebec would say, is once you have the values, that's it, because a dollar of value is a dollar of fiscal capacity. And that we fundamentally disagree with. We say you have to find a good relationship, the correct relationship, between values, the legal tax base, and fiscal capacity. That's what we're trying to put in place.

    The Chair: Thank you very much.

    I had a couple of questions, but there's no time. We have another committee coming in.

    Thank you, Mr. Lévesque and all the officials. That was very useful.

    The meeting is adjourned.