Provincial Revenues Research Articles

An Evaluation of the Stabilization Properties of Equalization in Canada

The Canadian system of equalization is designed to address differences in revenue-raising capacity across provinces, basing a province's annual entitlements on its actual tax bases. However, the standard against which a given province's equalization entitlements are calculated fluctuates from year to year with all provinces' tax bases and tax rates. The consequence is that, while the redistribution function is fulfilled annually, the stability of provincial revenues suffers. The evidence we present indicates that, at least for the three revenue categories we examine, the equalization system can actually be destabilizing, thereby imposing on provinces volatility in their potential revenue streams that exceeds what would exist in the absence of equalization.

An Evaluation of the Stabilization Properties of Equalization in Canada

The Canadian system of equalization is designed to address differences in revenue-raising capacity across provinces, basing a province's entitlements on its actual tax bases. However, since it does so on a year-on-year basis, the standard against which a given province's equalization entitlements are calculated fluctuates from year to year with all provinces' tax bases and tax rates. The consequence is that, while the redistribution function is fulfilled annually, the stability of provincial revenues suffers. The evidence we present indicates that, at least for the three revenue categories we examine, the equalization system can actually be destabilizing, thereby imposing on provinces variability in their potential revenue streams that exceeds what would exist in the absence of equalization.

Evaluation of the impact of forest reserves on harvesting costs and provincial revenues in ontario

The establishment of forest reserves for the benefit of other resources and other land uses in areas where timber harvesting is taking place constitutes a significant withdrawal of wood fiber annually in Ontario.

Financing Confederation: Principles and Practices of Equalization

Economic and political developments since 1973 have prompted a major re-examination of both principles and practice of equalization transfers. Significant contributions have come from individual writers, a Parliamentary Task Force (the Breau Commission), and most recently the Economic Council of Canada. Meanwhile in April of this year the federal government, after consultation with the provinces, enacted Bill C-97 setting out the equalization scheme that will prevail for the next five-year period. It is natural to ask at this time what we have learned from these efforts, and to what extent they have influenced the most recent federal legislation. We shall attempt to do this in this paper, although space limitations compel us to restrict our discussion to Financing Confederation, chosen because it represents the most recent and the most comprehensive of the available studies. Canada's equalization program has been plagued from its very inception by the facts that the principles underlying such transfers have never been fully articulated, and that the actual formula for calculating payments has been modified constantly in response to changing conditions. The Council, significantly, sets out to correct the ad hoc nature of each of these. We shall argue in what follows that their report, while it represents an important advance in our understanding of the murky areas of equalization, still has problems in both these respects. Specifically, the theoretical section exaggerates the degree of harmony between equity and efficiency criteria as rationale for equalization transfers, and almost certainly overstates the amount of such payments that are required. The transition from principles to practice is flawed in that the theoretical work envisages a system where transfers flow from a fiscal surplus to a fiscal deficit area, while the report retains the system of financing several deficit jurisdictions out of general revenues. The recent federal legislation, however, falls even further short of a theoretically consistent scheme. The basic argument of Financing Confederation can be summarized very briefly as follows. The 'net fiscal benefits' provided by provincial governments are likely to vary substantially across jurisdictions, due to differences in average real earnings and in the amount of sourcebased taxation revenue that can be raised. This both creates horizontal inequities among Canadians, and induces an inefficient migration response by labour and (perhaps) capital. Economic efficiency requires that these net fiscal benefits be fully equalized, as does horizontal equity interpreted in a broad sense. This would ideally apply to all provincial government revenues, but for constitutional-political reasons only a portion of natural resource revenues is to enter, the portion being equal to the marginal federal tax rate applicable to the province. Our objection is to the claim that equity and efficiency criteria fortuitously coincide, and that, except for constitution constraints, both require full equalization of any apparent net fiscal benefits. We argue instead that full equalization is only implied under one or other of two extreme assumptions about interregional labour mobility, and that in both cases efficiency and equity give quite different answers. Under more reasonable assumptions about factor

Financing Confederation: Rejoinders

In their comment on the principles and practice of equalization Norrie, Percy and Wilson (1982) make several interesting points primarily concerning Chapter 3 of the Economic Council of Canada's Financing Confederation, but also on our own study (1982) and Bill C37. They correctly point out that the theoretical analysis argues for a net scheme while the Council's recommendations seem to accept a gross scheme. They note that the distinction between provincial resource revenues and other sources of revenue in the choice between the narrow and broad views of horizontal equity involves a judgment about the interpretation of the Constitution that not all would accept. As well, they point out the defects of the five-province average standard for equalization for dealing with resource revenues. Their main criticism, apparently subscribed to by Vanderkamp (1982:294), is that 'the theoretical section exaggerates the degree of harmony between equity and efficiency criteria as rationale for equalization transfers, and almost certainly overstates the amount of such payments that are required' (Norrie et al., 1982:290). Their argument is based on the contention that the Council's recommendations for equalization on equity and efficiency grounds are only valid in the cases of zero migration and perfect migration respectively, and that with imperfect migration, full equalization is not called for on either ground (Ibid.:290-1). We would like to argue that imperfect migration is a red herring which has no effect on the case for equalization. Given the judgments explicitly made by the Council and ourselves, full equalization is warranted on both equity and efficiency grounds in all the circumstances considered by Norrie, Percy and Wilson. The efficiency arguments for some form of equalization can be shown most easily using the simple diagram Figure 1 depicting the market for homogeneous labour in a two region federation. The curves MPA and MPB refer to the marginal products of labour in A and B respectively, while m is the cost of migration, assumed to rise with migration. The initial allocation of labour endowments in the federation is L. Labour migrates from B to A until MPA = MPB + m shown as the allocation Lo. This is an efficient allocation of labour. Suppose now some net fiscal benefits are generated by the actions of province A, say, due to the collection of resource rents. In the diagram, these net fiscal benefits are denoted R. The migration equilibrium in the presence of the net fiscal benefits is shown as L1, and is obviously inefficient. A little thought will convince the reader that only if net fiscal benefits are equalized over regions will the migration equilibrium be efficient. Algebraically, labour will migrate until MPA + RA m = MPB + RB. Only if by transfers RA = RB will this result in an equilibrium at the optimum Lo where MPA m = MPB. Thus, efficiency requires full equalization in the presence of migration costs. The equity argument for equalization in the presence of migration costs is somewhat more subtle. Broad-based horizontal equity, the notion which we apply here following Norrie, Percy and Wilson, requires that individuals identical in the absence of net fiscal benefits remain identical in their presence. The argument requires that there be more than one type of worker. Suppose that there are two types of workers and that, in the absence of net fiscal

Provincial Public Finance in Ontario: An Empirical Analysis of the Last Twenty-Five Years

This detailed and informative study makes a timely contribution to a subject that has been the focus of much public discussion and debate in Ontario and elsewhere, namely the size and growth of the public sector. Working with the Public Accounts and other sources, Professor Foot offers both an historical account of, and an explanation for, the growth of provincial revenues and expenditures since the early 1950s. By concentrating on an analysis of the development of a single government over time, rather than adopting the traditional cross-section approach of analysing a number of junior-level governments. The study's conclusions are both informative and provocative. On the revenue side, a rate-base approach which separates discretionary from automatic changes in revenue determinants is shown to provide sufficient flexibility to accommodate the analysis and explanation of a wide range of specific revenues. On the expenditure side, the provincial government is found to adjust reasonably slowly to new levels of desired expenditures which appear to be determined primarily by demand variables. Of particular interest are findings which suggest that urbanization and elections have had little effect on expenditures and that available federal money has tended to be a substitute for provincial funds. In addition, the author notes that provincial expenditure patterns are consistent with either a revenue-led interpretation, where the recent availability of pension funds has stimulated expenditures, or a leading-sector interpretation, which implies a longer-run coordinated view of provincial public development. This study should stimulate a more informed discussion of the determinants and effects of provincial public finance in Ontario. It will appeal not only to those interested in the behaviour of junior-level governments but also to anyone interested in the size and growth of the public sector, in Ontario or elsewhere.

Public Revenue from Canadian Crude Petroleum Production

This paper is a discussion of allocation among the oil industry, the provincial governments, and the federal government of revenues arising from crude petroleum production in Canada. It argues that: I) the federal export tax and domestic price ceiling and subsidy on crude oil should be gradually withdrawn, for the sake of efficiency in resource allocation; 2) federal-provincial sharing of oil (and other natural resource) revenues could conveniently be based on the principle that all income should be treated similarly under taxation, or, specifically, that the federal share of provincial resource revenues should be the same as it would be if those revenues accrued to the private sector and were taxed accordingly.

Ground Rent for Provincial Forest Land in Ontario

Ground rent for provincial forest land in Ontario, dating back as it does to the mid-nineteenth century, is among the earliest means whereby the provincial government has sought and obtained revenues from the forest. As this charge on licensees of Crown timber-lands has been established for so long, it is pertinent to review its history and to record its place in the annual revenues yielded by the province's forests over the past century.These annual forest revenues have in the past come chiefly from stumpage—the price paid for timber cut on Crown lands. Forest revenues have also included, besides ground rent, bonuses paid by licensees in order to acquire their limits at auction from the Crown, tolls for the use of certain timber slides built by the government, and small sums collected as penalties for trespass and other infractions of the law. Slide tolls ceased to form a part of provincial revenues after Confederation as they were then collected by the Dominion government. Today the province's revenue from the Department of Lands and Forests comes from a variety of sources. For comparison with the forest revenue of early days, forest revenue in this study is equated with the revenue of the Department's Division of Timber Management. This includes stumpage—the chief component and now comprising Crown dues and the Crown evaluation and bonus payments—ground rent, fire tax, mill licence fees, certain payments for scalers, and sundry other small items.

Roman Revenues from Greece after 146 B.C.

T HE ancient evidence relating to the revenues which Rome drew from Greece after the Achaean War is both scanty and obscure, with the result that modern accounts of those revenues show wide divergences.' Recently, however, two authoritative works have appeared, which, in this matter, agree in general that, as one of them says, taxes were imposed on many and probably most of the communities that opposed the Romans [in the Achaean War].2 As there is, therefore, a distinct possibility that the version they give will be generally adopted, it may be worth while to point out that, though it is attractive, it is not definitive, since the evidence on which it is based is capable of being differently interpreted. The argument which follows is based on the following general assumptions about Roman provincial revenues. These revenues fall into two main types-tribute and rents. Tribute might be either a fixed amount, whether in cash or in kind (stipendium) or a pars quota in the form of tithes (decumae). Rents were drawn from property of various kinds-land, mines, forests, harbors,3 etc.-owned by the Roman state. Second, there was an im-