Putting an End to Leak Week

Everyone now and then in the policy debate world some amazingly stupid things get said that sets my hair on fire. Right now, my hair is on fire from….blood. If blood makes you squeamish then you should stop here. If talking about *whispers* lady problems makes you uncomfortable then you should also stop here. For the rest of you, let’s take on a taboo.

PERIODS! Many girls (yes, girls as young as 9 or 10) and women (often well into their 50s) (and people) get them. Then can be regular or irregular. Even regular periods do not start and stop like a well timed clock. It is not like every 28 days at 10am there it is. They can start with spotting or they can start like your water breaking. They trickle down and then suddenly spurt in a dying gush. You can be late, you can be early. They can even suddenly stop for a few months, and start back up again with no notice. They can come with advance symptoms, they can come with little other change, they can be lived with with little effort, or you can be in complete pain from the cramps for days on end. They can signal a pregnancy, a pregnancy loss, and come like a MOFO after you’ve given birth. They can last 2 days, they can last 8 days. You can have medical conditions that make them worse. The variations on these things is a much as women themselves.

Periods mean for upwards of 40-45 years of a person’s life with their uterus, they will need to sop up the flow (Did you know that women are one of the few mammals that continue to live after the reproductive years end? Mostly, we are just allowed to die when we stop being useful to the dudes. So there is that). There are many products available: tampons, pads, cups, disposable, reusable, home made, store bought, the list is endless. All this variation means how much a woman needs in products, when, and for how long is a bit of a mystery, sometimes to the person themself.

Despite periods being, well, normal, talking about periods is still considered taboo. It is like miscarriages. Many people experience them, they are completely normal, yet we are forced into the Red Tent when they come. We have to skulk around work and school with tampons and pads stuffed up their sleeve, we have to whisper to our friends if they can hook us up, we have to deal with embarrassing leaks, may have to leave work and school if we can’t obtain proper supplies. We have laws that mandate toilet paper, soap, and related products in washrooms, but there is nothing similar about a product that many people with a uterus need. And so it has been since the beginning of time. If a machine is even present in a washroom, we are required to put a quarter or more (I’ve seen as much as $2 needed) into the tampon machine in the washroom and if we are really lucky (they are often empty with no notice, leaving you high and not dry) it will spew forth a tampon worth about 10 cents. This is the cost of being a menstruating person.

There has, however, been a growing movement around the world and in Canada about period products. In 2015 the tampon tax movement culminated in the federal government (Conservatives nonetheless) removing the GST/HST from menstrual products. Many provincial PST systems already had removed it or have since also removed it (The debate in Manitoba included Gary Marshall of the Manitoba Party spending a weekend on Twitter mansplaining periods and menstrual product use to menstruators. Yes, it was as delightful as it sounds).

While some women rejoiced at saving 30 or so cents a month in tax, they seemed, and continue to be oddly unphased, by the tariff on menstrual products (9619.00), a tariff that the federal Liberals should be well advised to look at (oh and the tariff on bras for boobs, which is higher (yes, higher) than the tariff on bras for cars) or that fact a piece of cotton on string costs 15 cents a piece when bought in bulk. Of course removing the tax is simply about gender consumption tax equity, an argument that I actually had and still have some issues with, but then like most economists, life with a consumption tax would be much easier if we just taxed everything and addressed equity with an income transfer. Make the tax codes easier and the revenues could be used to address, dunh, dunh, dunh, period poverty.  With the GST in place on menstrual products, the government is estimated to have collected over $36M in revenues A YEAR. Over the life of the GST, this means the federal government alone collected more than $1B in blood money. Imagine if that had been redirected to low income menstruating women. But I digress, I lost that battle. (sad trombone for the menstruating tax economist).

We have now, however, moved on to the issue of access, long ignored. Even with the products being tax exempt (well, zero-rated), they are unaffordable AND inaccessible to some people, girls (yes, girls, remember this can start when a girl is 9), and women. Yes, affordability and access need to be separately considered. Not all people can afford these products on a regular basis, not all people can access these products when they need them, and a person should not have to reveal private information about their body in order to obtain access to a needed product at the exact moment they need them. Imagine, having to go to the security desk at work or the office at school asking for a wad of toilet paper and having to say “can you double that, because you know.”

And so enter the United Way Period Promise Research Project. This project is looking at ways to best provide services and products to people who menstruate. The men, yes, men, in the BC legislature on March 7, 2019 had an amazingly respectful conversation about period poverty in the province that lead to a commitment from the BC government to provide start up funds to help all BC public schools provide free pads and tampons to their students by the end of 2019 (they were already free, actually, but this is about access, not making the people go the office and beg for a pad). It was, as it should be, a fairly uncontroversial act.

Enter the federal government, which recently committed to a regulatory process to make free menstrual products available in federally regulated workplaces. It includes a 60 day consultation period and will help about 500,000 people with uteruses (uteri?) who are employed in the federal labour force. The federal Labour Code already requires that employers provide toilet paper, soap, warm (gasp) water, and a means to dry ones hands. This would simply add menstrual products.

Oh Boy, the audacity. Apparently some men took to twitter to talk about personal responsibility, as though menstruators do not already take significant personal responsibility for their periods. We keep products at home, at work (come visit me for my stash), in our purse, in our cars, our backpacks, coat pockets (assuming it has, you know, pockets). We tuck them up our sleeves and in our bras so you don’t have to watch us walk with them out in our hands as we sneak off to the washroom. What the federal government is addressing is not some sort of communist hand out line for government grade pads (you know, like the ones you get in the hospital), is it about, if you will, a federal backstop. Despite hoarding menstrual products in every nook and cranny possible, we all get caught from time to time without access to products. This is about helping women who are caught be able to finish their day without bleeding through their pants. It is about dignity FFS.

The consultations are unlikely to result in a smorgasbord of options, a complaint that some people seem to be levying, laid out in a fan like they do in, gasp, high end restaurants, spas, and even dentists. I would be, in fact, unsurprised if what we are left with is the machines in the washrooms will no longer need a quarter.

There are other interesting reactions, like won’t women steal them? Is this a problem with toilet paper? Soap? Those brown bags to deposit our bloody wares? Paper towels? No, and anyone stealing these items probably really needs them. Is this just about virtue signalling and vote getting? Ummmm, removing the GST on menstrual products did not seem to help the Conservatives win re-election. Should we just leave well enough alone? After all, employers can offer these products if they wish. Here is the problem, they don’t and they seem in no rush to do so.

Will this be the end of the debate? Not bloody likely.

 

 

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Saskatchewan loses first battle with Ottawa over Carbon Pricing

Since my car accident, wherein I sustained a concussion, I have been unable to have the focus and where-with-all to blog, but I am going to give it a try as today is an important day.

Today was a big day in the policy world, as the Saskatchewan Court of Appeal released their decision on the constitutionality of the federal carbon backstop. The decision is here and is actually a fairly easy read. The decision was a 3-2 split decision that upheld the constitutionality of the backstop. We know that Saskatchewan will appeal the decision to the Supreme Court of Canada (SCC). We will simply have to see if the SCC will hear the appeal and, if so, what will be its decision. That is, the is not the end of this battle, more like the middle of it.

While there were lots of arguments over whether the backstop was sustainable under the national concern branch of the Peace, Order, and Good Governance clause of the constitution or a general trade and commerce matter, and so on, the one most interesting to me (and to my readers, I am sure) was whether the carbon levy imposed by the carbon backstop was a tax or a regulatory charge.

The federal government argued/argues that the carbon levy under the backstop is a regulatory charge. I’ve written about regulatory charges before here. I find it easy to compare them to user fees, a concept that more people understand. A user fee is a levy for a publicly provided good or service, the revenues for which must be solely used to fund the provision of that good or service, and the fee charged is dictated by the cost of providing the good or service. Further, payment of the fee is a necessary condition for consuming the good or service. There are many examples of user fees, particularly at the municipal level, including public transit fares, recreation fees, and refuse collection payments.

While a user fee is a charge related to a publicly provided good or service, a regulatory charge is a charge related to a right or privilege granted by a government. Regulatory charges are a broad category of charges imposed by governments and include such levies as development charges, local improvement charges, removal and dumping charges (e.g. sand, gravel, water, landfill, electronics, and beverage containers), fines, inspections, environmental protection, and licenses (e.g. liquor, animal, and business).

There are four key components to a regulatory charge: (1) a specific regulatory purpose: (2) a detailed code of regulation; (3) actual costs incurred; and, (4) a relationship between the regulation and the person being regulated (Farish and Tedds 2014, p. 658; Althaus and Tedds 2016, p.53). Under a regulatory charge, the revenues must be used to recover the costs of the regulatory scheme, in whole or in part. That is, much like a user fee, a regulatory charge is a cost-recovery tool and the conditions described above that a user fee must meet must also be met by a regulatory charge. This means that regulatory charges and user fees differ only in purpose. Both are cost-recovery tools: a user fee is a charge for a good or service, whereas a regulatory charge is for a right or privilege (e.g. serving liquor, owning a dog or cat, the disposal of specific products, or, based on this ruling, the right to pollute).

Saskatchewan argued/argues that the carbon levy under the backstop was a tax. What is a tax? The key distinction between a tax and a user fee/regulatory charge is that the former is a payment for the purpose of raising revenue not connected to the activity being taxed, whereas the latter is a payment connected to the activity being charged. Notably, tax revenues can be used to fund any government activity, whereas user levies are constrained in this area. For example, revenue from income taxes can be used to fund the RCMP, the Canadian Space Agency, and Parks Canada. Tax revenues may be earmarked for specific purposes, for example the revenues from a fuel tax may may be earmarked for the purposes of providing roads, but that earmarking is a political choice rather than a legal constitutional requirement.

Saskatchewan went this route for two reasons. First because taxes must be imposed by the legislature, whereas a regulatory charge only needs to be approved by Governing–in-Council, if the levy under the backstop was a tax, and not a regulatory charge, than the federal government did not obtain proper approval (this is what is behind that saying “no taxation without representation”). This is not a fatal flaw, it would just mean that the federal government would have to follow a different process to have the levy be valid, namely it would have to be approved by the legislature. Second, governments and government property do not pay taxes. This is important in Saskatchewan where power and energy are governed by crown corporations. A regulatory charge would apply to them, whereas a tax would not.

The interesting aspect to this is whether or not the levy was found to be a tax or a regulatory charge, the federal government has the authority either way. The difference simply being that the levy would not apply to governments and the levy would need to be approved by the legislature. The latter is a simple process matter to correct, the former impedes the effectiveness of the levy.

What was the decision? Well the majority went through the case law and found the levy is a property enacted regulatory charge. The minority decision did not go into as much of a detailed analysis of the case and finds the levy is a tax. Overall, I find the majority decision much more convincing in its finding, but I look forward to the SCC review on this matter.

However, I am also a little sad as an aspect in the case law I was hoping would get settled didn’t. Not alluded to above, there is a second permitted use of a regulatory charge. One where the size of the charge levied on persons is set to proscribe, prohibit, or encourage a specific behaviour. If the purpose of the regulatory charge is to change behaviour, then a surplus of revenues may be a permitted outcome. However, the presence of a behavioural modification aspect has been found by the courts to mean the regulatory charge meets the criteria of an indirect tax. The authority to charge indirect taxes, however, is not delegated to the provinces and but is in the wheel house of the federal government. What we do not have definitive ruling on is what are the constraints on the behavioural aspect of a regulatory charge. This is important to me and to the Ontario Government, who argued that the carbon levy as part of the backstop was not a proper regulatory charge BECAUSE it has a behavioural component. I can’t find any discussion on this in the current decision. That may be because Ontario was just an intervener and not the petitioner.

So there you go, that is the tax vs regulatory charge explanation related to the carbon levy and the Saskatchewan court case. Hope it make sense!

 

Stairways, ladders, and LIFTs: Ontario unveils its minimum wage worker tax credit

On Thursday Nov. 15 the Ontario government released their economic outlook, which included spending measures meaning it was a mini-budget. As always there is a lot of interesting stuff in the outlook, but a main measure that jumped out at me was the low-income individuals and families tax (LIFT) credit.

You may remember back in the election that Ford promised to eliminate taxes for minimum wage workers which was in exchange for halting the next planned minimum wage increase from the current $14 to $15. That is, Ford promised to leave the minimum wage at $14 but to compensate, it would ensure anyone earning minimum wage would not pay Ontario taxes. In this way they would get some benefits, just not all that they would get from the $15 increase.

I blogged at the time about how this all could unfold here.  I also made a proposal in detail here. Of course there were lots of debate about how Ford could possibly target minimum wage workers. I knew that this was not at all possible and said so. He only has the tools to target income, not wages. While some poo-pooed my thoughts on this, I now smugly point to an income targeted tax credit…for whatever winning such a technical tax implementation argument is worth.

For those of you interested in this tax credit, the full benefit (elimination of Ontario personal income taxes not including the Ontario Health premium) applies to individual income under $30,000 (equivalent to income of full-time full-year minimum wage worker) or family net income under $60,000. The tax credit is phased out at a rate of 10% for income above these thresholds.

There are a few things to note or question with the LIFT tax credit.

First, Ontario already has the Ontario Tax Reduction (OTR) credit which fully eliminates taxes for those with income above the basic exemption and below $~14,840 and is fully phased out at an income level of $~19,500. It is unclear how the LIFT works with the OTR. Is the OTR being replaced or is the LIFT applied just above the OTR thresholds? I’d hate to see the tax system made even more unnecessarily complex.

Second, the OTR is factored into withholding, meaning that a low income workers obtains the benefit on each pay cheque as opposed to waiting until tax time. There is not indication of if the LIFT will be similarly factored into the withholding and if so, how, since it is based on family net income. If the LIFT is not factored into withholding then individuals or families will have to file to obtain the benefit, yet filing rates among low income Canadians is problematic. How does the LIFT work with withholding and what plans does the Ontario government have to increase filing among the group targeted by this tax credit? Will the LIFT be automatic or does the tax filer have to check a box to ask to apply?

Third, both the existing OTR and the proposed LIFT are household based. The OTR is such that only the spouse with the higher net income can claim the OTR, with no requirement that the benefits from the application of the OTR be shared within the  household. The LIFT applies to adjusted family net income, meaning that a low income worker may not derive any benefit at all from the LIFT, depending on their household income. While many advocate for household based system, such determination makes serious assumptions about power and sharing within a household assumptions which are becoming more like dinosaurs in terms of their actual practice. It also means that the LIFT has serious gender concerns and is at odds with achieving economic independence. Of course, some of you tell me that considering gender in designing and delivering policy is pandering, but those of you telling me that know what I have to say to you.

Fourth, the LIFT and similar programs mean that low-income worker keeps more of their income through tax reduction. This means that, because the actual income is not increasing, they continue to qualify for existing benefits like the Trillium Tax Credit or the GST/HST tax credit. However, a wage increase means that worker gets more actual income while reducing their reliance on tax benefits. And therein lies a real  tension with public policy. Do we want workers to be more independent and able to live off their income or do we want workers to be more dependent and only able to live off their income plus their benefits? This is a ill-discussed tension, though a point in a recent interesting paper. Those who lobby against wage increases, highlighting potential economics costs, point to the tax system to make up the difference instead. But those we make up the difference are the tax payers in the province through higher taxes which have efficiency concerns as well. There are costs and benefits to either approach, yet the costs of the minimum wage are discussed to great fan fare without considering the costs of the alternative.

Fifth, the LIFT does nothing for those we already do not pay tax due to the OTR, earn below the basic exemption, or who are unable to work (notice how I did not use the word unwilling). These folk are already reeling from the sudden cancellation of the basic income pilot and are probably concerned about the direction this government will go with their needs. These folk will have to wait the outcome of the social assistance review, the results of which are, I think, being announced next week.

Overall, since the government was hell bent on cancelling the planned minimum wage increase, it is worthy to note that this did not come without benefits. However, the LIFT is no panacea either, more so with the implementation path chosen by the Ford government.

 

 

 

Who Pays for Municipal Governments?: Pursuing the User Pay Model for Solid Waste

Today the , of which I am a Commissioner, released a report today called Cutting the Waste: How to save money while improving our solid waste systems.

The full report is here, or you can read a shorter blog here, we also wrote an Op-ed in the Calgary Herald here. Robson Fletcher with the CBC also wrote a nice overview piece here which focused on the model for the City of Calgary here. You might even catch one of us talking about it in the news.

One of the main recommendations of the report is that we should pay for waste through user fees as opposed to through property taxes. It is not about paying more, instead it is about aligning municipal revenues to its expenditures. I want to talk about, first the issue more generally, and then move more specifically to the issue as it relates to solid waste. Suffice to say that the views expressed here are my own, and are based on my own research on municipal user fees as well as on the Ecofiscal report.

User Fees as a Municipal Funding Tool

In municipal public finance, we talk a lot of linking expenditures to revenues, which is a method to ensure that the costs of providing a good or service is borne as directly as possible by those benefiting from the goods, services, and privileges. Where *possible* (I’ll come back to this), the direct users, the beneficiaries, of the goods, services, and privileges should pay the price of providing the goods, services, and privileges.

By charging beneficiaries directly, this ensures that the services are consumed by those who value them the most and the government obtains direct feedback as to whether citizens really desire the provision of the goods, services, and  privileges at the cost incurred. This is what economists call an efficient outcome. Efficiency is achieved when goods and services are produced at the lowest possible cost to the producer and the quantities that are provided are of the greatest possible benefit to the consumer.

When goods and services are instead funded through property taxes then the implicit price of using a particular service is zero. When something is *free*, people tend to use more than they would otherwise, imposing higher costs on everything through increased property taxes. Another side effect of paying for residential services through property taxes is that these costs can also be imposed on businesses, since in many municipalities non-residential property taxes are a multiple of residential property tax rates. That is, when things are paid for through property taxes, businesses end up paying for a service that they do not benefit from or consume and may even end up paying twice for a service since many business services are not provided by a municipality. If we care about the business property tax burden then we care about user fees.

User fees also have accountability embedded in them. By law, user fees are a cost recovery tool, the revenues for which must be solely used to fund the provision of the service, and the fee charged is dictated by the cost of providing the good or service. Accountability related to property taxes, on the other hand, is weak. Taxes are a form of payment for the sole purpose of raising revenue with no connection to the activity being taxed. Property tax revenues can be used to fund any activity and the size of the tax is unrelated to costs.

User fees are important municipal tools, especially when compared to provincial and federal governments, as municipalities are increasingly likely to be involved in matters where the direct beneficiary, the user, is well defined and it is a simple process to extract payment from the user.

The criteria, easily identifiable individual beneficiary from whom payment can be extracted (or, more importantly, can be excluded from benefiting if they do not pay for the service) are essential characteristics for determining if a user levy is appropriate. This is why user fees are good for say garbage, but not, say, sidewalks, fire, police. So user fees cannot and should not be used to fully fund municipalities, but instead be deployed strategically.

The main concern with user fees is regressivity. This means that the cost of user levies is a heavier burden on lower income individuals. Here are a few considerations on that. User fees are equitable on a benefits received basis, one measure of equity. They may not, however, be equitable based on ability to pay. With user levies, all consumers pay for the cost of the good or service regardless of their income, a key measure for ability to pay. It is this concept, ability to pay principle, where the most frequent, and likely the strongest argument against user levies lie.

The literature, however, is not conclusive regarding the regressive nature of user levies. In fact, the evidence suggests three main arguments against user fee’s regressivity. First, upper-income households benefit disproportionately from free public services. For example, upper-income households are more likely to live in large households and consume more than their share of sewage, water, and refuse collection than lower income households when these services are funded through property taxes and not user levies. Second, user levies allow low-income consumers to adjust their consumption to lower levels, thereby paying less than they would under a property tax system. Third, any regressive or disproportionate effects can be minimized or even reversed with careful design, revenue uses, and compensation mechanisms, particularly discounts and exemptions for readily identifiable groups. For example, the City of Calgary has a fairly unique Fair Entry program that responds directly to this concerns.

But it is also important to understand that property taxes also suffer from similar arguments of regressivity. Property taxes are tied to the assessed value of a property which is only loosely tied to the income of the property owner. This incongruence has led to property tax circuit breaker programs that provide property tax relief to low income residents and cancellation of property tax increases. Suffice to say, while user fees dominate on efficiency concerns, both instruments carry concerns regarding equity on the ability to pay side of things, but user levies at least gain some credibility on the benefits received measure of equity.

 User Fees for Solid Waste

Managing solid waste is a significant expense for municipal governments. In addition, the cost of managing waste is rising. Landfills are expensive to build and maintain and many of our landfills are nearing their capacity. For example, the City of Calgary landfill has about 30 years left at current disposal rates and it will cost $1.5B for a new landfill. If, however, we can deploy a model whereby we can both pay for solid waste management AND reduce the amount we are sending to the landfill, we can achieve multiple objectives of cost recovery and cost reduction/avoidance.

Embedding the costs of managing solid waste in property taxes means that there is no alignment of expenses with revenues and there is no incentive to consider the costs you are putting onto the system.  The amount an individual pays for waste management under this system has no connection to the quantity or composition of the solid waste they generate or the external costs they impose on others due to their waste generation. A properly designed waste management fee that recovers the cost of waste management and aligns the costs to the waste generation of the individual is an important step towards reducing the amount of waste we send to the land fill.

While some municipalities, like the City of Calgary, have or are moving to a fully cost recovery user fee system, in many cases the user fee is a flat monthly fee that is unrelated to the amount of waste. While a fixed portion to a waste management fee will be a necessary part of any waste management user fee system, since a portion of waste services is unrelated to use, in order to incentivize waste reduction, the fee must also contain a variable portion. Such a system is commonly referred to as a Pay-as-you-throw (PAYT) system.

PAYT systems can be as simple as a model where the City makes different bin sizes available and your monthly fee is based on the size of bin you select, with smaller sized bins incurring a lower fee than larger sized bins.Variable bin sizes allow households to chose the bin size the best works for them, as opposed to forcing all households into using the same bin. Variable bin sizes increases the options and even allows a household to opt for a bigger bin than a one-sized-fits all model that the one bin size model imposes.

However, it can also contain other features. For example, there can be an additional fee that is levied whenever the bin is emptied into a waste truck. Many waste bins, including those in the City of Calgary, include RFID technology that can be used to apply a fee to households only when they actually set their bin out for collection. It may come as a surprise that annual operating costs can be significantly reduced simply by redrucing the number of times your household has their bin collected. Another example is to have weighing technology that allows for a fee that is based on the weight of the waste a household produces. However, weight-based models can suffer calibration challenges that may make the costs greater than the benefits and should be pursued with caution.

A key concern that comes with PAYT models is illegal dumping. It is essential that appropriate policies with respect to illegal dumping are considered along with PAYT. Such policies include a basic allotment, tag a bag policies, financial relief for low income households, scheduled large waste item pick up, encouraging the use of the second-hand economy, and the like. However, we note in the Ecofiscal report (p. 27) that the evidence surrounding concerns with illegal dumping associated with PAYT may be overstated.

Summary

Moving to a PAYT model is not about paying more for something, it is about paying differently. PAYT models put the control for costs into the hands of the household, where they should be. And PAYT models offer more choice and extends the life of our landfills and helps us avoid future costs.

And if you want to learn more about user fees and funding municipal governments, check out our upcoming School of Public Policy Current Affairs lunch on that topic on October 31 in Calgary.

The Great Ontario minimum wage tax debate of 2018

If you follow any media from Ontario, you will know that there is yet again another minimum wage debate. Doug Ford, leader of the Ontario PCs, has come out with a plan to refund Ontario taxes for minimum wage earners in lieu of increasing minimum wage to $15/hour in 2019. Kathleen Wynne, leader of the Ontario Liberals, will increase minimum wage from the current $14/hour to $15 hour.

This launched a number of twitter critiques and the CBC released their calculations of whether someone would be better off under Ford or Wynne. Unfortunately, the calculations are not complete, by anyone so far as I can tell. This is because everyone overlooked some upcoming changes as well as the net effect on tax benefits. What we really care about is taking into the whole tax and transfer system, federal and provincial, what will be the net implications for workers. I’ve done those calculations and you are welcome to peruse them here.

A key limitation is that we actually don’t have any of the details of the implementation plan for Doug Ford’s plan. There are some pretty concerning complexities with the dribs and drabs we have been provided with, but hard to make clear commentary without the actually plan. So I take his plan at face value, that a minimum wage worker would pay no Ontario tax, but nothing else changes.

The spreadsheet looks at 2017 (Column B) and 2018 (Column C) first which shows the effect of the minimum wage increase from $11.4/$11.6 in 2017 to $14 in 2018. These rest of the columns are various scenarios for the 2019 tax year (Columns D-K), the year in which both proposals come into play. The basic amounts are indexed to inflation and I used 2% for that (hat tip to Election Watcher here as I initially used 1.5%). EI and CPP contributions are calculated using what is confirmed as the formulas for 2019 (again, hat tip to Election Watch here as I was originally unable to confirm the 2019 CPP rate). Federal and provincial tax owing is calculated using current the lowest statutory tax brackets (there has been no announcement yet from either government or party leader that these would change). The GST, WITB, and Trillium tax credits are calculated using best available information and may be off by a bit (which does not change comparisons across categories as they’d be off all by the same fudge factor).

Column D presents for a worker earner $14/hour and working 40 hours a week for 50 weeks (I granted the poor worker two weeks vacation). Column E is the same but for a $15/hour minimum wage. Cell E34 then calculates the net tax position of a $14/hour worker vs $15/hour worker. The $15/hour worker comes out ahead by $712.13.

Column F and G then consider what would happen if the $15/hour worker faced reduced hours so we could see where the break point is. If the worker has their hours reduced by approximately 80 hours a year then they would be better off (net tax position wise) earning $14/hour and having their Ontario tax offset by a credit. If a worker looses their job, well that is a pretty easy scenario.

Column H and I looks at a part time worker, working 20 hours a week for 50 weeks a year. Again, this worker is better off with $15/hour, netting $717.21 a year. But here we see the impact of taxes and benefits that are not re calibrated to minimum wage increases as the worker faces some pretty stiff penalties in having tax benefits reduced.

Finally, Column J and K use the calculations used by Doug Ford and the CBC. In these two columns the poor worker works every week of the year. In this case, the worker nets $740.40 under the $15/hour scheme, assuming no reduction in hours.

If you are interested in knowing the poverty level in Ontario, Row 37 notes the Low Income Measure for Ontario. Row 39 also calculates the inflation that has been reported from the minimum wage increase. Rows 35 and 36 report the average tax rate faced by the worker.

Anyone can use the information in this sheet to play around with any scenario they like.

I present this information, not to say one policy is better than another. They each have their costs and benefits. What I wanted to provide were the facts of the policies and the effects of it on various scenarios. I welcome comments, particularly if you see any errors.

 

GAAR me maties Part III

On the evening of March 6, 2018, I was fortunate enough to be in Victoria and invited by Murray Rankin, the MP for Victoria, to participate in a community town hall he was hosting on his private member’s bill to add an economic substance test to section 245 of the Income Tax Act (ITA).

Section 245 of the section of the ITA is the General Anti-Avoidance Rule. In the early days of this blog, I had two posts about Canada’s General Anti-avoidance Rule (GAAR). One was on the basics of GAAR and the other was on some of the ways GAAR has been used. What I am going to do here is walk us through why we should be supporting Murray’s bill.

Before GAAR

“Modern” Canadian tax avoidance law was established in the UK in 1936 which legitimized legal tax avoidance. This was the Duke of Westminster case that established that taxpayers are entitled to structure their affairs to minimize their tax liability and they cannot be compelled to pay an increased tax. This ruling features prominently in the Canadian tax system and is the key principle governing tax law.

Of course allowing people to engage in tax avoidance without limits leads to abuse. Aggressive and abusive tax planning is one of the five main tax compliance risks in Canada. Other countries, through the judiciary, have created court-led anti-avoidance principles based on business purpose and economic substance tests.

The economic substance doctrine is a common law judicial doctrine that disallows tax benefits of a transaction if the transaction lacks economic substance or a business purpose. The goal of this doctrine is to prevent taxpayers from subverting the legislative purposes of the tax code. It is above the legal standards, which looks to see if the letter of law is followed, to see if the spirit of the tax law was followed. The taxpayer must prove that the underlying economic transaction was not concocted simply to avoid or reduce tax liability, but that there is an economic reality to the transaction. That is, the transaction or series of transactions also creates economic value or profits, other than the tax savings. In particular, economic substance test respects the fact that transactions with similar economic consequences are taxed similarly.

In Canada, however, no such test developed through the judiciary. It pretty much came to a head in the Subart ruling in 1984 when the courts affirmed the Duke principle and that a business purpose test was inconsistent with achieving economic policy through the ITA. This then created the prime opportunity for taxpayers to become much more aggressive in their tax avoidance activities and led to a large growth of tax shelters.

GAAR

Parliament, not pleased with this situation, then embarked on the creation of a General Anti-avoidance Rule (GAAR) which was codified into the ITA in 1988. The idea of GAAR was to stop the cycle of complex, specific tax measures aimed at sophisticated business practices, and inevitably, professionally guidance and equally specialized reaction. While there are many sections of the act that refer to anti-avoidance (specific anti-avoidance), GAAR was supposed to serve as an overarching rule informing the entire Act unlike the other anti-avoidance rules that suffer from a lack of breadth. GAAR was intended to distinguish between legitimate tax planning and abusive tax avoidance, requiring the Duke principle to be united with GAAR.

Economic substance was envisioned by Parliament to be part of the GAAR, because in the explanatory notes accompanying the draft legislation it said the provisions of the income tax act are intended to apply to transactions with real economic substance, not to transactions intended to exploit, misuse, or frustrate the Act. Therefore transactions lacking economic substance should be presumed to frustrate the legislative purpose of the income tax act. However, an economic substance test was not directly incorporated into section 245 of the ITA.

Post-GAAR

The case law shows a very cautious application of GAAR and an uncomfortableness with economic substance, often playing in the background rather than featuring in the decision. And because future cases look back at past cases for their decisions, this feature of not applying or developing a clear test has become somewhat entrenched in the application of GAAR at the judicial level. In fact, in looking at the court cases it is clear that an application of economic substance is needed but more guidance to the courts is needed.

It has been suggested that this has arisen because the courts have preferred to look at legal substance or the legal form whereas economic substance requires textual, contextual, and purposive analysis. The textual contextual and purposive analysis is to determine what the words of the ITA mean so as to determine the object, spirit, or purpose of the provision. It is a search for rationale. Economic substance is a search for rationale and so is consistent with this approach.

The SCC has specifically said that absent a specific provision to the contrary, it is not the courts role to prevent taxpayers from relying on the sophisticated structure their transactions arranged in such a way that the particular provisions of the Act are met. The courts role is to interpret and apply that Act as it was adopted by Parliament, not necessarily the explanatory notes. What the courts have said is that the act of searching for policy and then to use such policy to override the wording of the provisions in the ITA would place the formulation of tax policy in the hands of the court.

The courts have, therefore, concluded that the concept of economic substance has no relevance without a specific statutory provision that makes it relevant.

Economic Substance

Adding an economic substance test is consistent with most legal analysis of the situation in Canada regarding abusive and aggressive tax planning. Without the economic substance test or similar test many abusive transactions will not be found to be such. E.g Offshore beneficial trusts, which have flourished as a tax shelter.

Canada is an outlier not having an economic substance test. For example, the US economic substance test developed in the courts in response to a waive of tax shelters set up in the 70s and 80s, the same tax shelters Canada was responding to when it enacted the GAAR. The US economic substance test was codified in 2010 into the ITA following the global financial crises (a need for revenues and discouraging the use of tax haves). The enactment was given significant teeth by enacting high civil penalties.

The US is a good example as real economic substance to transactions is what was in the mind of parliament when GAAR was enacted. The US defines a transaction as having economic substance (sham transaction) if (1) the transaction changes in a meaningful way (apart from its federal income tax effects) the taxpayer’s economic position ( subjective intent, whether the taxpayer had a non-tax business goal for the transaction); and (2) the taxpayer has a substantial purpose (apart from those tax effects) for entering into the transaction (objective intent, whether the non-tax business goal had a reasonable or expectation possibility of profit). The US provision is accompanied by a general directive that gives guidance on how to determine if the doctrine applies.

Other Actions

We should not overlook the role of tax accountants and tax lawyers in creating abusive tax shelters that lack economic substance. Tax professionals contribute majorly to abusive tax avoidance, benefit greatly from its persistence, and have significant capacities to reduce its extent. Tax professionals ought to do much more to address tax avoidance than merely comply with existing legislation. These responsibilities are consistent with widely accepted standards of professional integrity. A way to nudge better professional standards is to adopt penalties for those who promote abusive tax shelters, as the UK, US, and Quebec has done.

Further, Canada does not currently impose penalties when the GAAR does apply. If a transaction or series of transactions is found to run afoul of GAAR, only the tax owing is assessed. This is contrary to other jurisdictions, like the US and Quebec, which levy penalties as well and may also help reduce aggressive and abusiveness tax avoidance.

Of course, we all know a key problem is learning about these abusive tax shelters in the first place. Some jurisdictions, including Quebec, impose mandatory disclosure of potentially abusive tax shelters. The advantage of disclosing tax shelters in advance is that it provides information to the tax authority for it to investigate. Why would a tax planner disclose a tax shelter? If disclosed if found to be against the general anti-avoidance provisions, the aforementioned penalties would not be applied due to the disclosure.

There is a lot of talk in Canada about how immoral these tax shelters are and more should be done to stop them. That is easier said then done, but Murray Rankin is right to push the Government to enact an economic substance test. I just hope it is one with teeth.

Canada’s Equalization Program

As many of you know, I am spending my research semester as a Visiting Professor in the School of Public Policy, University of Calgary. This allows me better opportunity to attend various SPP events, including the one held today on Current Affairs in Equalization. I can say it was a very well attended event, held in the Alberta Room of the Fairmont Palliser. The event featured Bev Dahbly as framer and moderator and Ted Morton, Tracy Snodden, and Trevor Tombe on the panel.

To get more details on the issue, you can read Trevor Tombe most recent blog post here along with other popular reading here, and here. In January 2014, SPP also held a two day conference on equalization and that is summarized here.  And there are oodles of papers on equalization on the SPP research website (just search equalization). I’ll attempt to summarize the discussion at this panel below.

The panel began with Bev Dahlby framing the problem. Equalization is a very hot topic in Alberta, but as noted at this panel session, the program, its formula, and the payments are not well understood. As noted in the framing for the panel, Canada has oodles of programs that transfer money from the federal government to the provinces, and equalization is but one of these programs.

The basis for the equalization program is 36 of the Constitution Act which reads

  •  (1) Without altering the legislative authority of Parliament or of the provincial legislatures, or the rights of any of them with respect to the exercise of their legislative authority, Parliament and the legislatures, together with the government of Canada and the provincial governments, are committed to

    • (a) promoting equal opportunities for the well-being of Canadians;

    • (b) furthering economic development to reduce disparity in opportunities; and

    • (c) providing essential public services of reasonable quality to all Canadians.

    • (2) Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation

Canada in not unique in having such an arrangement, but may be unique in terms of the vagueness of the commitment, being aspirational rather than definitive in its commitment. The equalization program was introduced in 1957 and has been tweaked many times since its introduction. It currently transfers about $19B in federal tax revenue to the provinces.

The equalization program works by transferring federal money according to a formula that is intended to equalize fiscal capacity. That is, it tries to address the difference between a particular provinces capacity to raise revenue from taxes compared to the average capacity to raise revenue. Notice this is not about what is actually collected, but rather the capacity. The current formula considers this from the angle of

  • Personal income taxes
  • Corporate income taxes
  • Consumption taxes
  • Property and miscellaneous taxes
  • And includes 50% of resource revenues.

The example that was given to understand the formula was as follows:

  • Say you were interested in calculating the fiscal capacity of consumption taxes in a province
  • Say the average provincial consumption taxes rate is 5%
  • Say the average per capita consumption expenditures subject to tax was $32,000
  • Assume the average per capita consumption expenditures subject to tax in a given province was $30,000
  • Then the per capita transfer for that province would be 5%(32000-30000)=$100

There are concerns with the equalization program. The biggest is the incentive effects. That is, equalization may affect the fiscal decisions in a recipient province. The formula incentivizes these provinces to have a higher corporate tax, and reduced incentive for productivity enhancements and resource development (since a $100 in resources reduces equalization payments by $50) which reduce equalization payments. The next biggest concern seems to be related to how much resources should count in the equalization formula (with views ranging from 0-100%) and whether resource monies put aside into a provincial sovereign wealth fund should count. There are significant concerns about the cap on total payments that was introduced in 2009 to ensure Ontario did not get net equalization payments and its unintended consequences of introducing a price floor. There are concerns that some provinces are keeping their resource revenues low by not charging a market price for their resources (e.g. hydro on Quebec). Finally there are concerns about the model being based solely on fiscal capacity and not taking into account the difference costs provinces face in publicly providing goods and services.

Ted Morten then proceeded with some comments that were driven in response to this recent publication on equalization. The key points seemed to be related to a point above, about how equalization does not account for decisions in the provinces or other factors that affect a provinces capacity. One example he gave was the National Energy policy, which Ted indicated led to a $98B in reduced activity in Alberta and garnered the federal government $100B in additional revenues. The other example Ted gave was the long term economic effects of Quebec sovereignty included their language laws, which reduced economic capacity. Ted also noted the problem with the equalization program in that there is executive discretion which allows the formula and the program to be subject to partisan politics and electoral consideration (e.g. no one wants to get into a fight with Quebec).

Tracy Snodden noted that the formula is set so that not all provinces get money. It is set to the average, and some will be above average and some will be below. It is the nature of the formula. Tracy focused on Ontario, who became a have-not in 2009, but is about ready to shake this qualifier off. Ontario had already had economic difficulties before 2008, but was also heavily affected by the 2008 financial crises. In addition, the resource boom in other provinces raised the baseline fiscal capacity. These two things, poor economic growth and the raised baseline fiscal capacity interacted to lead to Ontario being a have-not province. Ontario’s per capita transfer under the program is small but because it has about 14 million people the total payment appears large. She noted that Ontario was also a have-not province for 1977-1981, but did not get payments then. When Ontario becomes a have-not province, because the implication on total transfers is large, the response in Ottawa has been to introduce overrides due to the fiscal concerns with making these payments. Tracy noted that with Ontario moving out of have-not status this leaves some breathing room for discussions to proceed with the 2019 renewal/modification of the equalization program, but the cap that was put in place in 2009 needs to be reconsidered as it also, unintentionally, put a floor onto the program that has lead to adverse affects.

The panel concluded with comments from Trevor. Trevor note that in 1867 20 cents of every federal dollar was transferred to provinces. Fast forward to 2018 and 20 cents of every federal dollar was transferred to the provinces. So transfers are not new nor have they changed much in total. They have though changed in the nature of the transfers. Trevor pleas for people to get the facts straight. He says too many people argue that equalization is a transfer from Alberta to Ottawa (the province of Alberta does not write a cheque to Ottawa. Albertans pay federal taxes), equalization caused the deficits in Alberta, the cap brought in in 2009 (by the Harper (and Kenney) government) has impeded Alberta’s ability to obtain equalization payments during the oil crises, and removing resource revenues from the formula would benefit Alberta (note: doing so would increase payments to Quebec). All of this is fiction.  What we need to do, to have a better discussions, is focus on the facts and to try to come to a common understanding of what objective are we trying to achieve and what problem are we solving. It is true that Alberta, since the program’s inception, has been a net contributor to all federal transfers, but this is because: Albertans have higher incomes, businesses have higher levels of profit, Albertans are younger than other provinces, and Albertans have a high rate of consumption. All this factors into less money from federal transfers.  In fact, Trevor noted that if we went back in our TARDIS and instead of dropping the GST, the federal government dropped income taxes, then Alberta’s fiscal gap under equalization would shrink.

Questions then came from the floor:

  • Q: How is money transferred to the federal government. A: We pay federal taxes, it is as simple as that. However, it was noted as to whether it makes it less serious if out of the pocket books of individuals or the provincial legislature? [I would say, define serious.]
  • Q: If this is all due to Albertans being so much better off than the rest of Canadians, is that really such a terrible problem? A: The problem would indeed go away if Albertan’s were less successful, but there are of course implications that go along with that. This takes us back to two issues: if equalization distorts productivity gains and resource development then, yes, this is a concern; and, what problem are we trying to solve.
  • Q: If Albertans are helping these other provinces by paying federal tax, are there any assurances that the provinces we are helping will become more productive? A: Poignant question , since the program does not appear to address this problem.
  • Q: Are we impeding mobility with equalization? A: Seems that EI is a bigger consideration in mobility than equalization. But we can ask this question: what policies will help facilitate mobility, productivity, resource development, etc?
  • Q: When I looked at the payments I saw for this year a $1.8B adjustment factor that meant $1.8B more in funds that went to other provinces including Ontario. What is that? A: That adjustment factor is the unintended result of the cap put in in 2009 which also effectively operates as a floor. That adjustment factor, the floor, shows how broken the system is.
  • Q: When does the current model expire? A: Strictly speaking, it is a federal program and the  federal government can do what it wants. But it is set to expire March 2019 and Ottawa does typically consult with the provinces.
  • Q: How do Manitoba and Quebec hydro resources revenues get counted? A: Hydro rents are included in the formula, the question is whether the hydro rents received reflect the potential rents. This is poignant since Alberta sells at market rates, yet some provinces subsidize hydro by underpricing it for domestic needs compared to what it sells for on the open market. This was followed by a discussion as to whether revenues from renewable resources should be treated differently from non-renewable resources since the later is finite. Of course, however, everything is finite in the long run so does it matter (that was an economist ;-))? There was also a conversation as to, since resource royalties and related are not taxes should they be considered? [This is true, resource royalities or selling provincial proprietary interests (e.g. hydro) are proprietary charges, not taxes.]

The panel finished with a final consideration in that what is the role for Ottawa and our fellow provinces helping Alberta out when times here are not good? The oil price collapse was a significant economic adjustment and many in Alberta felt abandoned (not just through equalization but also EI and federal transfers like the CCB and GST tax credit that do not adjust quickly enough). What can we, as a federation do, in these times?

That is the sum total of my notes. My notes are simply an attempt to record the statements. I am not evaluating the statements made (except where noted) and I may have erred in my note taking.

Debate #1 in the #BCLibs18 Leadership Race

Today the BC Liberals had their first so called debate in their leadership race. I say so called since there was no actual debate. It was two hours of vague answers to questions, with most speakers, most notably Dianne Watts, being cut off half way through their answers as they were unable to manage their alloted time.

Overall, there were not many details provided by the candidates about their policies, possible because none of the six current candidates have a detailed platform, or so it seems by reviewing their leadership websites. The main themes that did come up were: 1. they are a free enterprise party (I’ll remember this the next time I critique a platform because I could rip past platforms to shreds on this principle); 2. they need to strike a better balance between fiscal stewardship and investments in program spending; and, 3. they are scared as hell about the province moving to proportional representation.

With so much vague detail there is little to critique, though I could mention the irony of our former Minister of Transportation mentioning that the province needs a transportation plan and a better relationship with Metro Mayors. There were, however, three gems that came up that are worthy of this blog.

First, Andrew Wilkinson is committed to providing a tax deduction for tutors. We can talk about how tutors are a luxury afforded by households with the income available to pay for them. We can talk about how tutors are not a cost incurred to earn an income and therefore not an item we would consider worthy of a tax deduction. Instead, I will note that this is once again an example of the BC Liberals showing their lack of understanding with basic tax nomenclature. Under the tax collection agreements with the federal government, the provinces can’t enact tax deductions. They are wed to the federal definition of taxable income. They can enact tax credits. Tax credits are not tax deductions. Stop calling tax credits tax deductions! The BC Liberals did this in the election. Get the nomenclature correct because it is really hard for me, a tax economist, to think you are truly a fiscal steward when you can’t get basic tax and spending nomenclature correct. Oh and by the way, a tax credit for tutors is just as terrible an idea as a tax deduction. Stop with tax credits. All you are doing is taxing people throughout the year, creating all those distortions, and giving it back to a chosen few at tax time who do things they would have done otherwise, all while paying for the administrative costs of the tax credit.

Second, Sam Sullivan answers my call to arms that we, as a province, put our big girl pants on and have an adult conversation about doing away with the PST in favour of a VAT. Sam wants a modified value added tax in BC, a VAT that sounds a lot like the VAT proposed by Bev Dahlby’s tax competitiveness commission last year. This is great as doing so would help address a terrible tax burden in BC, but without having any details I don’t know his plan to deal with the regressivness which is easily done through a low income transfer that we can piggy back onto the GST refundable tax credit or low income carbon fund payment.

Third, Mike De Jong outlined a plan to ensure that students are not saddled with post secondary debt by, wait for it, a BC version of the RESP grant. He firmly believes that people should pay for their education so low income families be damned. Instead, he wants to give the equivalent of a $500 RESP grant. Now no details, of course, are provided, like what contribution rate is needed to get that grant. If we assume that the program would piggy back off the federal one then $2500 would be needed to get the $500 provincial grant. There is recent data available to help us understand RESP participation and contribution rate. It seems that the overall RESP participation is just under 50% and the average holdings are just under $7k. The data shows that we have a lot to do to improve participation in RESPs, notably among low income households. Without a plan from Mike De Jong to improve participation rates and contribution amounts than all this plan does is subsidize even more of those individuals who are already saving for kids who will already go to post secondary education. I also note that he has not costed the proposal or indicated how it will be paid for (the opportunity cost). I sent him this tweet:

These are fairly basic questions that someone proposing this policy should be able to answer right now, especially one promoting themselves as a fiscal steward.

So that is round one, five more to go. I hope more detailed platforms come out, the debates, become debates, and the candidates learn to deal with the time the limits before the next one.