Tax Points and Fiscal Transfers

I was recently talking to our resident expert in Federal-Provincial relations, none other than the infamous Herman Bakvis, and we got talking about tax points. He was pretty upset with an article that Andre Picard had wrote about the decline of health transfers as Picard made no mention of tax points. I encouraged him to write an article for the G&M, but I am not sure that is his bag.

It did get me thinking about why understanding your history is so important to policy analysis. And tax points are a very important piece of history if you are to ever truly understand fiscal transfers. If you are into reading whole books about taxes and transfers, I might suggest you pick up a copy of Financing the Canadian Federation, 1987 to 1995: Setting the Stage for Change published by the eminent Canadian Tax Foundation (not to be confused with the Canadian Taxpayers Federation).

In 1962, tax points made their emergence, as the tax rental arrangements expired. The tax points system was a system of tax abatement: the federal government would not collect a portion of its taxes, instead leaving taxing room so the provinces could raise their own taxes. The importance of tax points to understanding today’s transfers occurred in 1977 with the establishment of federal transfer programs in health and education. This is when the federal government agreed to transfer funds for health and education and the value of this transfer was made up of both cash and tax points. The value of the tax points under this arrangement though varies from province to province so it is only the combination of cash and tax points that provides each provinces with the same per capita support.

This system of a mix of cash and tax points continued to March 31, 2014 (which is why these transfers will seemingly increase after this date) and any analysis of cash transfers for health and education before this date must consider tax points in addition to the cash transfers, an oft overlooked complexity. The problem is that it can be quite difficult to get numbers on the value of the tax points. The Department of Finance used to show this series on their website, but I am unable to locate it on their current website.

The best source I could find was Wikipedia which says this: “In 2008-09, CHT cash transfer payments from the federal government to the provinces and territories were $22.6 billion and tax point transfers were worth $13.9 billion.” With respect to the education transfer, “In 2008/2009, the programme transferred $10.6 billion in cash to the provinces and a further $8.5 billion in tax points.” As you can see, not considering tax points leads to a substantial undervaluing of federal transfers.

When the tax point system was in place, the federal government was quite hesitant to increase its transfers because the tax point system would then allow the provinces to cut provincial taxes AND take all the credit. Going forward, transfers will now solely be based on an equal per capita cash basis, and the federal government is free to increase funding without worrying about not getting the credit. However, it is worth noting that when tax points are excluded from consideration in health transfers, every province except Alberta gets less cash per person. So expect to see the provinces up in arms yet again over transfers.

The new cash-based system also means that comparison will be much easier to make going forward. I do, however, wonder how many arm chair analysts though will forget their history and make inappropriate comparisons between cash transfers pre and post the tax point regime?