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Today in #abvote there was a suggestion that Alberta push for changes to two major federal transfers programs. Specifically, to change them into "tax point" transfers instead of cash. Let's unpack this a little.
Background: CHT and CST are federal health and social transfers. They're large. Close to $55 billion this coming year. Each province currently receives the same amount per person. They're equal. 
Tax point transfers are when the Feds lower its tax rates and the provinces simultaneously raise theirs an equal amount (if they want). They're less "transfers" than a shrinkage in the federal govt. Also, tax points are worth more to high income provinces.
The previous government changed the programs to equal per capita in Budget 2007 (implemented for CHT in 2014). They used to be a mix of tax points and cash. This change benefited Alberta a lot. The change was pitched as bringing "fundamental fairness back" to federal transfers.
Changing to tax point transfers would benefit 3 provinces: BC, Alberta, and Ontario. All other provinces would lose. Here's my estimate. This suggests it would be very difficult for the federal government to make such a change, absent other adjustments.
Previously, when the health and social transfer program included tax points, those tax points were implicitly equalized with unequal cash transfers. The combined total were equal per capita. This figure from trevortombe.com/publication/tr…
Why the mix of cash and points? Back in the early 1970s when a new transfer program was being negotiated (the EPF), Feds wanted to do cash and provs wanted points (since they were expected to grow more). Provinces also wanted equality. So, needed a top-up to make things equal.
To be clear, nothing in the above tweets should be interpreted as suggesting the idea is "good" or "bad". I'm merely highlighting what its effects would be in isolation of other changes, and why it might be unlikely to happen.
Quick historical aside: tax point transfers were quite important for many decades starting in the 60s and ending in 2014. To read more about their history, and why different changes were made along the way, see trevortombe.com/publication/tr…
Personal opinion: Feds should boost CHT using a tax point transfer -- BUT using GST points. :) That way, Alberta either accepts it and finally gets a sales tax to call its own, or is left in the cold. Mainly, I think this would just be funny. Haven't thought deeply about it.
Since I'm thinking about this, I'm just going to keep tweeting here... no need to read further. But I have a real philosophical issue with 'tax point transfers'. Are they actually 'transfers'? I don't think so.
What they really are is an agreement to coordinate tax policy across orders of governments. They allow one jurisdiction to raise taxes without actually increasing the tax burden on individuals. But, there's no lasting effect as provs can change rates in the future.
Also, since jurisdictions have different brackets, credits, etc, there's not really a "clean" way to transfer federal tax points anymore. (There used to be, but let's not get distracted by the pre-2000 tax-on-tax system.) So, any change isn't really neutral for all taxpayers.
Now, here's the main problem: If the feds lower their rates and provinces increase theirs, what happens if a province later lowers its rate again? Nothing. It's not really a transfer. And could a province not raise their rate initially? Yup. If they didn't want to.
Say the feds lower their rate and some provinces raise theirs. If the provinces that didn't initially raise their rates did so later would that be "accepting the tax point transfer" or would it just be "increasing provincial taxes"??
And if you think moving into previously occupied federal tax space is just "accepting a transfer", then could AB increase with GST here to 7% (through an HST) and say it's just a transfer not a tax increase? I don't think so.
I think 'tax point transfers' today are really just ways to frame a conversation about shrinking the size of the federal and provincial governments. Fair enough, but it's not really a 'transfer' imho.
And that's why they were just dropped in 2014. They started decades ago and finance officials dutifully estimated their value but no province really thought "wow, thanks for the transfers". So we just stopped estimating their value. Shrugged and said "they're not really there".
I'm going to stop here because I have an incredible urge to explain that while 'tax point transfers' aren't really transfers, "provincial" offshore resource revenues *are* federal transfers despite not being recorded that way.
For anyone that read this far, you might be interested in a full one-day course on federal transfers and equalization through continuing education at the U of C that I'll give sometime in September! :) Details to come. Contain your excitement in the meantime!
* should read: shrinking Feds and growing Provs.
