Rebalancing

The Canadian Centre for Policy Alternatives wades into the fiscal imbalance issue once again, leaving few current assumptions standing.

First, the report takes on the claim that provincial deficits are of the federal government's making:

"The real force behind the fiscal pressures currently faced by provincial governments is competitive tax cutting by provincial governments intent on getting ahead in the race to the bottom," concludes the report, compiled by economist Hugh Mackenzie for the left-leaning think tank.

The tax cutting binge was started by Ontario but was quickly matched, to varying degrees, by other provinces, particularly in the West.

"Fiscal imbalance . . . is largely a problem inflicted by the provinces on themselves through tax competition," Mackenzie says.

Provincial officials pinpoint the 1995 federal budget, which slashed billions from federal transfers to the provinces, as the start of the current fiscal squeeze.

But Mackenzie maintains the provinces "insulated" themselves from those cuts by reducing their own transfer payments to municipalities by an equal amount.

Moreover, while the federal government has begun restoring transfers to the provinces in recent years, he says the provinces have not done the same for municipalities.

"In fact, the data demonstrate that the real fiscal imbalance involves local governments, not provincial governments," he says.

Sounds about right so far...but also sounds like what Jim Flaherty would say before daring individual provinces to start raising their own taxes. Fortunately, the report goes on to deal with that position as well:

Mackenzie says provinces are under intense pressure to keep their tax rates competitive with one another. With highly mobile companies and individuals prepared to move to the lowest-tax jurisdiction, no province wants to be the first to raise taxes.

"Provincial governments are caught in a kind of political/fiscal prisoners' dilemma in which no individual province has an incentive to take action - protecting revenue - which would benefit all provinces if they all did it."...

Mackenzie advocates a role for the federal government in defending provincial tax bases against competitive pressures. That could be done either through:

-An inter-provincial tax treaty that would set a floor beyond which provinces could not lower taxes, or

-The creation of federal "umbrella taxes" that would be applied uniformly across the country and from which pre-determined levels of provincial taxes would be deducted.

As well, Mackenzie sees a role for Ottawa in helping to alleviate the real imbalance between municipalities and provinces. He urges the federal government to invest in "national projects," such as funding to refurbish and build vital infrastructure.

Furthermore, Mackenzie says equalization should be overhauled so that it is based on the actual cost of providing an acceptable standard of social services in poor provinces, rather than average provincial revenue-raising capacity.

Particularly at a time when movements toward regulatory harmonization are winning favour both from provincial governments and from the federal finance minister, it only makes sense to add some form of tax harmonization to the mix as well.

Granted, the proposal may be a tough sell for provinces who are counting on keeping their current advantages by cutting taxes to levels which their neighbours can't match. But if enough other actors within the country take up the call, it should be possible to show that the national benefits of a relatively equal structure (both in lesser obstacles to trade throughout the country, and in a lessened need to support other provinces through equalization) outweigh the supposed costs of the measure.