FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, February 18, 1999

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call the meeting to order and welcome everyone here this morning. The order of the day is that, in accordance with the order of reference of the House of Commons of Monday, February 15, 1999, the committee commence its study on Bill C-65, an act to amend Federal-Provincial Fiscal Arrangements Act.

This morning we have the pleasure to have with us the Parliamentary Secretary to the Minister of Finance, Mr. Tony Valeri; and from the Department of Finance, federal-provincial relations division, Mr. Peter Gusen, the director; Mr. Richard Davis, chief, program policy and operations; Mr. Pierre Doucet, senior policy analyst, program policy and operations; and Ms. Marcie Doran, economist, program policy and operations. Also present is Mr. Doug Adlard, general counsel, legal services, Department of Finance.

Welcome, everyone. I think we'll begin with Mr. Valeri, who has some opening remarks, followed by Mr. Peter Gusen. Welcome.

Mr. Tony Valeri (Parliamentary Secretary to Minister of Finance, Lib.): Thank you, Mr. Chairman. I'm pleased to be here to discuss Bill C-65. It's a bill that proposes to amend the Federal-Provincial Fiscal Arrangements Act. Mr. Chairman, this act legislates a number of federal transfer programs to the provinces, such as equalization, stabilization, revenue guarantee, and the Canada health and social transfer. Each of these transfer programs has its own purpose.

Mr. Chairman, equalization ensures that all provinces have a comparable level of revenue in order to provide a comparable level of services. Currently seven of the ten provinces qualify for these payments. Under the stabilization program, the federal government compensates any province if their revenues decline more than 5% due to economic circumstances. Even for the relatively more affluent provinces, stabilization provides a safety net with respect to drops in revenue. The revenue guarantee program protects provinces from declines in personal income tax revenue resulting from changes in federal policies. The Canada health and social transfer is a transfer to all provinces and territories in support of health, post-secondary education and social assistance.

Mr. Chairman, it's clear that the system is flexible, and as you can see, the federal government provides support to all provinces depending on their needs. This bill proposes to renew two of these federal programs, the provincial personal income tax revenue guarantee program and the equalization program, each for an additional five years.

Under the revenue guarantee program, the federal government protects the provinces participating in tax collection agreements from large revenue reductions resulting from changes in federal tax policy. Such a provision allows for transitional protection to provinces so that their income tax revenues will not be significantly and immediately altered by federal government amendments to the income tax base. This ensures that serious disruptions to provincial financial planning arising from federal personal income tax changes are avoided.

However, Mr. Chairman, the major portion of the bill before us deals with equalization and a program that is considered the foundation of Canada's fiscal federalism.

Mr. Chairman, in the early decades of the 20th century, as provinces delivered the social programs that had become national priorities, it became evident that the tax capacity needed to carry out these responsibilities was not evenly distributed amongst the provinces. Bluntly said, Mr. Chairman, there were richer provinces and poorer provinces. In 1937, the Royal Commission on Dominion-Provincial Relations was established to make recommendations on federal-provincial issues. Primary among the recommendations made in its 1940 report was that the dominion government, as the federal government was known then, should make annual national adjustment grants to the less prosperous provinces. This would make it possible for every province to provide its residents with comparable services without resorting to excessive taxation. The establishment of a program dedicated to this purpose took place in 1957 with the introduction of the equalization program. Later in 1982, the commitment to equalization payments was enshrined in the Constitution.

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Federal equalization payments, Mr. Chairman, are determined through a legislated formula that compares provincial per capita capacity to raise revenue to a standard per capita capacity. The standard is calculated according to the average ability of Quebec, Ontario, Manitoba, Saskatchewan and British Columbia to raise revenue.

Now, Mr. Chairman, I'd like to make some points that might clarify how the program works specifically. It's important to emphasize that the same formula applies to all provinces and that provinces are raised to the same standard if they fall below it. Therefore provinces that have a greater ability to raise revenue on their own and are above the standard do not receive equalization. Those provinces that have less capacity to raise revenue on their own and are below the standard receive equalization. And the payments are determined using a legislated formula.

Under the formula, Ontario, Alberta and British Columbia do not receive any equalization since they benefit from their stronger economies and have a greater ability than the standard to raise revenue on their own. Provinces that receive equalization are all raised to the same standard. Each of these provinces—and again this is important to note—will receive different per capita and total amounts because they are all at different levels below the standard and therefore need differing amounts to raise them to that standard. But they are all raised as high as each other to the same level. That means a level playing field among seven provinces that get equalization.

Ever since the introduction of the equalization program, the legislated formula has been subject to a federal-provincial review process and a federal renewal at least once every five years. The process involves two tracks: extensive consultations with the provinces, followed by passage of legislation by the Parliament of Canada. It's this consultation process that has always taken considerable time and necessitated focused attention by both federal and provincial governments.

The legislative process that follows is always the business of the federal government alone, because equalization is a federal program, not a joint program. It's a federal program that transfers federal revenues to provinces, no strings attached, according to a federally legislated formula. This latest renewal was and is no different. Both the federal and provincial officials and minister met regularly over a 27-month timeframe.

The bill we are here to discuss today is a product of that focused attention and analysis given to the equalization program. Over this 27-month period numerous priority areas, priorities that were determined jointly by federal and provincial officials, were discussed. Some of these areas were also raised by the Auditor General in his 1997 audit of the equalization program. And, Mr. Chairman, members of the Auditor General's office are here in the audience today as well.

Three of these priority areas are the sales tax base, games of chance, and user fees. Some other priority areas also received much attention due to the complexities of the issues. These include property tax base and measuring natural resource fiscal capacity. The parameters of the equalization program, the ceiling, standard and floor, were also discussed at length.

As the consultation process came to a conclusion, the federal and provincial governments worked together in deciding on priority areas and improvements for this renewal. However, Mr. Chairman, there remain some areas where further analysis and discussion are required. The federal government and all provincial governments have agreed that these analyses and discussions will continue between now and the next renewal, which is scheduled in five years.

Overall, federal and provincial governments do agree that the proposed changes in the legislation before you represent another step towards improving the equalization program.

Very briefly, Mr. Chairman, let me touch on some of those priority issues of concern and how they were dealt with.

First, the sales tax base. The federal government, with the agreement of the provinces, proposes to adopt a tax base that reflects both the retail tax system and the more recent value-added tax systems.

Second, the measure of fiscal capacity for games of chance. The current measure is based solely on lottery ticket sales in the province. However, as we all know, Mr. Chairman, significant changes have occurred over the years in the lottery and gaming area. The federal government is proposing changes to the equalization program that will take into consideration all types of gaming activity. Such a change will provide greater accuracy in calculating equalization payments.

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The third priority area is user fees. The Auditor General recommended that the treatment of user fees in the equalization program be reviewed. The federal government agreed to review the issue with the provinces as part of the renewal process. The review indicated that there were substantive arguments both for and against including this source of revenue in the equalization program. The federal government proposes to include only half of the revenue from user fees, and both the federal and provincial governments agree that this portion of the equalization program requires additional discussion.

Natural resources—another area discussed by the Auditor General, Mr. Chairman—received considerable attention over the course of the discussions. Some examples of the changes proposed for the resources bases include the following:

- using an economic rent approach for the mining and mineral bases.

- using the existing practice for the oil base by dividing oil production into separate categories, such as heavy oil, light oil or third-tier oil, which reflect the provincial taxable categories. Two new categories are being added at this time to mirror current provincial practices.

- for the forestry base, the value of production will replace the volume of wood harvested, thus allowing the calculation to take account the differences in the value of various types of wood.

Mr. Chairman, the property tax base is one area that has consistently been a complex issue within the equalization program. The provinces and the federal government devoted considerable time to reviewing this base. This review served to confirm the complexities of measuring provincial and local governments' ability to raise property tax. Most provinces agreed that the complexities of a base for property tax posed difficulties. In the end, however, the federal and provincial officials were unable to agree on a base that would be a clear improvement over the existing one, but they did agree to continue active research in this area.

As you can see, Mr. Chairman, the contents of this bill are based on a considerable amount of analysis and discussion. The proposed changes to the equalization program are not taken lightly. In all cases, they are only adopted if they represent an improvement upon the existing program.

I'd like to say that I look forward to the committee's discussion of this very important federal program. While it's true that it is solely a federal program, its design and continued renewal are based on extensive consultations with all provinces in this country.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Valeri.

Mr. Gusen.

Mr. Peter Gusen (Director, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch, Department of Finance): Thank you, Mr. Chairman, and good morning. I'm happy to be here today to discuss Bill C-65 and to answer your questions, particularly on technical details of the amendments contained in the bill. My colleagues introduced at the opening of the session are here today to help me with that task.

The parliamentary secretary has provided you with some of the details of the bill, both in his speech in the House of Commons and in his remarks today. I don't intend to repeat what he has already said, Mr. Chairman, but I'd like to just touch on a couple of things if I may.

First, some of the changes proposed in this bill weren't mentioned because they're not as important as the ones that were covered in the parliamentary secretary's remarks. Secondly, I would comment on some recent re-estimations that we've made of the amount of money going to the various provinces under the existing equalization program.

The most important proposed changes to the equalization programs are those associated with the modification of the ways in which we measure gaps in the revenue-raising capacity of different provinces. These are the tax base changes that Mr. Valeri just talked about, but there are other parameters of the equalization program that are dealt with in Bill C-65. I'd like to touch briefly on three of these.

The first parameter is transition. The first part of the bill before you introduces four new sections into the Federal-Provincial Fiscal Arrangements Act, allowing for a gradual phasing in of the base changes—the ones we just heard about—over the period from 1999 to 2003.

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A similar transition provision was employed previously when we renewed the equalization program. The reason for introducing a phase-in of the changes is first of all to dampen the distributional impact across provinces, and secondly to ensure federal and provincial fiscal planners have sufficient time to adjust to the changes in a predictable and manageable way.

The second change I'd like to refer to that's included in Bill C-65 is the modification to the ceiling provision of the program. The purpose of the ceiling provision is to protect the federal government from unsustainable large increases in equalization expenditures. The ceiling in the current program, as of this year, has a value of about $10.4 billion, and that's about $1.2 billion higher than the actual amount going out to provinces. The proposed ceiling in the bill you have before you would set the ceiling at a value of $10 billion in 1999-2000, and in the following years it would grow at the same rate as the GDP.

The third change included in the bill that I'd like to mention is the floor provision. The floor provision is in some ways analogous to the ceiling provision. The floor protects individual provinces against large declines in equalization payments from one year to the next. The floor in the current program needs improvement because the protection it offers to provinces could fluctuate very widely given relatively small changes in provinces' economic situations. So the proposed floor that's described in the legislation you have before you provides a similar level of protection as the current floor, but it would not be subject to these large variations.

Those are the additional parameters I wanted to discuss.

Now I'll turn to the recent revisions to our estimates of equalization payments, which you probably heard about if you were listening very closely to the budget speech on Tuesday night.

Equalization entitlements for the upcoming fiscal year are produced every February, and these estimates are based on federal-provincial forecasts of economic activity, revenues, and population. Adjustments to equalization calculations are also made at that time for prior years as actual data replace forecast data.

Let's take the fiscal year 1996-97 as an example. Initial estimates of the amounts that would be paid to each qualifying province were calculated in February 1996, just before the beginning of the 1996-97 fiscal year. But adjustments are made to those initial estimates every six months thereafter until the final data are included, and that will happen in the spring of this year.

So for a three-year period, the estimates for 1996-97 were continually updated with new data. The federal government makes payments to provinces every month on the basis of the most recent estimates of what each province is entitled to.

As you no doubt heard in Tuesday's budget, equalization estimates for the last two fiscal years—for 1997-98 and 1998-99—have been revised upward by a major amount. They've been increased by $2.2 billion in total. This was in response to economic changes, in particular the strong economic growth in Ontario, which raised the equalization standard, and also to the widening economic disparities amongst provinces. This is the way equalization is expected to work. It's supposed to be a responsive program that measures what's going on out in the economy right now and keeps up with the latest data and makes adjustments to payments accordingly.

These new figures have made some of the information in your briefing books out of date. I believe copies have been distributed of the new pages you can insert in your briefing books to replace tabs 11 to 13.

That concludes my remarks, Mr. Chairman, and I'd like to thank you very much for giving us this opportunity to discuss the equalization program.

The Chairman: Thank you very much.

We'll move to the question and answer session, and we'll begin with Mr. Epp.

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Mr. Ken Epp (Elk Island, Ref.): I think probably Mr. Valeri is the one who can answer my first question. What is the real philosophical basis of equalization payments? What's the rationale for them?

Mr. Tony Valeri: Well, the basic rationale for equalization is to ensure that the provinces that lack the physical capacity to provide a comparable level of service in their province are given support from the federal government through an unconditional transfer to be able to meet that level of service. So when you take a standard that is comprised of an average amongst those five provinces, you then measure, through formulas that are established through legislation, the provinces' ability to raise revenue within their provinces, and when they fall below that standard we raise them to that standard.

If you didn't have a system like equalization, I guess what you could in fact end up with is that those provinces that lack the ability to raise revenues would have to increase taxation to a point where there really wouldn't be.... With such high taxation levels, the provinces wouldn't have the opportunity to provide the service.

This is a collaborative attempt, after discussion with the provinces and recommendations from a committee back in 1940 that the government should make national adjustments to help the less well-off provinces in being able to provide a comparable level of services.

Mr. Ken Epp: Okay, you haven't really answered my question, because what I'm actually getting at is whether the.... Well, first of all, I know it's given in the Constitution. It seems to me the basis is that the basic services to citizens in the various provinces should be kept to a minimum level. I'm thinking there of health, education, maybe housing—although I don't know how much that fits into it. It seems to me the purpose is to meet the needs of the people. Is that not true? I'm trying to put words into your mouth now, to give the right answer.

Mr. Tony Valeri: No, no. I think the purpose of it is to provide Canadians with a comparable level of services right across the country.

Mr. Ken Epp: That's what I said.

Mr. Tony Valeri: That's the purpose of equalization. It's also to provide equality of opportunity, so that an individual in an Atlantic province has the opportunity to receive the same quality of health care as one would receive in Ontario, Alberta, or elsewhere.

The national government, after consultation with the provinces, puts forward this program, and it's adjusted every October and February after measurement of the fiscal capacity. So the underlying philosophy would be to provide the equality of opportunity and provide a comparable level of service regardless of which province you live in, whether you're a have or a have-not province.

Mr. Ken Epp: You see, I have a problem with this. I don't know how it applies on the provincial level, but certainly on an individual level if you ask about a person's capacity to earn versus what the person actually earns, they're sometimes quite disparate.

I know a guy who everybody judged in high school was going to be a total loser, and in our class he's now one of the richest guys. And on the other hand, they thought I was going to be rich—

A voice: If they had had equalization payments you'd both be rich.

Mr. Ken Epp: We'd both be equally poor, I think.

Does that fit in the province? I'm thinking again of another neighbour I had some years ago who was very capable, but one year he said, I'm tired of working. So he quit working. And we paid for him, for his basic necessities of life, because he just quit. Yes, that's true.

Mr. Paul Szabo (Mississauga South, Lib.): Let's ask a question.

Mr. Ken Epp: I can tell you about that. So what I want to know is whether there would be a mechanism we could use in equalization that would reflect the money the provinces actually earned, rather than what we guess by some convoluted formula they might have been able to earn.

Mr. Tony Valeri: I think you have to go back to the basic underlying principle of equalization. And I think, Mr. Epp, with all due respect, the approach needs to be a bit more positive. I think every province would want to increase their capacity to earn, and ultimately earn more in terms of their revenue base through economic development. That's number one. So any assistance that the government provides is not an attempt to provide a disincentive for provinces.

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If you look back, Alberta and British Columbia were at one time recipients of the equalization program. It provided them assistance at a time when they did not have the capacity to earn revenues up to that standard. Now they are not recipients of the equalization program, and I think you'll find that whether you are a have or a have-not province, all provinces of this country want to ensure that Canadians generally can receive a comparable level of services, regardless of where they live.

So if the intent of your comment is that this in some way allows provinces to not engage in greater economic opportunity, i.e., the individual who you mentioned decided to just quit work and thereby we supported them, then I disagree with the basic premise of what you're saying.

Mr. Ken Epp: No, you see, you misinterpreted what I said completely, because I'm looking at it in the opposite way. Is it better to measure what you could earn if you went out and did it, or is it better to measure what you did earn? That's really my question.

Anyway, I have a question for Mr. Gusen.

You're bringing lotteries into this in a new way, and I would like to ask you, specifically, how do you compare the ability, say, of Prince Edward Island to earn lottery earnings with that of Alberta, which has I think one of the highest levels of lottery sales in the country? What is the actual mathematical mechanism?

Mr. Peter Gusen: That's one of the tax base areas where we're making a significant change in Bill C-65. So let me describe to you first what we do now and then what we propose to do if this bill is passed.

What we do now is look at the value of sales of lottery tickets per person in each of the provinces, and we consider that as the measurement of their relative fiscal capacity. The sales per capita of lottery tickets are the highest in Newfoundland, and they're quite low in Manitoba, for example.

In our discussions with the provinces, and prompted by some observations that the Auditor General made in his report, and from our own observations, we recognize that the gambling field as a source of revenue for provincial governments is much broader than just lottery tickets. Casinos are becoming very prominent and video lottery terminals are also very prominent. There are also other types of tickets other than the traditional lottery tickets. The break-open tickets are also becoming prominent.

So what we plan to do for the future is have the gambling revenue base divided into two measures of relative capacity across the country. One will be the lottery ticket base that we currently have. The other will measure differences in provinces' capacity to raise money through casinos and VLTs and the like, and for that we're looking at personal income per capita in provinces.

Some studies we've done have suggested that the frequentation of casinos and VLTs rises with income, so in the future we'll be looking at two different measures of capacity for provincial governments to raise revenues there—lottery tickets and income.

Mr. Ken Epp: One of the things that's happening here in this bill, according to the numbers I've looked at, is that Manitoba, for example, is going to be losing in the amount they get in equalization. Now you've brought the example to mind, because you said that Manitoba is one of the lower purchasers of lottery tickets. I would like to know, is Manitoba being penalized because there are many more people in Manitoba who choose not to fritter their money away on lottery tickets? Does this cost them?

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Mr. Peter Gusen: No, not at all. In the equalization system that's currently in force, we were measuring Manitoba's capacity to raise revenues from the whole gambling area, as if lottery tickets were the only source of revenue in that field. It happens that sales of tickets per capita in Manitoba are below the average, but that doesn't mean that the Manitoba government lacked the capacity to raise revenues. In fact, if you look at Manitoba's revenues from gambling activities in the casino area and in the video lottery terminal area, they are well above average. With our new approach to measuring differences in provinces' capacity, where we take the more recent types of gambling activities into account, we're properly measuring the capacity that Manitoba has, rather than lowballing it as we were when we looked only at lottery tickets.

Mr. Ken Epp: I'm not clear now. If Manitobans were to really go on a big binge and say that they're going to start buying more lottery tickets, would that affect their equalization, and if so, how?

Mr. Peter Gusen: It would affect their equalization because it would increase the capacity of the Manitoba government to raise revenues through that type of gambling activity, but it would have no effect on the other portion that we're measuring, the casino and VLT portion.

Mr. Ken Epp: So you are using what they actually earn. This is what I'm getting at. You actually are using a number that the government actually earns from lotteries, as opposed to saying that if they were to drop their morals and buy lottery tickets they would get more. I want to know how you make that judgment.

Mr. Peter Gusen: That's not—

Mr. Ken Epp: How do you know how much money? If you look at me, how much money do you think you could earn from me from lottery sales?

Mr. Peter Gusen: Just getting back to your—

Mr. Ken Epp: I don't know how you can judge that.

Mr. Peter Gusen: The first part of the question was do we look at how much the government is actually earning from lottery tickets? What we're look at is the gross sales of lottery tickets by province, not the government's take out of the lottery ticket sales. So we're not looking at government earnings.

As far as looking at an individual and determining how much money the government could make from the gambling activities of that individual, certainly you can't do it person by person without knowing a lot about their habits and what they do in their spare time. But over the whole population, we've done studies to indicate that participation in casinos and VLT activities is associated with income. So over the whole population, on average, provinces that have higher per capita incomes have a greater capacity to earn revenues from those sources.

Mr. Ken Epp: So I don't know why you just don't use that as a measure.

Mr. Chairman, I'd like to give other members of the committee a chance to ask questions, so I'm going to ask just one more and then, if possible, I'll come back before our time is up.

My next question is a very simple one. I would like to know how many people in Canada actually understand how this equalization formula works. What's your estimate? Are there 10 people in Canada, are there 200? How many?

Mr. Tony Valeri: Mr. Epp, I would say—

Mr. Ken Epp: Five.

Mr. Tony Valeri: —seven, including the people from the Auditor General.

Mr. Ken Epp: And we're not too sure about them.

Mr. Tony Valeri: And we're not too sure about them, actually.

Mr. Ken Epp: Point made.

Go ahead, Mr. Chairman.

The Chairman: I have a question. How many people should understand equalization?

Mr. Discepola.

Mr. Paul Szabo: Thank you, Mr. Chairman. Mr. Gusen would like to answer that question.

Mr. Peter Gusen: Thanks.

I think, ideally, we'd like everybody in the country to understand the program completely, because it's a program we're proud of, as people who toil in the salt mines of the equalization formula. I think people generally understand the principles of equalization, the idea of sharing that's implicit in the equalization program, and they understand that we're measuring how much provinces can raise by themselves, and then we top them up to a standard if they can't raise sufficiently by themselves.

As for understanding the intricacies and all of the details that we're just been discussing in one tax base, in the gambling, I don't think it's really necessary for every Canadian to understand that in order to make it a program they can appreciate and support.

The Chairman: Mr. Discepola.

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Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Mr. Chair.

As time goes by, it seems that the more things change, the more they stay the same. I remember having the same discussion with Mr. Grubel and Mr. Speaker back in 1993, and they seemed to have difficulty understanding then what the equalization program was all about.

The chair asked a very important question, but I don't think Canadians care what equalization is. As Mr. Valeri said, what we really care about as Canadians is making sure that no matter where you live in this country, you have equal access to a standard of living that we judge to be appropriate. We have to ensure that everybody has minimum levels of services no matter where they live in Canada. If the Reform Party hasn't come to understand that since 1993, I think we'd better give up.

One thing I am concerned about, Mr. Smith, is the decision to include gambling in your tax base. Has your department done any studies on the profile of the stereotypical gambler? Have any of the five of you who really understand equalization even attempted to go to a casino? I have a hard time with it when you have to include that.

If I understand it correctly, equalization is to measure the richness of a certain province, and you have certain criteria in that tax base. I really want to understand why you're using lottery gambling, because there are many social problems when you associate lottery and gambling revenues—those from casinos, for example. These are costs that are immeasurable. The suicide rate in Quebec is very high. When you talk about crime associated with casinos, it is very high. If you only take the revenue component of it, maybe Mr. Epp has a point. There should be some offsetting component for the societal impacts of gambling.

Why would you even include that? Am I wrong that what you are really trying to do is measure the richness or the revenues of a province? Why not just go strictly by the revenues that the province generates through its different forms of taxation?

Mr. Peter Gusen: That's an interesting question.

The inclusion of gambling revenues with other types of provincial and municipal revenues in our formula is necessary to achieve a comprehensive coverage. We don't want to measure the differences in capacity in some sources of revenue and not measure it in others, because poor provinces would then have an incentive to collect revenues only in the areas that were not being measured. It wouldn't have any effect on their determination of equalization.

You also raised a point about whether or not the inclusion of provincial government gambling revenues in equalization encourages provinces to offer that sort of activity, and whether the social costs from it outweigh the revenues that provinces get. I don't think the equalization program is either encouraging or discouraging provinces to get into that line of business. We measure what provinces could raise if they imposed income taxes, sales taxes, resource taxes. For comprehensiveness reasons, we also look at revenues from gambling and some other undesirable activities, like taxes on sales of liquor and taxes on cigarettes too. We're not suggesting that we approve of or promote those activities by our inclusion of them in the equalization formula.

If we're measuring all types of revenue, provinces will not be able to improve their situation by raising more money through gambling and less money through income tax. If we included only certain types of revenues, we would be giving an incentive to the provinces to raise their money in certain areas but not in others.

Mr. Nick Discepola: But why did you use that as a measure? I understand the bases from Confederation, or why you would use natural resources in the oil-rich provinces, or forestry, for example. I think the tax base is outdated, though. Maybe one day Saskatchewan will be a rich wheat province and we should include wheat. Why do you choose that as a tax base? Why not have something that's more flexible?

If you're also moving to property tax evaluation, a home in Vancouver might be worth $1 million, but the same home in Montreal might be worth $300,000. In Toronto it might be $600,000 or $700,000. Is that a valid tax base that we should be looking at? Does that really measure the wealth of a province? Or should we just be going by the provincial revenues they generate and let the provinces choose whatever revenues they want to generate, in the method they choose? Why the tax base?

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Mr. Peter Gusen: The property tax area is an area we've been discussing with provinces really since the equalization program first got going back in the 1950s. We've never satisfactorily resolved the proper way to measure differences in fiscal capacity in the property tax area, but we're still working at it.

The method we have now is not the straight differences in market value between B.C. and Quebec, or between one province and another, because that does not truly reflect the capacity that provinces and municipalities have to raise revenues.

You mentioned the example of a home in Vancouver selling for three times the amount of a similar home in Montreal. That may be the case. But it's not the case that Vancouver has three times the possibility or potential to raise revenues from property taxes that Montreal has. So the technique we use now for measuring property tax revenues takes into account the underlying capacity that homeowners have to pay the taxes. It doesn't just reflect the differences in the values of their homes.

But I think there was a deeper question underlying your question. Why don't we just look at provincial revenues, the whole package, and go to a simpler measure that people could understand and that wouldn't be focusing on things like gambling revenues or property tax revenues?

There have been a number of proposals that we go to a very simple approach to equalization where we look just at the gross domestic product of the different provinces, or the gross domestic product per person, and the differences across the country. We've looked at that and we've engaged in discussions with provinces about doing that, taking a very simple macro approach to measurement. In general, although people are attracted to it initially, as soon as they start to delve into the intricacies of it, they stand back from it and prefer to continue with what we have now.

The main reason for that, I think, is that the capacity for provinces to raise taxes is not the same for a dollar sale of groceries, a dollar sale of liquor, or a dollar sale of gasoline. Every different type of economic activity in a province has a different tax potential associated with it. If you use just the GDP of the province to measure the tax potential, you wouldn't be reflecting the fact that Alberta has a lot of oil production that's quite heavily taxed, or that sales of cigarettes are higher in certain provinces and they're very highly taxed, and so on.

So we're still open to the idea of going to a simpler measure, and we'll continue our discussions on that basis. But until now it hasn't been proven attractive to the provinces involved.

Mr. Nick Discepola: That's the basic problem. With any formula you come up with, you have to make sure there are not too many losers and not too many winners, because the discrepancies we see today will occur. I think that's your fundamental problem, no matter what formula you come up with.

Mr. Tony Valeri: Yes. I just wanted to add one point that I think is very important, and that is just to repeat that the value of every dollar is different in every province, and equalization is really a national program. That's why it's not the actual tax in a province that's measured; it's the average tax of those five provinces.

So when you look at a dollar generated in a province, you look at the average tax of those five provinces, and then you compare that standard with the provincial standard. Then it's the difference in that. Either you need to equalize if they're below the standard, or they're a have province if they're above that standard.

Mr. Nick Discepola: Okay, thank you.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: During the debate in the House, one of the issues that came up substantially—and this builds nicely on what Mr. Discepola has been talking about—was the issue of disincentives, about whether or not provinces receiving equalization would in fact have a disincentive to pursue economic growth and job creation and achieve a fuller level of capacity of raising revenue, etc. I thought I'd like to pose that to you with regard to whether there is in fact any possibility that a province could benefit more by restraining its activities. Coupled with that, is the calculation of equalization in all its complexities such that all of the provinces are satisfied that no one province could in fact manufacture its situation?

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Mr. Peter Gusen: That's a very interesting question. My colleague Mr. Davis deals directly with the provinces on a day-to-day basis in the administration of the program, and if there is such manipulation going on, he has probably heard of it. So I'll turn it over to him for a response.

Mr. Richard Davis (Chief, Program Policy and Operations, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch, Department of Finance): Thank you, Mr. Chairman.

Let us put it this way. Provinces are very interested in their equalization entitlement. They will always be anxious about how it is likely to move, up or down. On the other hand, there is no incentive in the program to not develop. For the government, let's say, of a province that's receiving equalization, if there is development in their province, there will be more jobs and more economic activity. Its residents will be wealthier, and they will pay more taxes. As a result of that, equalization may go down by a proportion, or even 100% in some cases, of the extra taxes the residents are paying. Now, the government may find itself in a net no-win situation. But the economy itself of the province will be definitely in a plus situation. The individuals living in that province will have more money and a higher standard of living.

So it's true that if a particular revenue source for a province rises strongly, the province could lose an equal amount of equalization as the government gains revenue. But at the end of the day the province's citizens would always be better off after the development took place even if the net fiscal position of the government hasn't improved a lot.

Mr. Peter Gusen: If I might add just one thing on that, when a province develops, it tends to attract people from other provinces. The equalization program payments are calculated on a per capita basis, so the more people a province has living in it, the more money it gets from equalization. In Newfoundland's case the equalization payment is something over $1,500 per person. So every bit of development Newfoundland can do and every person it can attract will bring in $1,500 worth of extra equalization payments. So there's certainly an incentive there to develop, I think.

Mr. Paul Szabo: I think you've explained very well how to relate to those who would suggest there was a disincentive to get out. With regard to the issue of resources, particularly in the Newfoundland situation with Voisey's Bay, the offshore, Hibernia, and all the other good things, I think you've laid it out that even if you lost all your equalization, the end result would still be infinitely better than not pursuing that production, and that's helpful.

Mr. Tony Valeri: If I could just add a point on that, Mr. Szabo, we have to remember that British Columbia and Alberta were recipients of equalization, and they are now have provinces. So I think the disincentive issue is dealt with in that example.

Mr. Paul Szabo: Stabilization is not being changed. I'm curious about it, because one of the issues that came up in anticipation of tax cuts in this budget was the impact on provincial tax revenues. Under the existing program, should the federal government make substantial cuts, the net impact on any province could never exceed the 5%.

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Mr. Peter Gusen: There are two programs that sound very similar, and they sometimes get confused. They're both in the Federal-Provincial Fiscal Arrangements Act. There's a program called stabilization, which comes into play when a province's economy declines for some reason and its own revenues drop because of this economic decline. That program is triggered when a province's revenues decline by 5% or more from one year to the next.

There's another program called the revenue guarantee program, and that's being extended for a further five years by this bill. That is to protect provinces against a different type of calamity—I shouldn't use such a provocative word—a different event that could affect them. If the federal government changes its tax rules, tax rates, tax exemptions, levels, and so on, that affects provinces because nine of the provinces base their personal income taxes on the basic federal tax.

The revenue guarantee portion of this bill ensures that if the federal government makes a large change in its definition of taxable income or its tax rates and that affects provinces, the provinces have some time, some warning, so that they can take off-setting action if they wish to do so. If the federal government were to introduce a major change in its tax rules that affected provinces, for that year provinces would be protected against reductions in the revenues beyond a threshold amount.

So there's both the stabilization program, which is part of the same act we're looking at now and which is not being touched at all, and there is the revenue guarantee program that's being extended by this bill.

Mr. Paul Szabo: Thank you.

The Chairman: Monsieur Cardin, followed by Mr. Brison, and then we'll go to Ms. Redman.

[Translation]

Mr. Serge Cardin (Sherbrooke, BQ): I understand very well how the equalization program works. Earlier, you stated that the equalization program was considered to be the foundation of Canada's fiscal federalism. The aim of the program is to provide a comparable level of service to all Canadians, despite the disparities that may exist in terms of the provinces' ability to generate tax revenues. This is a noble, and laudable objective indeed.

However, despite all of the efforts made under the equalization regime to ensure a comparable level of service nationwide, while we are on the subject of this bill, certain events have transpired which lead me to believe that the government is doing one thing with its right hand, but at the same time negating with its left hand any benefits derived from that action. Equalization payments are included in overall transfers such as tax points or other forms of transfers.

The purpose of equalization is to ensure equity for all Canadians. However, through transfers, the benefits of equalization are cancelled out because the government is moving toward a per capita formula. Therefore, while it focuses on equalization on the one hand, on the other hand, its proposed actions will nullify the effects of equalization.

Would you care to comment on this?

[English]

Mr. Tony Valeri: Mr. Chairman, I think two points need to be made. I think I heard you correctly when you indicated that there was an attempt to take away the effect of equalization. A province that receives equalization does not receive the same equalization amount per capita when you compare province to province, because provinces are at varying levels below the standard. So in order to get them to that standard, they would receive a varying amount of equalization per capita. That's point number one.

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On the Canada health and social transfer, we are moving towards an equal per capita formula. Because of what happened in a prior administration, there was a cap on the Canada assistance program. You therefore had provinces that were receiving an amount that was less than equal per capita in the Canada health and social transfer. By moving the Canada health and social transfer to an equal per capita formula, there is no intent, in any way, to somehow diminish the impact of equalization. Equalization is still based on moving provinces to a standard that is based on an average of five provinces.

I hope I'm clear when I say that the equal per capita issue that I think you're raising has to do with the Canada health and social transfer program, which we will move to an equal per capita. The equalization program is not an equal per capita program. It is meant to bring provinces up to a standard, but provinces will receive a varying amount on an equal per capita basis. Is that fairly clear?

[Translation]

Mr. Serge Cardin: Not really. Basically, that's what the government said when it tabled its budget. It included everything in its calculation of transfer payments, whether it be tax points, equalization or other transfer payments for health, education and social assistance. Its position is quite clear. It appears to be moving closer to a per capita funding system. Therefore, the effects of equalization in all of this are lost.

[English]

Mr. Tony Valeri: Mr. Chairman, I think there has to be a distinction between the two programs. The Canada health and social transfer is a program that transfers moneys to provincial governments on a block funding basis, in order for them to invest in health care and higher education. As the legislation indicated back in 1996, that program was always meant to go back to an equal per capita system. Every province in this country should receive, on an equal per capita basis, an amount of money to fund those services. For those provinces that are below the standard that is made up of an average of five provinces, we have the equalization program. Based on that, you have a different amount on a per capita basis, depending on which province you live in.

Perhaps I'll ask Mr. Gusen to point out table 5 in The Budget in Brief. That document outlines for you what in fact the per capita amounts are for every province, their shares of the CHST, and then those provinces that are receiving equalization. You'll see different amounts there.

Mr. Peter Gusen: This table is actually in a booklet called Federal Financial Support for the Provinces and Territories. There is a table at the back that indicates what each province's share of the population is, what its share of the CHST is, what its share of equalization is, and what its share of total transfers is. If I understood Mr. Cardin's question correctly, the idea was that what's being done on the CHST will undo what's being done on equalization. I think these numbers would lead him to the opposite conclusion.

Right now, the population of Quebec as a share of the Canadian population is 24.1%, and we predict that it will be 23.6% five years from now. In terms of total transfers—now we're considering both CHST and equalization—Quebec's share is 29%, which is about five percentage points higher than its share of the population. By the end of the five-year period, in 2003, Quebec's share of total transfers will be 28.6%, while its share of the population will be 23.6%. In other words, Quebec's share of the total transfers will again be about 5% higher than its share of the population. The move towards equal per capita transfers under the CHST therefore seems to be offset by the growth of the equalization program over this period, leaving the Quebec situation more or less the same as it is now.

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Mr. Tony Valeri: The point I would make, though, is specifically that the per capita amount in 1999-2000 would be 24.8% under the CHST, right?

Mr. Peter Gusen: Yes, that's right.

Mr. Tony Valeri: The population, however, is 24.1%.

To address your point, the equalization percentage per capita is 48.1%, so there are two different measurements. One is the actual Canada health and social transfer, which is based on equal per capita as we move forward, and the other is based on the equalization formula. For a province like Quebec, which has 24.1% of the population, it receives 48.1% of the equalization on a per capita basis. There is a distinction there. In no way are we attempting to penalize provinces that are receiving equalization by moving to equal per capita. In fact, what was happening was that we had equalization going on through the back door, without moving to equal per capita.

[Translation]

Mr. Serge Cardin: I would nevertheless like to make myself quite clear on this. I would much rather prefer we not receive any equalization payments and see the government plan more economic activities, more purchases of goods and services, more investments and regional development.

From a personal standpoint, no one likes to pay taxes, but in my opinion, which I'm sure you all share, everyone would rather pay one million dollars in taxes a year because this would mean that the same amount would be left over on his or her pay cheque.

We too would be interested in contributing more and not necessarily receiving equalization payments, but there would still have to be equity at all levels.

We can always get out the books and argue the figures that you quoted to me earlier. No doubt we will have an opportunity to debate this further.

Overall, the government's actions will negate the effects of equalization. We'll discuss this again. We do, however, support the equalization program and we also understand how these calculations are done.

[English]

Mr. Tony Valeri: I'll just make a final comment.

As we move forward from 1999-2000 through to 2003-04, the actual amount per capita under equalization will move from 48.1% per capita of equalization to 49.3%. Quebec will therefore continue to have growing equalization. It isn't a matter of reducing the amount, because it's actually increasing. Collectively, you'll see those transfers as reflective of Quebec's experience in terms of its economic ability to raise revenue.

The Chairman: Thank you, Monsieur Cardin.

Mr. Brison, followed by Mrs. Redman.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman.

First, what would be the projected impact of the tax measures in the budget on provincial revenues? When we're considering equalization, it's important to have an understanding of the impact of other government measures, including the federal budget, of course.

Mr. Peter Gusen: Thank you.

I brought along every table I could think of, but I'm not sure I brought that one.

Mr. Scott Brison: If you can tell me, I'd be interested in the effects of the federal tax measures on provincial revenues, but also there may be upward pressures on provincial revenues due to bracket creep, which would offset those. But that is relevant to the discussion of equalization. We're seeing an increase to most provinces, but is there going to be a commensurate decrease in tax revenues that may in fact negate these gains?

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Mr. Peter Gusen: I have the tables here, but there is one for each province.

Mr. Scott Brison: Okay. For instance, I'm looking at table 10 here, in terms of the increases for provinces.

Mr. Tony Valeri: Is that for all of Canada?

Mr. Scott Brison: Yes. For instance, it shows $51 million more for Nova Scotia, based on this table, and $37 million less for Manitoba. That's the one. Now, this is on a per annum basis. Which year is this for?

Mr. Peter Gusen: It's for the last year, after it's fully phased in for 2003-04.

Mr. Scott Brison: Okay, for 2003-04. What is the impact of the federal tax measures?

Mr. Peter Gusen: On Nova Scotia?

Mr. Scott Brison: On Nova Scotia, per annum.

Mr. Peter Gusen: In Nova Scotia, it will have a negative impact of $31 million in 2003-04.

Mr. Scott Brison: Okay. So we're looking at a reduction in provincial revenues by $31 million, and an increase in equalization by $51 million. Is that taken into account in that calculation? This is very Byzantine.... I mean, you'd need a forensic auditor to understand equalization, or the federal budget for that matter.

Mr. Tony Valeri: That's why the Auditor General is... [Editor's Note: Inaudible]

Mr. Peter Gusen: I'm sure all of these factors are taken into account in setting policy and deciding what the tax measures and equalization changes are going to be. But just to try to crack some of the Byzantine nature of it, it's important to remember that the federal tax reductions that result in provincial tax reductions result in more money in the pockets of people in Nova Scotia. They get a provincial tax cut, unless the provincial government decides to to do something about it.

Mr. Scott Brison: Sure.

Mr. Peter Gusen: Whereas the equalization increases the Nova Scotia government will get are money in the pocket of the treasurer of Nova Scotia. So there are different people who are receiving or losing these moneys.

Mr. Scott Brison: Can I get a copy of that chart?

Mr. Peter Gusen: Yes.

Mr. Scott Brison: Does that also take into account bracket creep?

Mr. Peter Gusen: This is just a—

Mr. Scott Brison: That doesn't take it into account, so in fact bracket creep may eliminate some of that loss.

Mr. Peter Gusen: That's right. Not that I'm arguing in favour of bracket creep.

Mr. Scott Brison: Is that quantified? You may not be able to provide it to me now, but I would like to get that information.

Mr. Peter Gusen: I'll talk to my colleagues back at the—

Mr. Scott Brison: That would be great. I'd like to have a better understanding of the impact of that. Thank you for that answer.

I understand there's been a change in the calculation of the equalization formula based on final-product value in some sectors. I think forestry was one example. One of the areas that was raised that may be problematic was whether that would create a disincentive for value-added manufacturing or secondary manufacturing. Effectively, if we base equalization on the value of final product and don't consider that in fact there will be higher production costs to achieve that, there may be a disincentive. We know one of the problems in Canada now is that we have declining productivity rates relative to our trading partners. Could that create a disincentive for what would effectively be positive behaviour?

Mr. Peter Gusen: No, it couldn't, and let me explain why.

Mr. Scott Brison: Okay.

Mr. Peter Gusen: One of the areas in which we made a number of changes and came up with what we think is a better measure of the revenue-raising ability of the provincial governments is in the production of natural resources. But we're measuring the natural resources only up to a certain stage of production, only up to their primary-product stage of production.

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So in the forestry area, which you mentioned, where we've gone from looking at the volume of production to the value of production, it's the volume of production of logs that we're talking about. If they're upgraded beyond that, it's not considered part of the fiscal capacity of the province through forestry taxation. The stumpage fees and other types of forestry taxation the provinces opposed is just at the primary stage of production.

It's similar in the minerals area, where we've changed our approach to better measure what the differences in fiscal capacity across provinces are. We're measuring the production as the product comes out of the mine. If there's further upgrading after that, we measure that fiscal capacity differently.

Mr. Scott Brison: On the social costs of gambling, and that is a very important issue, to what extent have the social costs, which are largely provincially borne, been quantified? Has there been an effort to quantify these social costs? Again, if you look at it, a lot of the social welfare costs are provincially borne. To what extent has that occurred?

Mr. Peter Gusen: Our study of the gambling field is a restricted one. We don't get into all of the aspects of the implications of provinces raising money from gambling. We're looking strictly at their capacity to raise revenue and differences amongst provinces, how to measure differences from province to province. But we're well aware of the controversy surrounding the old idea of provinces and municipalities raising money from gambling activity.

If provincial governments as a group or individually decide that the social costs outweigh the revenue-raising advantages of that type of activity and they cease that activity, then the way we measure it in our system of equalization now will reflect the fact that provinces aren't using this revenue source.

Mr. Scott Brison: Based on that response, do you believe it's possible that when provinces weigh the social costs of gambling and consider the impact on equalization, it may in fact...? My question is, is there a social agenda of the federal government to actually create, in effect, a disincentive to gambling by changing equalization to actually create a negative reinforcement for pursuing what might be considered a negative behaviour?

Mr. Peter Gusen: That would be a departure from what we are doing right now. We try to have a neutral system in terms of what provinces decide to tax or not tax and what activities they promote or decide to try to turn off, but certainly it could be something worth looking into.

Mr. Scott Brison: My question is do you agree with me that in fact this does create a certain disincentive potentially for provinces to pursue games of chance as a revenue source if in fact they are a recipient of equalization? It may reduce some of the draw, as it were, for them.

Mr. Peter Gusen: No, I think it's a complicated business, but by and large the system we have now provides neither an incentive nor a disincentive. If all provinces stopped all gambling activity, then it would drop out of the equalization system, but at the margin I don't think there's an incentive or disincentive.

Mr. Scott Brison: A general question is whether there is an alternative, or are there organizations that have presented alternative proposals to the current formula that are less complicated and perhaps more inclusive in terms of sectors? I don't see, for instance, in the criteria or the sectors considered here, things like the IT sector. Is the IT sector hidden in part of that?

Mr. Peter Gusen: That list there is a partial list, because it's the tax bases that we're proposing changes for.

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Mr. Scott Brison: But the IT sector must be—

Mr. Peter Gusen: Yes, corporate income tax is included.

Mr. Scott Brison: What alternate proposals are you familiar with in terms of changing equalization dramatically? As a committee, it would be interesting for us to study this in a more thorough way and to at least be aware of some of the alternatives that are out there. I'm not aware, for instance, what those proposals are and whether or not there are some more transparent and potentially effective means to ensure equality of opportunity for all Canadians. I'd be interested in that.

Mr. Peter Gusen: There have been academic studies recently. We've just passed the fortieth anniversary of the equalization program. It began in 1957, and various academic groups have celebrated this anniversary by studying the equalization system and publishing reports on it. One was sponsored by Queen's University—a conference was held in Montreal fairly recently. The idea of having an equalization formula based exclusively on differences in gross domestic product per capital across provinces, rather than getting into all of the 33 different tax bases we're getting at, was raised and discussed. But generally the academics didn't look favourably on that.

The C.D. Howe Institute has been publishing a series of studies on the federal-provincial transfer payments generally, and equalization in particular. There's been a recommendation there that we go to a very simple system for measuring differences across provinces in their capacity to raise revenue, based on gross domestic product. So there have been studies of that type.

I think I mentioned earlier that when people first come upon this as rookies in the field, their first reaction—and my first reaction when I got involved in it—is to ask why we can't come up with something simpler than this so it's more easily understood. But after you work with it for a while, you recognize the need to get into complexity if you're going to measure things properly. This is a poor analogy, but it's sort of like our income tax system. When it started it was very simple, but we didn't want people to—

Mr. Scott Brison: Understand the tax book?

Mr. Peter Gusen: No, I don't think that was the motive. The idea was to make sure different types of income were taxed equivalently, and you have to define things very strictly for that to happen.

Mr. Scott Brison: So you're suggesting simplicity is just too complicated.

Mr. Tony Valeri: Like silence is golden.

The Chairman: Your time is up, Mr. Brison.

Ms. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairperson.

While I would certainly agree with those who said this is very complex, I'd also have to tell you it's the topic of great discussion. Certainly when I've talked to constituents about it, it's part of what makes us Canadian. They really approve of the fact that we try to unify the kind of standard and quality of life for everybody across Canada.

In one of the earlier comments it was mentioned that this bill extends the revenue guarantee program, and a threshold was referenced. What is that threshold?

Mr. Peter Gusen: The threshold is defined in terms of the federal personal income tax that's collected in the province. If there's more than a 1% drop in the basic federal tax that's collected in the province, the program kicks in.

In terms of their provincial revenues, the provinces base their tax collections on the federal tax that's being collected in their jurisdiction. The provincial rates on that vary from 60% to about 40%. So in terms of what threshold there would be for a change in provincial revenue, there would have to be in the neighbourhood of a 2% drop in provincial revenue before this program would come into effect.

Mrs. Karen Redman: I think I know the answer to this question, but when we were in the Atlantic provinces as part of our tour as a finance committee, there was a lot of talk in Newfoundland about out-migration of people who had to go to other parts of Canada. My assumption from my understanding is that this is exactly the thing that would help ameliorate the fact that those people are maybe going to other parts of Canada, therefore eroding the tax base in Newfoundland specifically.

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Mr. Peter Gusen: This is aimed specifically at changes in the federal tax rules that have a spillover effect on provincial tax collections. I believe the program that would be of most benefit to a province in the situation you describe, where there has been some out-migration, would be the stabilization program that I referred to before. If Newfoundland had a large drop in its provincial revenues because of economic conditions, then the stabilization program could kick in and help it. The stabilization program has helped a lot of provinces in the past, including some of what we consider to be the well-off provinces. Ontario is probably the biggest beneficiary from the stabilization program. Alberta has benefited from it in the past. B.C. has as well.

Mrs. Karen Redman: One of the things this bill does is revise the ceiling on equalization payments. What's the rationale for the $10 billion ceiling?

Mr. Peter Gusen: We wanted to have a ceiling in the program that would protect the federal government against very large and unsustainable, unmanageable increases in the cost of the program. But at the same time, we did not want a ceiling that was so close to the actual payments that it would come into play immediately with the renewal of the program. So what we did was compute our estimate of what actual payments were going to be in the first year, and that's about $9.2 billion or $9.3 billion. Then we said we would add another 5% on top of that for a safety margin, and then we'll add in the cost of these improvements that we're proposing so that all those improvements can take place without hitting the ceiling. That was how we arrived at the $10 billion figure.

Mrs. Karen Redman: Thank you.

The Chairman: Thank you, Mrs. Redman.

We'll have two final questions for Ms. Leung and then we'll go to Mr. Epp.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chairman.

You have given us a very interesting presentation. I have two small questions.

The first one concerns the recent study by C.D. Howe, which said you tend to take a very poor Canadian's income to subsidize or support the rich in Quebec or any other province. How do you justify that kind of arrangement or philosophy?

Two, you have put forestry under the resource base. I'm from B.C., and we know that forestry has great fluctuations. Is that a good base to use because it is so changeable? Again, in B.C. right now the economy is so down that you cannot say we are the rich province. We are the poor now subsidizing the rich.

Thank you.

The Chairman: Thank you, Ms. Leung.

Mr. Peter Gusen: Thank you very much. That C.D. Howe study got a lot of attention because it had a good one-liner as the headline on the study. It was unfortunate, because it was misportraying the way the equalization program works. It's not taking money from poor people in rich provinces and giving it to rich people in poor provinces. There could be nothing further from the truth than that.

The equalization program is financed by federal revenues that are collected from all Canadians across the country, and it's collected through the personal income tax system and the corporate tax system. They're all progressive taxes, so that the higher your income is, the higher proportion of your income you pay in taxes. The higher your income is, the more you pay. The money that is used to pay the equalization program is not raised from poor people across the country. Nor does it go to rich people across the country. It goes to those provinces that need it so they can provide public services that overwhelmingly go to moderate- and lower-income people.

When Newfoundland gets its equalization payment, it doesn't spend it on services for very high-income people in that province; it spends it on services for modest- and lower-income people. If anything, I would take that unfortunate headline that was used in that study and turn it right around; the equalization program is a way whereby the well-off people across the country can share with the less fortunate people across the country.

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As for the changeable conditions of the resource sector in British Columbia and whether it is possible that if B.C.'s economy is not doing well now B.C. will still be paying the freight for helping the less fortunate across the country, the equalization formula is one of general application. The calculations are done exactly the same way for all ten provinces across the country, and whether a province qualifies for equalization payments or not is determined by the current conditions in that province.

So we'll be doing our calculations of each of the provinces. We've just done a set in February. We'll be doing it again in October. Should conditions deteriorate badly in British Columbia—and I certainly hope that this is not the case—it's possible that British Columbia could become an equalization receiving province, as it was back in the early days of the equalization program. But in British Columbia, as in other provinces, as was stated by Mr. Cardin earlier, everybody would like to not receive equalization because it's a sign of prosperity in the province.

Thank you, Mr. Chairman.

The Chairman: Thank you.

Mr. Epp.

Mr. Ken Epp: I have several more questions. One, you find the averages—at least I think that's what you use; just a straight arithmetic average of the rates that people collect—based on five provinces, and five are excluded. Why do you not use all ten to get a true national average, as I think you do when it comes to income tax?

Mr. Peter Gusen: The equalization system used to be based on a ten-province average, ten-province standard, back prior to 1982. When the five-year renewal of the program was undertaken in 1982, it was decided to drop the lowest-income provinces from the standard—that was the four Atlantic provinces—and at the same time to drop Alberta from the standard, the province that has the greatest capacity to raise revenue. The average stayed about the same, but the extremes were dropped out of the system for calculating the average.

The reason for doing this was that the revenues Alberta potentially could earn were very volatile; they depended greatly on international prices for oil. And during the seventies they went up very high, increasing the payments under the equalization program, and then crashed down, which reduced the payments under the equalization program.

By eliminating Alberta from the standard and at the same time offsetting the equally weighted group of lower-income provinces, the payout of the program wasn't changed, but the volatility of it was substantially reduced.

Mr. Ken Epp: That leads me to a specific question. I believe Alberta is one of only two provinces in the country that charge a premium on health care. We pay monthly premiums into our health care system because we liked the old private system so much we just couldn't stop paying. So because Alberta is excluded, that is taken out of it...the fact that we do this. So it seems to me that this would be a great disadvantage to the province of Alberta in this computation, since there is an element we charge that doesn't enter into the national computation, and so everybody else is brought up on that.

Is that an accurate assessment of this?

Mr. Peter Gusen: No. It's easy to make that assessment, because it's a very complex program. But let me assure you that we do look at hospital insurance premiums as one of the tax bases, as one of the revenue sources; we do look at the Alberta rates of hospital insurance premiums as well as British Columbia's. Those are the only two provinces that continue to charge health care premiums. But then we apply that average health care premium for those two provinces only to the five provinces that are in the standard.

So it is a tax base. We do look at Alberta's rates, but we consider what would be raised if those average rates had been applied in the five standard provinces.

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Mr. Tony Valeri: Just so we're clear on this, the premise of Mr. Epp's question is that because Alberta is not included in that five-province standard, the ability to raise the revenue of those provinces is not taken into account with respect to the health premium that's being paid. Your response is that it is actually taken into account as a tax base, and that it is averaged out amongst those five provinces in order to give you an average amount that provinces could raise if you include it.

Mr. Peter Gusen: That's right.

Mr. Ken Epp: Okay, so of the 31 items, you've established now that the five provinces are used, except for health care premiums. Are there any others for which the Alberta standard is brought in?

Mr. Tony Valeri: That statement is not exactly correct, because health care—

Mr. Ken Epp: I don't understand it then.

Mr. Tony Valeri: —premiums are being used as a revenue generator in the calculation. Even though Alberta is not a province included in the five province average, that tax base—the ability to raise revenue through health premiums in Alberta—is being averaged out because there is one other province. You're taking those two provinces and you're averaging out the amount that those other provinces could raise under that tax base.

Mr. Ken Epp: In Alberta, we pay $60 per month per family for our Alberta health care premiums. Are you saying that you multiply that figure by the number of families in Ontario to find out how much Ontario could raise if it had the same thing? That you do the same for all the others? I'm really confused then, because what you're telling me is that you are only using the average ability of these five provinces. I don't see how that connects.

[Translation]

Mr. Pierre Doucet (Senior Policy Analyst, Program Policy and Operations, Federal-Provincial Relations Division, Department of Finance): Here is how we went about calculating the tax base for health care. I believe Alberta and British Columbia are the only two provinces in Canada to charge health care premiums.

Here's how the system works. We apply a model of the Albertan system to each province and Alberta revenues are tied to this tax base. We then do the same thing for British Columbia. We then apply the British Columbia model to each province and relate this tax base to the revenues generated by the premiums collected by the province. This gives us a weighted system that can be applied to all provinces. Therefore, there is no systematic bias. I hope that answers your question.

[English]

Mr. Ken Epp: Okay, then I have a further question for the example of forestry. There must be one or two provinces that have no forestry industry. If Alberta, Saskatchewan and British Columbia have a capacity to raise revenue from forestry, what about the province of...I don't know, is there forestry in Newfoundland?

Mr. Nick Discepola: There isn't any in Saskatchewan, so you can use it as an example.

Mr. Ken Epp: No, there is forestry in Saskatchewan.

Mr. Nick Discepola: Where?

Mr. Ken Epp: In northern Saskatchewan.

Mr. Nick Discepola: Oh yes?

Mr. Ken Epp: Yes.

How do you do it? Do you just say that if there are no forestry resources there, the capacity is zero?

Mr. Peter Gusen: Yes, but there essentially is no example that pops into mind of a province that doesn't have any capacity in one of the fields we look at. Suppose, however, that the forestry capacity for P.E.I. is very small. In fact, let's say it was zero. What we would say is that P.E.I. has no capacity to raise revenues from forestry production. In that particular area, it should be brought up to the average capacity of the five provinces that belong to the standard, so it would get an equalization payment on that basis.

Mr. Ken Epp: Now, there's one province in this country—I won't identify it, but it starts with Q—that has a considerable capacity to raise revenue from hydro. That's a renewable resource. Places like Alberta and Saskatchewan, however, are so very flat that they can generate very little electricity by having water fall. The question is, how come you don't use that capacity in the province of Quebec in the evaluations?

Mr. Peter Gusen: Mr. Chairman, we do use that capacity. Two bases in our equalization system capture that. One is what we call the water power rental base, by which we measure the capacity to generate electricity from falling water across the country. We equalize based on which provinces have and harness the falling water and which ones don't. In the corporate income tax base, we also consider the operation and remitted profits of crown corporations, such as Hydro-Québec in Quebec or Newfoundland and Labrador Hydro in Newfoundland. Their profits or their remittances to the provincial government are considered to be similar to corporate profits as a source of tax for the province.

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Mr. Ken Epp: Do you distinguish between municipally or provincially owned utilities as opposed to privately owned ones?

Mr. Peter Gusen: They're treated differently but equivalently. The potential to raise revenue from the privately owned ones is looked at through the corporate income tax system. For a municipally or provincially owned utility, we look at the revenue-raising potential that the province has there as though the utility's profits were subject to corporate income tax.

Mr. Ken Epp: Okay.

I have another question. In your documentation, you say you expect that the cost of equalization is going to go up about $700 million in the next five years. On the other hand, in a speech just a couple of days ago, the finance minister said he expected it to go up by $5 billion. Why the discrepancy?

Mr. Paul Szabo: Did you say $5 billion?

Mr. Ken Epp: Yes.

Mr. Peter Gusen: The $700 million comes exclusively from the changes that are being proposed in Bill C-65: the changes to the tax base, the changes to the floor and so on. The $5 billion figure may be referring to a comparison of how much was paid out over the current five-year arrangement—the one that's just finishing now—and the projections for the upcoming five-year period. There would be a $5 billion—

Mr. Nick Discepola: I think it's $2.8 billion or something like that.

Mr. Peter Gusen: In any case, the increase there is coming not only from these improvements that are discussed in Bill C-65 but also from the normal development of the economy. The economy will be growing and the standard will be rising, and we assume the provincial disparities will stay about where they are now. Under a normal growth situation like that, the payout of the system would increase even if there were no changes such as those discussed in Bill C-65.

Mr. Ken Epp: I don't necessarily want you all to answer my next question, but there are five of you officials here who work every day on this thing in various capacities. Do you sometimes think of a better way of doing it? In my career, especially now that I'm in this particular business, we're always thinking about what we've done in the past and what we can do better. I wonder whether or not you can ad lib here and just tell us if there is something we can do, as legislators, to improve this. If so, what would it be?

Mr. Peter Gusen: The three old-timers on the panel here have been around too long to come up with any new ideas, but Marcie Doran is a relatively new recruit to our team.

Marcie, what ideas do you have that haven't been beaten out of you yet?

Ms. Marcie Doran (Economist, Program Policy and Operations, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch, Department of Finance): I really don't have any new ideas. It does take a long time to figure out all the data inputs, the different tables and so on. I'm just satisfied that I'm understanding the current arrangement, so I probably haven't thought of any.

Mr. Ken Epp: You probably are the wrong people to ask. You're so sufficiently immersed in your present whirlpool that you cannot really figure out a way of getting out of it.

Mr. Tony Valeri: But I think it's fair to say, Mr. Epp, that the equalization program is really a work in progress. No one here today is saying that equalization is perfect and that we've now found the panacea for all the challenges we face. The provinces, the bureaucrats who are here, ministers of finance, and members of Parliament are certainly free to engage in dialogue with their respective provincial officials in finding ways to improve it.

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I think the intent here is to continue to improve the program as we go along. That's why it's looked at in October and February, that's why the various tax bases and the measurement are continuously being improved, and that's why the provinces and the Auditor General continue to look at it, to ensure that the program is improved at every renewal. A number of academics also have some ideas that are taken into account. So there may not be any ideas provided to you today by the individuals who are at the table, but certainly as we're moving forward, we will continue to engage in a dialogue to try to find better ways to deal with this program.

Mr. Ken Epp: How many people are in this department altogether?

Mr. Peter Gusen: In the federal-provincial relations division at Finance Canada there are about 25 people. We administer not only equalization but also the Canada health and social transfer, stabilization, and all of the other programs we're responsible for.

Mr. Ken Epp: Do you have one or two people who are involved in research and development and that type of thing? For example, one thing comes to mind. Have you ever done a correlation between the numbers you come up with on each province's ability to raise revenue and the total amount of federal income tax collected? What's the correlation? I would think it would be about 0.95. Has that ever been done? Do you do that type of thing?

Mr. Peter Gusen: We've done simulations that are similar to that. Perhaps the broadest measure one could use would be provincial gross domestic product, and we've looked at how the system would differ if we used that as our measure rather than the 33 tax bases we look at. Broadly speaking, the payout of the system would be quite similar to what it is now, but there would be some provinces that would do much better and some that would do much worse. Even if there were no other considerations involved, it would be something you'd have to approach carefully so as not to cause too much disruption to the system. That was the conclusion of the research.

Mr. Ken Epp: It's interesting.

I think I'll pass, Mr. Chairman. I have a lot of good ideas here.

The Chairman: Do you want to share them with us? Oh, you already did.

Mr. Ken Epp: I will eventually. When we form a government, you'll see some changes.

The Chairman: Thank you very much, Mr. Epp.

Mr. Valeri, thank you very much for your presentation, and thank you to the officials. Certainly, you've clarified some key issues related to this bill, and we will of course use that information as we examine Bill C-65. So thank you.

Mr. Valeri, you may now switch back to being a committee member.

Mr. Szabo.

Mr. Paul Szabo: While these materials are being handed out, I thought I'd like to thank whoever is responsible for putting together the briefing books for the members. I appreciate it very much. It was helpful, and I wanted those responsible to know that. It's very well done.

The Chairman: They know now.

There are just a few things to be discussed. First of all, the House is not sitting next week, but when we come back, it's going to be a pretty busy week for us. As you may recall, prior to the break there was agreement amongst all members of this committee to deal with some witnesses in reference to the MacKay report, so we have scheduled some days during the week of March 1 to deal with them.

The times when the committee will be sitting will be e-mailed to you today, I hope, but I want to go through them very quickly. On Monday, March 1, at 3.30 p.m. we will be hearing from witnesses on Bill C-65. On Tuesday, March 2, at 11 a.m. we will be listening to witnesses for MacKay, as well as at 3.30 p.m. on the same day. Then on Wednesday, March 3, at 3.30 p.m. we will hear witnesses for MacKay. At 5.30 p.m. we will hear from witnesses with regard to Bill C-65, and we will also be dealing with clause-by-clause that evening. On Thursday, March 4, at 11 a.m. we will hear from witnesses on the MacKay report. Thereafter, we will have to decide what we do vis-à-vis the final report for MacKay. So that's in reference to scheduling.

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Mr. Ken Epp: Mr. Chairman, with regard to that, we've submitted the names of a number of witnesses. Have they all been invited?

The Chairman: Yes.

The Clerk of the Committee: They're all being contacted.

Mr. Ken Epp: So you expect to be able to handle them all on Monday and Wednesday.

The Chairman: That's right.

Mr. Ken Epp: Now, I would like to—

The Chairman: On Tuesday at 11 a.m. as well we'll be dealing with Bill C-65.

Mr. Ken Epp: Oh, I didn't get that, sorry.

I have one little problem, and that is that I would like to see at least one day lapse between the time we end hearing witnesses and we go to clause-by-clause. It could be that the very last witnesses come up with some pretty important things, and we might want to take those into consideration when preparing our amendments. So I think it would certainly be a good idea if that could be done.

The Chairman: Yes.

Mr. Tony Valeri: I should also make the point, though, Mr. Chairman, if I could, that obviously there would be the opportunity to present amendments here in committee, but you also have an opportunity to present those amendments in the House.

Mr. Ken Epp: The chance of their passing in the House is between zero and a snowball.

An hon. member: And here?

Mr. Ken Epp: I think sometimes it's a little bit better. I've had some success in some of my previous committees, and I don't think you guys are that much less reasonable than the members of the other committees I've worked on.

Mr. Tony Valeri: But I think in fairness, Mr. Epp, that is a personal opinion. If amendments are worth passing, then I think the House does take consideration of them and then does vote accordingly.

Mr. Ken Epp: Yes.

The Chairman: I think I want to accommodate Mr. Epp, if it's okay with the rest of the committee, and move clause-by-clause to Thursday, March 4, at 11 a.m. and MacKay to a 3.30 p.m. meeting. Is that okay?

Mr. Nick Discepola: Why not move MacKay to the 5.30 p.m. Wednesday slot?

The Chairman: Because we'll be hearing witnesses on Bill C-65.

Mr. Nick Discepola: The clause-by-clause will start on Thursday at what time?

The Chairman: It will take place at 11 a.m. Those changes you agreed to now will be reflected in the new schedule that will be prepared by the clerk and e-mailed to your offices.

As you know, we had a steering committee meeting on Thursday, February 4, and I just want to report on that. We already dealt with the first item, which is that we're going to invite witnesses with regard to MacKay, and in fact we have. There's also another motion that was agreed to, which is that the committee invite the minister to appear on the estimates of the Department of Finance. He will of course be invited, provided everybody agrees.

Some hon. members: Agreed.

The Chairman: I also would like to talk very briefly about a couple of issues related to topics of particular interest to members of the committee.

I know, Mr. Brison, you have already forwarded your list, as well as Mr. Epp and others, but of course not all members were present at the steering committee. So I would like to ask that if there are certain special studies you want to undertake as a committee, please forward your requests to the clerk. We will have an organizational meeting after we deal with Bill C-65 and MacKay to decide which studies we will go ahead with during the months of March, April, and May. If you could do that, it would be great.

I also want to bring to your attention that I'm trying to change the way we do pre-budget consultation. I'm advocating that instead of going to every province next year, we hold five major regional conferences and that we formalize and enhance the role of members of Parliament by making them more accountable vis-à-vis town hall meetings and reporting to the committee.

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We also want to develop, of course with the help of the clerk and research staff, a booklet that would be used during these town hall meetings and that in fact would be the same booklet we would be using for the regional conferences, so that there is uniformity among all the inputs from members of Parliament and the conferences and of course to get more people involved.

I want to be clear that on the regional conferences every single person who would have otherwise participated provincially would in fact participate regionally, which means that for example in Halifax all of the participants we've had in eastern Canada would in fact participate there.

It would work something along these lines. There would be some opening comments that set the framework. Thereafter, there would be workshops where people would actually, based on maybe four or five items, debate issues and come up with their own budget proposals at the end in a plenary session.

I think this system is much more interactive. It also brings people with differing opinions and sometimes divergent opinions and views together to really debate the issues and understand the trade-offs that governments must make in the budgetary process and decision-making process.

We will have proposals, of course. I'm moving ahead until everybody agrees here, but the clerk is going to put together a package for us to review and thereafter we will decide whether we go ahead with this idea or not. But I also want to stress that members of Parliament will be asked to participate in greater numbers than they have in the past so that nobody in the country is left out. That's on this particular issue.

There was also a motion—and it was agreed by the steering committee, so I seek formal approval here—that the committee invite the EC Commissioner, Mr. Yves-Thibault de Silguy, I hope my pronunciation is correct, to appear in the afternoon on Thursday, April 29, 1999. He's from the European Community.

(Motion agreed to)

The Chairman: Now we have to entertain a motion by Mr. Brison. We'll just get a copy of that. Actually, Mr. Brison, you can read your own motion.

Mr. Scott Brison: I'm moving that the committee make a recommendation to the government that the government should consider abolishing the regional rates of pay now in force for certain federal government employees in accordance with the stated policy of pay equity.

The Chairman: Do you want to expand on that?

Mr. Scott Brison: The issue is one of fairness. Not all government employees are currently treated in a discriminatory way based on region, but some are, and it's an issue of fairness. I think it has the potential, particularly in low-wage areas, of government to create a ghettoization of the public service depending on regions of the country that people choose to live in.

In recent years, national corporations have moved away from regional rates of pay, and in fact people make their decisions on where they want to live based on individual quality of life issues and standard of living issues. But I don't believe the federal government, which has a leadership role particularly in human resource management, should be encouraging what I see as a ghettoization of the public service depending on region.

I should mention that the people affected by this are typically the people at the lower wage scales of the public service, and it doesn't apply to all.

Mr. Nick Discepola: Can I have a ruling? Is this appropriate for this committee? Before we debate it, this is Treasury Board, so I'm wondering, even if we were able to study it, if it is appropriate for our committee. Isn't it for the Treasury Board committee to discuss?

Mr. Scott Brison: Certainly the finance—

Mr. Nick Discepola: It's Treasury Board.

Mr. Scott Brison: Yes, but it has Finance implications as well.

Mr. Nick Discepola: It's Treasury Board, uniquely Treasury Board.

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The Chairman: Fair enough. There's enough of an overlap to entertain this particular issue.

Mr. Scott Brison: There is not a Treasury Board committee.

The Chairman: But we of course have to resolve this issue as to whether the committee wants to go ahead with this.

Mr. Scott Brison: It's just to make the recommendation. I think it's an important issue of fairness, and the committee, certainly as a finance committee, can have an opinion on this.

The Chairman: Okay.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Mr. Chairman, on a point of order, is there a seconder for the motion?

The Chairman: You don't need one.

Is there a general consensus to make this a recommendation? Would you like to have a vote on this?

Mr. Scott Brison: Yes, I would like to have a vote on this.

(Motion negatived)

The Chairman: Okay. So I guess we'll see each other back on Monday, March 1, at 3.30 p.m. Please mail in your topics to the clerk.

Just one second here before you leave. Pat Steenberg is the new clerk, and Sue Baldwin will be doing Bill C-65 with us. She's the legislative clerk.

The meeting is adjourned.