A Note on the Analytics of the New Equalization Formula

From 1967-1982, Canada's equalization program was based on a formula which ensured that all provinces had access to national average revenues per capita for a wide set of revenue sources. The Representative Tax System (RTS) formula was replaced in 1982 by a new Representative Average Standard (RAS) formula which uses revenue per capita in a "representative" set of five provinces as the standard for equalization. The purpose of this paper is to examine the implications of the new RAS formula, especially in comparison with the RTS. We examine the effects on a province's equalization payment of changes in revenue bases and population, and consider the effects of interprovincial population and base shifts. Several somewhat disturbing consequences of the new formula are identified.