Tax Point Transfers in Canada: An Historical Review and Key Considerations for the Future
Bev Dahlby, Trevor Tombe & Steve Orsini
June 2023
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Canada’s fiscal arrangements face major challenges: financial sustainability, perceived lack of fairness, demographic changes and lack of any linkage to a growth agenda. The current arrangements are at risk of being overwhelmed and we can’t continue to kick these present and future challenges down the road. And the growing challenges that face municipalities – like housing costs, transit, public safety have become even more prominent.
Leading scholars from a variety of disciplines as well as policy practitioners have come together as the Fiscal Federalism Policy Network to identify both challenges and practical solutions.
The first major report, The Road Ahead: Rethinking Fiscal Federalism for the 21stCentury, lays out the landscape of Canada’s current intergovernmental financial arrangements and the challenges ahead.
The second report, Tax Point Transfers in Canada: An Historical Review and Key Considerations for the Future, provides a brief history and analysis of issues to consider in evaluating any future tax point transfer. Future reports will address other issues identified in the Road Ahead. The Network will publish research papers, policy briefs and op-eds and make recommendations for the reform of fiscal relations among the federal, provincial and municipal governments within the framework of the existing Canadian Constitution.
Introduction
The pressures on provincial government finances have been building for some time, given the current mix of expenditure responsibilities, tax powers, and intergovernmental grants. Studies by the Parliamentary Budget Officer (2020, 2021 and 2022) and Tombe (2020b) indicate that the ten provinces and territories, as a whole, will have increasing debt levels over next 30 years and beyond, which was only exacerbated by the Covid-19 pandemic. Although the federal government has incurred a large deficit in response to the Covid-19 crisis, and provinces have seen some improvement in the short term due to higher energy prices and nominal revenue growth, the federal government is still in a much stronger fiscal position structurally than the provinces, territories, and municipalities. Further pressures on intergovernmental finances are bound to occur following the federal government’s commitment to enhancing programs in areas of provincial jurisdiction, such as pharmacare, childcare, dental care, and eldercare. In the past, implementing national standards in areas of provincial jurisdiction has required increases in federal transfers to the provinces. Usually these have been cash transfers, but the federal government has also used tax point transfers in the past to enable provinces to finance the increased cost of federally mandated programs. At their peak in the late 1990s, tax point transfers accounted for nearly 40% of all federal fiscal transfers to provinces (Tombe 2018). Recently, there has been renewed interest in a tax point transfer to help resolve the fiscal challenges of the provincial governments, including among political leaders, commentators (Ibbitson 2020), and policy analysts (Nicholson 2023).
Should tax point transfers, rather than increases in cash grants to the provinces, be used to enable the federal government to introduce a national pharmacare program, enhance childcare and eldercare programs, and improve the long-term fiscal position of the provinces?
To understand the implications of a tax point transfer, this report begins with a brief history of tax point transfers and how provincial governments’ responded to the tax point transfers that occurred in the 1970s. It then discusses some of the issues that would arise with a future tax transfer given the current main sources of federal and provincial tax revenues.
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About the Fiscal Federalism Policy Network (FFPN)
Report | The Road Ahead: Rethinking Fiscal Federalism for the 21st Century
Rapport | La route à suivre : Repenser le fédéralisme fiscal pour le XXIe siècle
