These systematic differences over provinceshave tended to persist over the four decades. In principle, they couldarise from differences in needs for public expenditures, from differences incapacity to finance public services, and from differences in preferencestowards public services. It seems likely, however, that at least part isdue to differences in need and cost. The equalization system serves toequalize the ability to finance a common level of public services, so thatshould not be a major determinant of expenditure differences. Preferencedifferences are possible in principle, but the fact that per capita expendituredifferences persist over long periods of time makes one suspicious of thatbeing the major determinant. Therefore, it seems likely to be the casethat there are systematic differences across provinces in the need for publicservices or in their cost.
Unlike with the revenue-raising side, thereis no explicit program that equalizes the ability of the provinces to provide acommon level of public services to compensate for need differences. Thisis in contrast to Australia where the equalization system focuses primarily onequalizing for differences in need and cost. This is not surprising giventhat revenue-raising capacity of the Australian states is very limited comparedto their Canadian counterparts.
HFI of Provincial Taxes BeforeIntergovernmental Transfers
Table B.6 shows per capita own source taxrevenues by provinces for the same 1961-1995 time period.
Again, one must be cautious in interpretingthese numbers since they reflect not only differences in tax capacity, but alsodifferences in tax policy decisions taken by the provinces. Someprovinces will choose lower tax rates than others and this will affect revenuesper capita. Nonetheless, the data are suggestive. They reflect thewide disparities that exist across provinces in revenue-raising capacity.Alberta, British Columbia and Saskatchewan raise 6 to 8 percent more revenueper capita than the national average. (Quebec does too, but that is a bitof an anomaly arising from the fact that for historical reasons, it occupiesmore of the income tax room than the other provinces and receivescorrespondingly lower cash transfers from the federal government.) At theother end, the four Atlantic Provinces raise only between 70 and 80 percent ofnational average tax revenues. Ontario is near the average, reflectingthe fact that its size dominates the calculation of the average.
Table B.6: Provincial Governments Per Capita Revenues,Before Intergovernmental Transfers, as aPercentage of Canadian Average
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