Payroll tax offsets revenue loss
New expense for business a replacement of sorts for MSP premiums
Employers who thought they were off the hook for Medical Services Plan premiums as employee benefits when the NDP government announced the phase-out of premiums last year got a surprise on Tuesday.
The NDP’s budget unveiled a new payroll tax to take effect on Jan. 1, 2019, to offset the loss in revenue from premiums.
But the payroll tax will be a new expense for many companies with payrolls over $500,000 that did not pay premiums for their employees; those with payrolls under $500,000 are exempt from the tax.
The “employer health” tax, as it is dubbed by government, requires companies with payrolls greater than $500,000 a year to pay a 0.98 per cent tax on annual payroll.
The tax goes up in increments for every $250,000 in payroll. Big companies will be hardest hit as they will pay a 1.95 per cent tax on payrolls greater than $1.5 million.
Since the government is one of the biggest employers in B.C., the public sector will account for about 20 per cent ($400 million a year) of the revenue that new tax brings in when fully implemented, Finance Minister Carole James said.
The tax is projected to bring in $463 million in 2018-19 (it applies for only the last three months of that fiscal year), $1.85 billion in 2019-20, and $1.92 billion in 2020-21. MSP premiums brought in $2.6 billion annually in revenue so there will still be a revenue gap to make up.
A government-appointed group will make other recommendations by the end of March on ways to offset the remainder of revenue lost through MSP premium elimination.
An income tax surcharge is one possibility. Budget documents say the final analysis will focus on “progressivity, fairness and competitiveness of the tax system.”
The elimination of MSP premiums will be complete by Jan. 1, 2020. Combined with a 50 per cent cut that took effect this year, that will save individuals who paid premiums up to $900 a year and families $1,800 a year. Some employers have paid premiums for some workers as benefits while many workers paid their own premiums; the proportion is unknown, according to the government.
There was no immediate response from government to explain why B.C. is collecting the new tax in 2019, while partial premiums are still being charged until 2020, an apparent case of double-dipping.
James said MSP premiums were
akin to a regressive tax since it wasn’t tied to income. Individuals earning $45,000 a year have paid the same premiums as someone earning $250,000. But James admitted MSP premiums were a solid source of government revenue.
She said the employer payroll tax exists in other provinces but B.C. will have the lowest payroll tax rate in Canada. In a news conference, James said the government consulted with other provinces including Manitoba, Ontario and Quebec, which all have similar payroll taxes.
“The advice we got was to give time for implementation and discussions,” she said, referring to negotiations which may ensue between companies and employees.
Asked about whether there might be some unintended consequences such as layoffs, she pointed to provinces like Quebec which are “booming” even with such taxes.
The Greater Vancouver Board of Trade is concerned about the effect of the payroll tax on businesses.
“The government will be reducing the tax burden on individuals, by transferring the majority of the $2.6 billion burden onto business,” it said in a statement.
“Because many larger corporations already pay this on behalf of their employees (as a benefit), the incremental impact of this payroll tax will overwhelmingly affect small- to mid-size businesses the most.”
In other revenue-raising measures, the government said it will boost taxes on tobacco in the 2018-19 fiscal year. Based on tobacco consumption rates, the tax will increase tobacco tax revenues to $822 million in 2018-19, $112 million more than sales tax revenue in this fiscal year. The percentage increase is said to be about 11 per cent, according to the Ministry of Finance.
Before the increase, B.C. lagged most other provinces in tobacco tax rates. The tax rate on loose tobacco will also rise to help close a loophole in which loose tobacco was taxed less than manufactured cigarettes.
Andrea Seale, executive director, B.C. and Yukon, for the Canadian Cancer Society, praised the tobacco tax increase because it has been proven to help smokers quit, reduce consumption and “discourage young smokers from starting.”
B.C. will still have the fourth lowest cigarette tax rate of Canada’s 13 provinces and territories.
Cannabis is expected to be legalized later this year and, curiously, the B.C. share of cannabis tax revenue is projected to be only $50 million in 2018-19, rising to $75 million in 2019-20. It is not clear if there will be a price advantage to consumers using cannabis compared to tobacco.
The Health Ministry budget will balloon to a hair below $20 billion in fiscal 2018-19, by far the most spent by any ministry. James said the government will spend $548 million over three years on seniors care and $150 million more over three years on primary care.
The capital budget calls for spending $1.11 billion in the current
fiscal year and $1.10 billion in 2018-19, totalling $3 billion over the next three years. Some of the biggest capital projects are already announced hospital upgrades.
Noticeably absent from the budget is any mention of the St. Paul’s Hospital redevelopment near Main Street and Terminal Avenue in Vancouver. Health minister Adrian Dix had said last year that he expected financing for a business plan in this budget.
Hospitals and health regions will consume $13.4 billion in 2018-19 and the Medical Services Plan, which pays fees to doctors for patient services, will cost $4.81 billion, five per cent more than the current fiscal year.
Pharmacare adds another $1.272 billion in costs to Ministry of Health spending. The government has allocated $105 million to the Pharmacare budget, largely because it eliminated deductibles for an estimated 240,000 lower-income families.