Fiscal fairy tales: Who really pays the bills in Canada?
Some fairy tales are designed to teach us a lesson. Others make little sense, yet endure because they are repeated across generations.
Canadian federalism has some fiscal fairy tales that endure, not because they are based on facts, but because they are continually repeated by influential people like political leaders and public policy commentators.
Public policies based on fiscal fairy tales are often misguided. Consequently, citizens should be on the lookout for such fairy tales and be ready to test them against the facts.
Two such Canadian fiscal fairy tales relate to who contributes to federal revenues and who pays for equalization.
The facts needed to test these fairy tales are easily understood. Federal revenues by province show that the top four groups of contributors are the residents of Ontario (39 per cent), Quebec (18 per cent), Alberta (17 per cent) and British Columbia (12 per cent).
Taken together, revenues collected by the federal government in these four provinces make up 86 per cent of the total. The remaining 14 per cent is collected in the other six provinces and three territories.
In other words, despite what you might hear about the “engine” of the Canadian economy, Ontario residents are the largest contributors to federal government revenues, and by an amount that is more than double the contribution of the next largest group.
Quebec, Alberta and B.C. residents are mid-sized contributors and residents of the rest of the provinces and territories are small contributors.
Notice I did not say that Ontario was the biggest contributor. In fact, despite the fiscal fairy tale propagated by some, provincial governments don’t contribute anything to federal tax revenues.
Canadian individuals and firms pay federal taxes. They pay the same rates, usually based on their incomes, regardless of where they live. Ontario residents are the most numerous and collectively they pay the most.
Which brings us to the fiscal fairy tale around equalization. Some commentators would have us believe that the funding for equalization comes from the provinces that do not receive equalization payments. Currently, those provinces are B.C., Alberta, Saskatchewan and Newfoundland and Labrador.
This is clearly false for a couple of reasons. First, as noted above, provinces don’t pay for equalization in any sense; federal taxpayers do. Federal taxpayers live everywhere in Canada, not just in provinces that don’t receive equalization payments.
To understand the second reason this fairy tale is false, we need to compare what each province receives from the equalization program to what provincial residents contribute to the federal revenues that pay for it.
It turns out that Ontarians are actually the biggest net contributors to the program, paying about $6.4 billion, while their provincial government received only half that amount, about $3.2 billion in 2013.
Albertans are next largest net contributors, paying $2.7 billion while their provincial government received no equalization. British Columbians come third, paying $2 billion while their provincial government received no payments from the program.
Indeed, the residents of the four provinces that receive no equalization all contribute less than Ontario residents, even when you subtract the payments that the Ontario provincial government receives.
So the next time that political leaders or policy commentators talk about how much their province contributes to confederation, be on the lookout for a fiscal fairy tale. The facts are that Ontario residents pay by far the largest portion of federal bills, B.C., Alberta and Quebec residents are midsized contributors and residents of other provinces and territories comprise a small total contribution.
When it comes to equalization, provinces contribute nothing to the program — federal taxpayers pay the bill. Ontario residents are the largest contributors to the equalization program, even when you subtract the payments their province receives.
Knowing the real story behind these fiscal fairy tales may not lead to living happily ever after, but it might help us have a more constructive debate on important issues like equalization.