Annex 6: User Fees

Should user fees be equalized?

The Panel heard diametrically opposing views on whether or not user fees should be included in Equalization.

The case to exclude user fees

The majority of academics who have studied this issue contend that user fee revenues should not be equalized, except for the portion that represents profit; that is, the excess of fee revenues over the cost of providing the service.

In their view, user fees are essentially a cost-recovery mechanism. In exchange for the fee, the payer obtains a benefit supplied by a government, much like a private transaction. Such transactions do not generate fiscal disparities and do not give rise to a need for Equalization.

In order to understand the arguments put forth by academics as to why user fees should not be equalized, it is helpful to briefly reflect on why regular taxes should be equalized. Consider, for example, sales taxes. Buyers are obligated to pay sales tax when they purchase taxable goods and services. The buyer receives nothing directly in return from the government for paying the tax on the purchase. This leaves the government with tax revenues (profits) to provide a broad range of government services such as health care and education to its citizens. A province with a low volume of sales (a weak tax base) is obviously less able to provide these
services, and needs equalization to help it provide comparable programs.

In contrast to a tax, a cost-recovery user fee is essentially a payment where the buyer gets something directly in return and the government incurs a cost to provide this service, leaving no profit to provide its citizens with public services.

Take the example of a provincially operated residential care facility where individuals pay a cost-recovery user fee to stay there. These user fees pay for staff, meals and maintenance, leaving no profits. The province with a large number of people wishing to use residential care facilities (i.e., a strong user fee base) does not have a fiscal advantage over other provinces. With each additional resident, the province incurs additional costs to hire more staff, provide more meals and secure more space. These additional costs are covered by fees charged to the new resident. As a result, the province cannot use additional revenues from these fees to provide more government services such as health care and education.

Similarly, the province with fewer seniors wishing to use government-operated facilities (i.e., a weak user fee base) is not disadvantaged in providing its citizens with comparable government services, and does not need Equalization for this revenue source. Indeed, if user fees do not cover all costs, it could be argued that the province with a low number of seniors (a weak user fee base) is better off as it does not need to provide as large a subsidy to keep the facilities afloat.

A slightly different perspective on the residential care facility illustrates the argument put forth by academics on why user fees should not be equalized. Consider two provinces that choose to offer residential care in different ways. In the first province, residential care facilities are provided by the government on a full cost-recovery basis, while in the other province all facilities are owned and operated by the private sector. Clearly, the first province collects more user fees for this service than the second province, but does the first province have a financial advantage over the second province? Should the second province receive Equalization because it does not collect user fees? The answer is no to both questions. The province providing the residential care service and charging the user fee is left with no profit and no additional revenues compared to the other province.

While the majority of academics who have examined this issue agree that cost-recovery user fees should not be equalized, they also argue that profits generated when a user fee exceeds the cost of providing the service should be equalized. These profits provide governments with an additional source of revenue to provide
public goods and services. A province that generates profits, be it from selling alcohol or lottery tickets, is in a better financial position to provide its residents with public services than a province which generates less profit. Profits should therefore be equalized, and a province with less than average profits should receive Equalization for these revenues.

The case for equalizing user fees

Provinces have argued that all user fee revenues, including some $17 billion of fees collected by colleges, universities, hospitals, and housing authorities, should be fully equalized. In their view, these fees represent revenues used to finance the provision of public services and are equivalent to taxes as a source of funds.

Provinces point out that an RTS system is supposed to mirror what provinces do. If they choose to deliver a service publicly, it is a public service and all revenues financing these services, whether user fees or general taxation, should be equalized. They argue that excluding some or all such fees from the Equalization formula could distort policy choices when it comes to collecting taxes or user fees.In other words, user fees are a source of revenue not distinguishable from any other source of revenue so they are a source of fiscal capacity.

Provinces noted that the inclusion of these fees, with Equalization payments determined by the current proxy base (and no fixed envelope), would enrich the program and raise Equalization payments to all receiving provinces. Provinces with the weakest non-resource fiscal capacity would receive the most benefit per capita.

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