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January 18, 2012

Clark Missed Tax Points

It is too bad that prior to their meeting on health funding, all premiers weren't asked to read the February 2011 publication of the federal Parliamentary Library, The Canada Health Transfer: Changes to Provincial Allocations. That excellent 12 page document might have stopped Premier Clark from making misleading claims about the $250 million loss BC will suffer when the federal government adopts its equal cash per capita health transfer formula. It is true that BC will lose $250 million in 2014 relative to the funding formula that is currently in place, but the change has nothing to do with how many seniors live in BC relative to other provinces.

Currently transfers to the provinces for health care are on an equal per capita basis, but that equality depends on the including both tax points and cash in the calculation. In 2007 the Harper minority government amended the Federal-Provincial Fiscal Arrangements Act, adding Section 24.21 which stated that after March 31, 2014 there will be only cash transfers to the provinces on an equal per capita basis. When tax points are excluded from consideration in health transfers, every province except Alberta gets less cash per person. If equality on a cash only basis had applied this year, the transfer to BC would decrease from $881.64 per person to $828.52. The loss of $53.11 per person doesn’t sound like much until you multiply it by BC's population and see it translates to a reduction of $243 million, and more in every subsequent year. The biggest loser is Newfoundland and Labrador which (on the basis of this year's data) will see its transfers go down by $95.88 per person. Alberta will see its transfers increase by $223.40 per person, for a total gain of $844 million (estimated to be $949 million in 2014-15).

It is hard to see why Clark would take the loss due to the change in the formula and claim that it means devastation for seniors. How BC will handle the change is yet to be determined. There is nothing that ties the lost revenue to a necessary cut in care for seniors. Changing the equal cash per capita formula to reflect an age adjustment would mitigate but not reverse BC's loss, and the extent of any mitigation is uncertain. BC has a larger proportion of its population over age 65 than the Canadian average, 14.6% vs. 13.7%, but so do the four Maritime Provinces and Saskatchewan. Age adjustment would mean Ontario, Quebec and Manitoba would lose even more than they otherwise would in 2014. I doubt whether BC's Ministry of Finance produced a calculation showing that age adjustment is the determining factor on whether BC loses $250 million; I have submitted a freedom of information request for its calculation. Rather than shifting the focus to seniors, an honest explanation from Clark would have been to say that BC will receive less by way of cash transfers for health after 2014 because Harper thinks our tax base is capable of bearing more.

The per capita change that got attention with the first ministers meeting early this week has been law for five years. Many controversial changes are introduced years in advance to allow those affected to adjust; when the pain is felt, government can say nothing is new as a decision made long ago is simply being implemented. Provinces may have hoped that total federal transfers would increase enough to offset a large portion of the loss arising from the per capita change, but it would be foolish to think that any government would commit to increasing transfers at a rate higher than the 6% per year embedded in the last Health Accord.

It is understandable that Ottawa isn't too keen on increasing health transfers to provinces only to give them greater ability to cut provincial taxes and thereby take the political credit. The tax point issue dates back to 1977 when the federal government agreed to decrease its personal and corporate tax rates to make room for the provinces to increase their tax rates, thereby shifting fiscal room from one level of government to another and at least partly dealing with a perceived fiscal imbalance. Ever since 1977 the provinces and federal government have argued about the tax points, sometimes not counting them as a federal contribution to health care and often disagreeing over their value. The federal government recognized that the tax points are not of equal value to each province, hence it included some element of equalization in the health transfer formula. Whether the move to eliminate consideration of the tax points and go to an equal per capita cash transfer is good or bad, the change and debate on that point happened five years ago. Clark's handlers should have briefed her on that point and prevented her from mudding the waters, especially since she was the chair of the first ministers' meeting.

What is new in the federal government's position is the announcement by Harper and Flaherty that the federal transfers will come with no strings attached (other than those in the Canada Health Act) and that the total transfers will increase after 2016 by the rate of change in nominal GDP (with a guaranteed 3% minimum). That announcement requires amendment to the Federal-Provincial Fiscal Arrangements Act. The amendment will be debated but with his majority it is certain to pass. It is possible that the changes will be an issue in the 2015 federal election, but it is far too early to predict what will be important to voters three years from now.