Tegan Hill says YES
The Fraser Institute’s director of Alberta policy
Equalization has long been contentious to Albertans. The program has clear design flaws, but the even bigger issue is that Albertans make important contributions to Canada yet bear the brunt of federal policies that disproportionately impact our economy.
The goal of equalization is to ensure provinces can provide reasonably comparable public services at reasonably comparable tax rates. In effect, the formula estimates a province’s “fiscal capacity” (i.e., ability to raise its own revenues) by applying a national average tax rate to different income sources and seeing how much revenue each province could raise at this hypothetical rate. Provinces that would raise less than the national average on a per person basis will receive equalization; provinces that would raise more will not.
In 2025/26 equalization payments will total $26.2-billion. All provinces except Alberta, BC and Saskatchewan will receive payments. If 16 per cent of federal revenues come from Alberta, Albertans will contribute roughly $4.2-billion to equalization this year while receiving no direct benefit. Indeed, the province hasn’t received equalization since the 1960s.
Reasonable people can disagree on whether or not they support the principle of the program. But some clear quirks simply don’t add up—and certainly don’t benefit Alberta.
Consider the “fixed-growth rule,” which ensures the total equalization payment grows roughly in line with the economy. Originally intended to act as a ceiling on equalization payments, it’s had the opposite effect, such that the total amount of payments grows even as the gap between “have” and “have not” provinces shrinks. If equalization is meant to close the gap between provinces, the amount spent should decrease, not increase, as richer and poorer provinces become more aligned.
Another problem is inconsistency in the treatment of different revenue types. Quebec, for example, provides below-market electricity prices. But the equalization formula accounts for actual resource revenues when determining Quebec’s ability to raise revenues. Put differently, it underestimates Quebec’s ability to raise revenue from its electricity provision. Ironically, the formula doesn’t follow the same approach for Alberta, which has no sales tax. In Alberta’s case, the formula includes hypothetical sales tax revenue when determining the province’s ability to raise revenue. Put simply, the formula doesn’t penalize Quebec for forgone hydro revenues but does penalize Alberta for forgone sales tax revenues.
The issue of “fairness” goes beyond equalization. Albertans contribute significantly to the federation but don’t get a fair shake in return. A slew of federal policies disproportionately and negatively impact Alberta: Bill C-69 (the “no pipelines act”), a tanker ban off BC’s northern coast, a cap on oil and gas emissions, and numerous “net-zero” policies, to name a few. It’s easy to see why many Albertans feel they’re getting a raw deal in the federation—and equalization is a piece of that puzzle.
Trevor Tombe says no
The University of Calgary economist
To former premier Jason Kenney, equalization is “the most powerful symbol of the unfairness of Alberta’s deal in Confederation.” In a 2021 referendum, just over 60 per cent of Alberta voters supported removing the principle from the Constitution. But not everyone agrees. Peter Lougheed, perhaps the most respected premier in our history, saw equalization as “a crucial aspect of Canadian confederation” and “one of the most equitable methods of maintaining the economic well-being of Canadians.” In my view Lougheed was right.
First, let’s clear up a common misconception: Alberta doesn’t “pay into” equalization. No province does. It’s a federal program funded by federal taxes collected from individuals and businesses paying the same tax rate across the country.
Of course, while everyone contributes similarly (based on their circumstances), Alberta has not received an equalization payment since the early 1960s. Isn’t that unfair?
Consider equalization’s main purpose. It isn’t about punishing wealth; it’s about ensuring all provinces can offer similar public services. That Alberta doesn’t receive payments is simply due to our economy being Canada’s strongest: we don’t need help. Even when we received equalization, we didn’t need it. Premier Ernest Manning initially gave nearly all of it to Albertans as direct cash transfers—“Manning Bucks,” if you will.
Today we need help even less. At average tax rates, Alberta could raise over $17,000 per person in revenue, nearly $4,000 more than BC and $10,000 more than PEI. Compared to Quebec—often singled out as an unfair beneficiary—Alberta’s fiscal capacity is around $7,000 per person higher. This matters. Provinces with weak economies struggle to fund health and education. Equalization brings them up to the national average. And this benefits not just the “have nots” but also Alberta. By helping poorer provinces meet their responsibilities without Ottawa stepping in, Canada can continue to be decentralized. This leaves Alberta freer to pursue its own interests.
Canadians are also mobile. Over the past five years, over 420,000 people moved to Alberta from another province—and brought with them the education that other provinces paid for and equalization helped support.
Still, the program has flaws. It might encourage provinces to keep taxes high, avoid developing resources, or undercharge for electricity. If Quebec raised power prices by just two cents per kilowatt hour, for example, it could lose over $4-billion in equalization. The program therefore subsidizes cheap power in Quebec. Is that unfair? Perhaps. But design details can be fixed.
The current formula was designed by one Albertan, Al O’Brien, chair of the expert panel, and enacted by another, prime minister Stephen Harper. It was significantly improved then, and can be improved even more today. But details aside, equalization reflects a core value: helping ensure all Canadians can receive normal public services without paying abnormally high taxes. That’s not unfair to Alberta. It’s quite the opposite.
tegan hill responds to trevor tombe
It’s a privilege to engage in dialogue with Trevor Tombe—not only a respected economist, but the professor who first taught me about equalization. He asserts that equalization is not about punishing wealth, and that it in fact helps free Alberta to pursue its own interests. I’ll address these arguments in turn.
Tombe offers a clear and accurate explanation of the purpose behind equalization, emphasizing that it isn’t about punishing wealth. This is true—the intention of the program is to ensure Canada’s provinces can provide reasonably comparable services at reasonably comparable tax rates. But features in the program’s design lead to skewed results.
Take natural resource development. To determine which province gets what (and which get nothing), the formula applies a hypothetical national average tax rate to sources of revenue, such as personal income and business income, to see how much money each province could raise on its own. But the formula treats natural resource revenue (e.g., oil and hydro royalties) differently. Specifically, it measures actual natural resource revenues, rather than hypothetical, meaning any natural resource revenue a province earns directly impacts whether it will receive equalization payments and what those payments will be. Estimates suggest the “clawback” rate from a 10 per cent increase in natural resource revenue can be as much as 97 per cent. That’s a massive disincentive for provinces to develop their resources—and effectively acts as a tax on resource wealth.
This has real-world consequences. In 2018, Quebec—an equalization-receiving province—banned shale gas fracking and tightened rules for oil and gas drilling, even though the St. Lawrence Valley holds an estimated $68-billion to $186-billion worth of recoverable natural gas. In 2022, Quebec banned new oil and gas development entirely. While several factors played into this decision, this effective “tax” under the equalization program creates a clear disincentive for resource development that would otherwise create wealth in that province. At the same time, provinces that do develop their resources, such as Alberta, are punished by not receiving equalization.
Equalization creates a disincentive for provinces to develop resources—and acts as a tax on resource wealth.
Tombe also argues that by helping poorer provinces meet their responsibilities without Ottawa stepping in, Canada can continue to be decentralized, leaving Alberta to pursue its own interests. I agree in theory, but in reality, Alberta is clearly unable to pursue its own interests. Canada’s uncompetitive regulatory environment—fuelled by federal policies such as Bill C-69, Bill 48 and the arbitrary oil and gas emissions cap—creates uncertainty and discourages investment in the energy sector. In a survey of oil and gas investors, 68 per cent of respondents said uncertainty over environmental regulations deters investment in Canada compared to only 41 per cent who said the same for the US. And 59 per cent say the cost of regulatory compliance deters investment in Canada compared to 42 per cent for the US.
Albertans are feeling the impact. Investment in the oil and gas sector plummeted by 56 per cent over the last decade, from $84-billion in 2014 to $37-billion in 2023 (inflation adjusted). If the federal emissions cap goes ahead, cumulatively, over the 2030–2040 period, Alberta’s GDP (inflation-adjusted) will be an estimated $191-billion lower than it would be without the cap. Alberta will have lower wages, fewer jobs and less tax revenue. (Ironically, this also means less revenue for Ottawa).
That’s why Albertans feel a sense of unfairness. According to an Angus Reid poll, nearly half of Albertans believe they get a “raw deal”—they give more than they get—by being part of Canada. Another survey finds that more than 7 in 10 Albertans feel recent federal policies have hurt their quality of life. Put simply, Albertans aren’t getting their end of the bargain. They contribute immensely to the federation while receiving none of the benefits of being part of one—such as support from other provinces and the federal government to pursue their interests.
It’s bigger than one program. Consider that from 2007 to 2022 Albertans’ net contribution to federal finances (total federal taxes paid by Albertans minus federal money spent on or transferred to Albertans) was $244.6-billion—more than five times the net contribution from British Columbians or Ontarians. That’s $15-billion to $20-billion a year from Albertans to help keep taxes lower and fund government services in other provinces. And as Tombe shows, Alberta has been a place of economic opportunity for the many Canadians that have chosen to relocate to the province.
Alberta’s outsized contribution to the federation—and equalization specifically—isn’t in and of itself the problem. The issue is that federations are built on compromise, and Albertans are simply not getting a fair deal.
trevor tombe responds to tegan hill
As my dialogue partner notes, fairness is subjective. That’s why every province, at one time or another, feels it isn’t getting a fair deal in Confederation. Some two decades ago Newfoundland and Labrador premier Danny Williams said, “We’ve been shafted again and again.” Ontario premier Dalton McGuinty once described equalization as “perverse” and “nonsensical.” Even in Quebec—the largest equalization recipient—politicians have claimed they’re being “swindled.”
So discontent is neither unique to Alberta nor is it new. More than a century ago, prime minister Wilfrid Laurier said the entire system of subsidies to provinces was “wrong in principle.” And Canada’s first election, in 1867, saw a separatist party dominate the vote in Nova Scotia, largely over concerns about federal policy and transfers. One leader declared that the province was “in this Dominion as a conquered country.” Sound familiar?
Regional grievances are a core element of our political history. This isn’t to belittle their importance but to place them in context. Canada is vast and diverse, and federal policies unavoidably create regional winners and losers. This fact alone is not unfair. It’s simply a reality.
Alberta’s concerns about equalization, however, go deeper than discontent. The program itself is said to be unfair to Alberta. For that to be true, equalization would need to systematically penalize Alberta (fundamentally at odds with how federations normally operate) or violate basic principles of fairness, such as equity, transparency or consistency.
Let’s start with equity. Equalization aims to help poorer provinces deliver reasonably comparable public services. By its very nature, equalization does not—and should not—send money to the wealthiest province. In fact, directing funds to the strongest provinces would itself be unfair and contrary to the program’s own goal.
Transparency matters too. It’s better to openly define who receives support and why than to bury redistribution within opaque federal programs. That clarity isn’t without costs, though. In 1956 CCF leader M.J. Coldwell warned of a “long-run danger”: equalization will “look” to high-income provinces like “a subsidy which others get and which [rich provinces] are going to pay for,” and that this “may invite powerful opposition.” He was right. The federal government, by clearly defining and disclosing equalization, does risk criticism—but the alternative would be worse. A transparent formula-driven approach means design details can be fairly examined and debated.
It’s true that we contribute more. But this just reflects Alberta’s higher incomes and stronger economy.
As for consistency, my counterpart identifies two problems: resource revenues are treated differently from other sources, rewarding artificially low power prices, and the fixed-growth rule breaks the link between addressing inequality and the program’s overall size. These aren’t new concerns. Nor are they raised only by resource-rich provinces. New Brunswick’s premier called it “discriminatory” when prime minister John Diefenbaker (a westerner, I must add) first included resource revenues.
But if such details are why the program is unfair, you may be surprised to learn how little they matter. I estimate that eliminating resource revenues and the fixed-growth rule would shrink the cost of equalization from $26.2-billion to $25.9-billion—a mere 1 per cent. Quebec’s payments would drop from $13.6-billion to $13.1-billion, while Alberta would still receive nothing. So even if you believe these inconsistencies need fixing (and I do too), the impact on Alberta is marginal.
Fairness, though, is also about who pays. Equalization’s critics say Albertans contribute $4.2-billion based on our share of federal revenues. And it’s true that we contribute the most per capita—once over 16 per cent of federal revenues, now below 14 per cent, even with only 12 per cent of Canada’s population. But this just reflects Alberta’s higher incomes and stronger economy. Since federal taxes are largely levied on income and consumption, wealthier people and businesses pay more—even though all face the same tax rates. Whether that’s fair or not concerns one’s views on progressive taxes, not equalization.
Some argue equalization discourages growth policies in recipient provinces. Why get richer if equalization will just shrink…? That’s a valid concern, but it’s not about equalization specifically; it’s about redistribution generally. And Canada redistributes no more across provinces than the US does across states—despite no equalization there.
Equalization has become a symbol for broader concerns over federal policies, from an oil tanker ban to an emissions cap. These are serious issues. But they are fundamentally separate from equalization and deserve their own targeted and effective responses.
Federations deliver real benefits—pooled risk, labour mobility, internal trade, collective strength and more. Not winning every policy debate doesn’t make the deal unfair. Equalization isn’t perfect. But it’s not unfair to Alberta.
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