As you were filling out your tax return last month, did you notice something odd? Most of the services that you would want those dollars to go towards are delivered by the provincial government, so why did you send most of your taxes to Ottawa?

Tensions are high between governments in the federation right now. They are strained in large part by fights over how much federal funding is coming to fill gaps in areas of provincial jurisdiction like crime, education, homelessness and addictions, seniors’ care, and health and social services more broadly. Sometimes what gets backs up even more than a lack of dollars are the strings attached to new federal funding dictating how and where to fill these gaps.

Those decisions do not only come from federal politicians—federal forays into provincial areas mean a whole second bureaucracy needs to be fed before that tax dollar gets back to your hospital or seniors’ home. In addition to the tax dollars siphoned off for that double administration, taxpayers in Ontario, Alberta, and B.C. are responsible for effectively shipping their tax dollars ($4,000-5,000 per Albertan annually) via Ottawa to other provinces mostly for provincial services.

With new federal programs like pharmacare, dental care, and housing initiatives being controversially added to the recent federal childcare agreements, these problems are only going to get bigger. One step towards strengthening unity in Canada and making politicians more accountable for their responsibilities is to even out the tax share taken by your federal and provincial governments.

While this tension can be slackened when federal programs respect provincial autonomy and add purse strings that are barely visible, so long as the strings are held by elected and unelected decision-makers in Ottawa, the next fight about expanding government will always be just around the corner.

The imbalance: tax power vs. responsibility

Why do provinces go cap in hand to Ottawa to fund services for which they are constitutionally mandated to provide anyway? And when they come back empty-handed, why do they shrug and point a finger back toward the Gatineau hills?

It is because of that odd thing we did last month: sending almost twice as much of our income to Ottawa as we did to our provincial capital. According to Finances of the Nation in 2021-22, we sent them $77 billion more in personal taxes, and the federal corporate tax bill was $28 billion higher than the provinces combined. In recent years the gap has averaged $90-100 billion.

For better accountability, the government responsible for delivering a service should be the one taxing us for it. If the people of a province want more spending on a given service, they can elect a government that will prioritize that—with some combination of shifting dollars or raising taxes and/or debt to do it.

Citizens lobbying Ottawa to improve their provincial services makes even less sense than provinces doing it, except for the distortions caused by this fiscal imbalance.

The reasons our original constitutional documents put social programs under provincial purview were good enough that, despite the significant growth of the welfare state, they stayed there in 1982.

Different regions have always had different pressures and needs, and different ways of meeting them. What they have not had is the fiscal independence to pay for them without their taxpayers’ dollars going through Ottawa.

This imbalance is not new, and in many cases, the provinces gradually brought it upon themselves by signing on to various federal funding agreements. What used to be more prominent, however, was a consensus that there needed to be latitude for provinces in how they used these funds (on constitutional as well as practical grounds). The Meech Lake and Charlottetown proposals, for example, both featured provisions for provinces to opt out of new national programs and instead get their share as a block fund.

Seguin report

Federal funds today virtually all have federal strings and sit on the edge of the chopping block when sporadic rounds of belt-tightening take place. The suggestion made here to even out the tax powers gets past that, which is why it has had support in the past.

In 2002 the Fiscal Imbalance Commission struck by the Quebec government proposed to rebalance tax power by moving federal tax points as well as GST revenues to the provinces to replace the unpredictable Canada Health and Social Transfer (CHT). In addition to securing predictable self-generated funds, another aim was to increase autonomy in program delivery.

“The situation can be summed up pretty easily,” said the president of the commission Yves Seguin: “The federal government occupies too much tax power compared to its responsibilities.”

The resulting “Seguin Report” made numerous recommendations, but emphasized the need for a major tax room shift. It argued (correctly in my opinion) that only increased tax power can truly reduce the provinces’ dependence on federal decisions for how and where to spend on the services they deliver.

Given provincial services are more than half of government spending, one could certainly argue the provincial share should actually be higher, but our compromise 50/50 proposal here means we need to close a $100 billion gap as outlined above.

To get a sense of what would be required on the revenue side, ceding GST to the provinces ($52 billion in 2022) could close that gap, as could switching 25 percent of our federal personal taxes to the provinces. On the spending side, drastically reducing the CHT ($52 billion) and eliminating the Canada Social Transfer ($17 billion) would do the trick. Given Ottawa likely wants to preserve a sizeable CHT baton with which to enforce the Canada Health Act, it would likely prefer to take a hard look at different places to back out of provincial areas—great!

Barriers to reform

So if there are clear reasons to shift the tax power significantly and straightforward ways to do it, why has it not happened?

One reason is that as these programs emerged last century provinces usually signed on to federal agreements; sometimes, this was because of advantages of scale, but it was also politically convenient to avoid being the ones raising their tax rate to pay for them. Repeatedly relying on the feds’ larger tax room only exacerbated the imbalance.

The tax power shift proposed here would mean provinces raise their rates to make up for the federal cuts in tax (and spending) but would be more palatable politically because it would be a sudden switch between orders of government and not necessarily a tax hike at all.

Another barrier to reform is the reluctance of the federal government to give away power, and the difficulty the provinces have in changing federal programs without Ottawa’s cooperation. The federal influence over these programs does help standardize services nationwide. This is for the better or the worse depending on your perspective or the program—but the feds of course would insist it is for the better.

Besides standardization, one of the benefits they and other supporters of the fiscal imbalance tout is that using federal funds helps promote equity between provinces. Or, in economist-speak, the vertical imbalance offsets the horizontal imbalance. Taxpayers from wealthier regions pay more in federal taxes, but payments come back roughly per capita so billions of dollars from wealthier provinces quietly go to support services in those with less economic activity.

Giving tax points back to provinces boosts coffers in B.C., Alberta, Saskatchewan, and Ontario but leaves the other 30 percent of the country a little short without the subsidies inherent in per capita payments.

This is the biggest political barrier to rebalancing tax powers. It would likely necessitate something like a five-year top-up for the lagging provinces to smooth out the adjustment, but for some, autonomy would eventually come at a price.

This effect was acknowledged in the 2002 Seguin report, but Seguin pointed out that the equalization program is the one that is designed to equalize with direct payments. If there are remaining equity needs, they should be openly and fairly addressed there, not quietly implicit in countless federal forays into provincial services.

At Fairness Alberta, we have pointed out that there is a distorting and inefficient amount of redistribution happening with equalization proper, made worse by all these quiet forms of redistribution on top of it. To point out one striking fact: despite provinces becoming more equal over the last decade, roughly $9 billion of Ontarians’ taxes are sent by Ottawa to fund provincial services in their neighbouring provinces through equalization alone. Even if the tax powers were balanced as proposed here, the feds would still be facilitating massive levels of redistribution.

Reducing these quiet forms of redistribution may be more of a feature than a bug.

Conclusion

To be sure, there are many permutations and combinations that can get us to this balance, and almost all of them will be controversial. But if you agree that the “let’s count on Ottawa to ensure our provincial services are strong” status quo is not working, then it is time to restart this conversation that has been alive for most of Canada’s history but lately dormant.

If we even out the “tax room” between federal and provincial governments their powers will better reflect the responsibilities each has been assigned.

In addition to aligning better with the Constitution, this will mean less finger-pointing, less regional alienation, and more political accountability for the services we want delivered.

From the era of the fur trade to today’s oil markets, Canada’s economy has been defined by exporting staples, a special term for natural resources. Those staples were fur in the 17th century, timber in the 19th century, and has been oil and gas since the 1970s.

The recent completion of the Trans Mountain pipeline (which as economist Jack Mintz recently noted in a Hub podcast ought to have been six years earlier) should be understood as part of Canada’s staple legacy. It’s also an opportunity to revisit two of the greatest historians that Canada has ever produced.

Harold Innis and Donald Creighton were historians of Canada’s political economy who wrote great volumes that revealed how natural resources were essential to nation-building in Canada. Today their work is mostly ignored by university departments and can even be difficult to find in used bookstores.

Innis wrote books like The Cod Fisheries: The History of an International Economy, while Creighton authored The Commercial Empire of the St. Lawrence, 1760-1850. What those titles lack in excitement was made up for by their depth, research, and in Creighton’s case, the quality of his prose.

Those two books alone still enable readers to make greater sense of the Canadian economy. Were Innis and Creighton still alive, TMX would fit neatly into their staples-centred perspectives—though the aversion among Canadian elites to the country’s natural resource economy most definitely would not.

Innis and Creighton’s conception of Canada was viewed through the lens of the country’s rich natural resource endowment. They conceived of and popularized the Staples Thesis and the Laurentian Thesis of Canadian history, respectively.

The Staple Thesis posits that the export of staples from Canada to more advanced economies decisively influenced our economic development, as well as our social and political systems.

It helped to inspire Creighton’s Laurentian Thesis, which similarly set out that Canada’s economic and national development came primarily from exploiting staple products like fur, timber, and wheat, under the leadership of colonial merchants operating on the St. Lawrence River.

As a wordsmith, Creighton was noticeably more adept than Innis, and his work is the perfect starting point for those wanting to know more about how Canada grew into the world. Reading The Commercial Empire of the St. Lawrence reveals just how unchanged Canada’s economic pillars have been since the 18th century.

In Toronto and Montreal, where finance and technology are significant, it’s tempting to imagine Canada as only a highly digitized economy, akin to Switzerland or Singapore. While there is no question that services contribute immensely to Canadian GDP, our natural resources are what has always made Canada stand out.

A stark economic difference between Canada and the United States is our greater reliance on exports, which made up a third of Canada’s GDP in 2022. By comparison, exports made up about 12 percent of American GDP in the same year.

If there is any doubt that crude oil is our modern staple, Canadian oil and gas exports were worth $123 billion in 2022. The second-most valuable export was automobiles, which were valued at just $29.4 billion.

Staples are not a hidebound industry that Canada should eschew, but a vital part of our economic and social well-being.

Innis’ assertion that staples have also helped define Canada politically is demonstrated by the polarized reactions to the TMX project, with one side celebrating it as a Canadian success story, while others deplore it as an environmental disaster.

Debates over the place of oil and gas in the Canadian economy have proven to be a great faultline in Canadian politics, such as how federal interference in the form of the National Energy Policy in Alberta’s oil industry drove Western alienation in the late 20th century.

At the peak of Creighton and Innis’ influence in the mid-20th century, Canadian institutions seemed to have a greater appreciation for the reality of our economy. They weren’t self-conscious or insecure about the providence of our natural resources.

Until the 1970s, the Bank of Canada still issued banknotes decorated with portrayals of commercial hunting, logging, and fishing. Maybe our currency ought to grant a place for the Trans Mountain pipeline.

The Bank of Canada projects that TMX will boost second-quarter growth in Canada by 0.25 percent at a time when the country is stuck in a growth and productivity crisis that is hurting our standard of living. For context, the entire economy of B.C. added 0.23 percentage points to Canadian GDP in 2023, while Ontario added 0.60 percentage points.

TMX will do more for our economy in the next few years than a banker, public servant, or EV lobbyist could ever hope for.

A constant feature of Creighton’s work was how the staples merchants were constantly thwarted by colonial administrators. This too remains unchanged, although the administrators are no longer appointed in London.

On average, it takes up to 20 years to approve and build mines in Ontario due to bureaucracy and red tape. In B.C., mineral exploration leaders warn that the provincial government’s confusing regulatory approach could drive members of their industry out of the province.

Canada has a tiny population given the vast size of the country. This land contains the world’s third-largest known oil reserves in the world, and one of its largest rare earth elements deposits, which are crucial to modern technologies.

Hungry markets are waiting for oil and minerals, and ramping up the export of these staples could make Canadians some of the wealthiest people in the world on a per-capita basis.

The bounty of Canada’s staples is a pillar of our prosperity. If TMX has proved anything, it is that Creighton and Innis’ work remains valid, prophetic, and more useful than ever.