This week, Nova Scotia Premier John Hamm complained that it was high time his province got its fair share of revenue from its energy resources — just like Alberta. He went on to argue that Nova Scotia should get its fair share of money out of Canada — just like Alberta. 

Alberta, as Premier Ralph Klein retorted, pays roughly $3,000 more per capita than it receives from Ottawa. Nova Scotia is a net recipient of nearly $4,500 per capita. This difference is twice as large as the amount by which the federal equalization program — the constitutionally mandated program that tops up provincial revenue to a rough national average — calculates the difference in fiscal capacities between these two provinces. 

Dr. Hamm got off on the wrong foot. Had he stuck to his first point, about getting his fair share of energy revenue, he would surely have gotten a more friendly response from his Western colleague. In fact, when it comes to reaping the rewards of energy, Dr. Hamm should look to Alberta as an ally, not an adversary. 

Dr. Hamm’s legitimate complaint arises out of the workings of the equalization program, which treats revenue from natural resources the same as other sources of revenue. As a result, when Nova Scotia taxes its newly developed offshore oil and gas, it would normally effectively sacrifice a dollar in equalization for every dollar in resource revenue. Ottawa, though, has cushioned this punitive tax back by allowing Nova Scotia to keep 30 cents of every dollar in tax revenue from offshore revenue. 

Dr. Hamm’s central complaint is that this treatment of natural resource revenue is unfair. He has both the Constitution and economics on his side. 

Canada’s Constitution puts the ownership of, and the right to levy royalties on, natural resources squarely with the provinces. In the past, Ottawa skirted this constitutional rule using indirect means such as the National Energy Program (NEP). It also skirts these rules by including natural resources within equalization. To the extent that these revenues are provincially owned, they have no place in the calculations of equalization entitlements. 

Further, the case for redistributing energy revenue is weak on economic grounds. It makes sense to equalize personal income taxes across provinces, because such revenue is properly regarded as ordinary government income. In contrast, the exploitation of natural resources is really the sale of a capital asset. There is only so much oil or gas and the benefits should be spread over more than one year. To put it into accounting terms, natural resource revenue represents a sale of a capital asset rather than current income. 

(It is worth mentioning that Ottawa excludes Alberta from the calculation of fiscal capacities in equalization, thus lessening the impact of natural resources on equalization payments.) 

Treating natural resource revenue as a sale of a capital asset is one of the rationales for Alberta’s Heritage Savings Trust Fund — money saved from high natural resource revenue so future generations benefit from the depletion of a non-renewable asset. It is also why Alberta recently passed a law requiring 75% of unexpected surpluses in Alberta to be used to pay down debt. 

For the same reason, only a small portion, certainly much less than 70% and perhaps none, of Nova Scotia’s resource revenue should be deducted against its equalization entitlement. 

The second reason not to include natural resources in equalization is that the discovery and exploitation of natural resources affects the prices and values of things already included in equalization. For example, when the NEP reduced the effective price Alberta received for its oil, the value of houses plummeted and wages for Alberta employees followed right behind. Because property taxes and personal income taxes are included in equalization, there is effectively double counting. Equalization payments rise and fall with the price of natural resources, and then rise and fall further when prices in the broader economy react to this fact. 

Taking natural resource revenue out of the equalization formula will eliminate this double counting, improve incentives for Nova Scotia and other equalization-receiving provinces to develop their economy, and reduce dependency on federal transfers — a public policy hat trick that would benefit every part of the country. 

“It is imperative that I present this in a way that it is simply not a province looking for money” was Premier Hamm’s stated desire. Had he argued the constitutional and economic case for excluding natural resources from equalization, he would have come much closer to his goal. He might also have been more likely to find allies rather than adversaries in Alberta and the other Western provinces.