My previous post dealt with differences in provincial health spending and how on a per capita basis some provinces were substantially above the provincial average while others were not. One of the factors behind any government spending at the provincial level is own source revenue capacity so in light of some of the comments asking about revenues I decided it would be useful taking a look at them.
As Figure 2 shows, Newfoundland & Labrador, Saskatchewan and Alberta are above the average in terms of own-source revenue Manitoba is at about the average while the remaining provinces are all below.
It does not require advanced training in public finance to realize that many of these differences can be largely attributed to the presence of robust natural resource revenues.
Own source revenues for Alberta, Saskatchewan and Newfoundland & Labrador should be adjusted for their resource rents from oil, natural gas and potash to better reflect direct tax burdens. About one-third of Alberta’s, one-quarter of Saskatchewan’s and about forty percent of Newfoundland’s own-source revenues are from resource rents. When such an adjustment is made, the national average drops to 6,390 dollars with Saskatchewan at 6,858 dollars, Alberta at 5,339 dollars and Newfoundland at 7,194 dollars. Figures 3 and 4 plot per capita resource adjusted own source revenue and the deviation from the national average and shows that there is substantial variation across the provinces though not as extreme as for total per capita provincial revenues.
Newfoundland, Manitoba, Saskatchewan and British Columbia have per capita own source revenues above the national average while the other provinces are below.
If one takes per capita provincial program spending and compares it to per capita own source revenues, one can obtain an estimate of direct cost to taxpayers or the “tax price” of provincial program spending. This is done in Figure 5 and shows that the “tax price” ranges from a high of 84 percent in British Columbia to a low of 49 cents in Alberta.
The difference is the contribution of federal transfers payments and of course any natural resource revenues from oil, natural gas and potash. This is of course a crude estimate in that resource revenues are not adjusted for in all the other provinces though they are substantially less. However, it does suggest that provincial program spending in all provinces is in a sense “subsidized” with the direct burden on provincial taxpayers varying. The provinces with the lowest direct taxpayer burden are either those with substantial natural resource revenues or those with substantial federal transfers. Are these comparable levels of taxation? Does this suggest that in some provinces, more own source revenue effort could be applied?
I think it would be wise for Alberta (and the other resource rich provinces) to save their resource rents and try to fund current spending from taxation rather than rents.
I can sympathize with the argument that because Alberta is not a sovereign entity, that creating a sovereign wealth fund leaves it vulnerable to confiscation by the federal government. A weaker argument is that because Alberta's population is semi-transient, if they save their rents, more people will move there to take advantage of the endowment.
Posted by: Andrew F | April 18, 2012 at 12:01 PM
The next step, ISTM, is to compare own-source revenues and provincial PIT, CIT and sales tax rates. Ontario has lower rates for all of these than Quebec and the Maritimes. Are are comparable to BC and lower than Saskatchewan and Manitoba, IIRC. So of all the provinces it seems like Ontario could actually raise taxes and perhaps should.
Posted by: Determinant | April 18, 2012 at 12:08 PM
"I can sympathize with the argument that because Alberta is not a sovereign entity, that creating a sovereign wealth fund leaves it vulnerable to confiscation by the federal government."
I've not heard that argument, and I'm not sure it's right. In Canada, sovereignty is divided between the federal government and the provinces. Legally, Alberta is every bit as sovereign within areas of provincial jurisdiction as the federal government is within areas of federal jurisdiction. Although we think of the feds and the provinces as being different levels of government, really they're different faces of one sovereign, namely the crown (which makes for entertaining court cases between the feds and provinces with her Majesty as the named party on both sides). For the same reason, Alberta isn't subject to taxation by the federal government - the feds can't tax the Crown.
Of course, the federal government could send in the army and seize Alberta's wealth, but since that happens to sovereign nations from time to time to, it's not clear how being a sovereign nation makes much of a difference.
Posted by: Bob Smith | April 18, 2012 at 12:38 PM
Livio,
In measuring the "tax price, should you also factor in the incidence of the tax used to fund transfers from the federal government? In you example above, federal transfers are treated, effectively, as free money - which is why every province has a price less than 1. From the perspective of a provincial government, that analysis makes sense, since they have to take federal transfer as given. From the perspective of provincial taxpayers, that perspective doesn't make sense, since they're the ones who are ultimately paying for those transfers. Moreover, in measuring "fiscal capacity", I'm not sure you can look at provincial taxes in isolation.
Posted by: Bob Smith | April 18, 2012 at 12:45 PM
That is a good point Bob. I'm looking at the provincial taxes in isolation but there is also the incidence of federal taxes. As the line goes, there are three levels of government in Canada but only one taxpayer. It is why I refer to these numbers as an estimate of "tax price".
Posted by: Livio Di Matteo | April 18, 2012 at 12:51 PM
The disjoint between the "tax price" to provincial governments and the "tax price" to provincial taxpayers, has led to some strange provincial policies. Back when Ontario was a "have" province, I can recall the provincial government (along with BC) lobbying the feds for more health care transfers. From a political perspective that made sense, from the perspective of Ontario taxpayers it didn't, since every extra dollar in federal spending was costing them (collectively) a $1.20 (or something like that) in higher taxes. The province would have been further ahead to urge the feds to reduce their spending (and taxes) and raise the money themselves (which would only cost Ontarians an extra dollar).
Mind you, these days, maybe it makes more sense.
Posted by: Bob Smith | April 18, 2012 at 03:07 PM
I think Andrew F is trying to make a case that Canada *could* choose to use the system Australia uses, whereby Australian States are on a symmetrical transfer system: lower-income/wealth states get extra transfers, the excess income/wealth of rich states is redistributed in total by the Commonwealth.
AIUI Western Australia, for example, would have all resource rents subtracted from its federal transfers without question and therefore couldn't build up a sovereign wealth fund. This is a structural feature of the Australian system.
But Canada doesn't do this because the constitutional basis of income tax in Canada and Australia is different. In Oz the Commonwealth controls income taxes and GST totally and utterly, the states there are dependent on transfers with compliance penalties to a degree unthinkable in Canada. Quebec would scream blue murder.
Nobody is stopping Alberta building up a sovereign wealth fund, certainly not Ottawa.
Posted by: Determinant | April 18, 2012 at 04:54 PM
"Does this suggest that in some provinces, more own source revenue effort could be applied?"
Are you suggesting that PEI, with among the highest sales taxes, income taxes and fairly high basic corporate tax levels should apply more revenue effort? Our lower tax burden per capita is a reflection of the fact that we have substantially lower incomes.
Posted by: Jim Sentance | April 18, 2012 at 11:20 PM