The notion that Ontario's Liberal government might actually consider (gasp!) raising taxes to help bring its budget back into balance isn't likely to impress the electorate. But while it may be unpalatable politically, it has a certain charm economically. And Ottawa is opening an opportune window for the provinces to consider grabbing a fairer share of the country's tax pie.
The provinces have been grumbling for years about Canada's "fiscal imbalance." While Ottawa's budget could well finish the current fiscal year (ending March 31, 2015) with a small surplus, the 10 provinces expect to be, collectively, about $15-billion in the red. Granted, Ontario is a massive $12.5-billion of that, but still, seven of 10 provinces expect to have budget deficits this year. In the years before the Great Recession, when Ottawa ran a string of 11 straight surpluses (many of them north of $10-billion), only half the provinces were consistently in the black.
The provinces' burden for providing key services – things such as health care, education, social services, infrastructure – keep rising. In the biggest-ticket provincial item of them all, health care, the country's aging demographics all but ensure that provincial governments will have huge and rising costs for decades to come. For provinces that can barely balance budgets in a good year (and those who can't even manage that), this is an onerous prospect.
Ottawa, on the other hand, looks set to be more than comfortable. Prior to the Harper Conservatives' recent announcement of targeted tax cuts, the Parliamentary Budget Officer had estimated that for the next 20 years, the federal government could afford to relinquish $28-billion a year (in 2014 dollars, either through tax reductions or additional spending or both) and still maintain federal debts at "sustainable" levels.
So, Ottawa has room to trim its tax take, and it has been doing so, with little danger of jeopardizing its fiscal health. That's good for Canadians – but only to a point.
The problem isn't that Canada's corporate and personal income-tax rates are too high; on a global basis, they're quite competitive. The bigger issue is that not enough is going into the coffers of the main service providers, the provinces – and that problem is only going to get bigger. When Ottawa is cutting taxes, it's a perfect time for the provinces to raise their own in kind. That way, the net impact on the taxpayer (and, broadly speaking, the economy) can remain steady; their total tax bill doesn't have to change at all. Canada's tax competitiveness is kept intact. But more funds go where they are more needed, where the responsibility for providing the services lies, and where can be most efficiently used.
And while the provinces love to clamour for Ottawa to increase transfer payments as a means to address the fiscal imbalance, this has its problems. It gives Ottawa significant influence over services it isn't responsible for providing.
"It's a basic governance principle: Any agency needs a clear mandate, authority, capacity to deliver on it, and accountability for outcomes," says Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute, who has been writing for years on the need to get more tax revenue in the hands of the provinces. "When one level of government raises revenue for another to spend, the linkage is harmed or broken."
But there's a problem with, say, Ontario jacking up personal income taxes to fill the void left by Ottawa's targeted personal tax breaks. The tax base at the provincial level is more "mobile" than at the federal level – that is, it's easier for economic activity to move to a neighbouring province in response to a unilateral provincial income tax increase. Mr. Poschmann says it makes more sense for provinces to raise consumption taxes instead (like, say, goods and services taxes), as they are much harder for businesses and individuals to escape.
There, too, Ottawa has handed the provinces with room to manoeuvre. The federal GST was cut to 5 per cent from 7 per cent over the past eight years. In theory, that gives the provinces space to hike their side of consumption taxes.
But it's awfully hard for any provincial government to explain to voters that it makes economic sense for it to raise your taxes when Ottawa is lowering them. Especially with the opposition screaming (as they will) that it's an opportunistic money grab that is undermining Ottawa's attempts to reward long-suffering, hard-working Canadians. Show me a premier who wants to make Ottawa look like Santa Claus, his/her opposition look like working-class heroes and his/her own government look like Scrooge, and I'll show you a soon-to-be-ex premier.
So, we can expect the provinces to continue to pester Ottawa to increase transfers, the most politically saleable way to go after more tax dollars. But it's not the most enlightened or efficient route. The provinces have the need, the means, and Ottawa has given them the opportunity to increase their tax take. They would be prudent to take it.