MSP premiums cut welcome, but flawed

Proposal requires tweaking, Rhys Kesselman writes.

Headlining British Columbia’s 2017 budget was a prospective 50 per cent cut in Medical Services Plan premiums for most resident households. This change should be welcomed by many British Columbians, and it partly fulfils a longexpressed goal of both the B.C. Liberals and NDP of phasing out the premiums.

Since flat-amount MSP premiums are the most regressive component of B.C.’s revenue system, cutting them is the most progressive tax reduction the province could undertake. This $845-million-per-year cut will benefit all but the poorest households already enjoying full premium relief and those excluded by incomes above $120,000.

Yet this budgetary initiative can be critiqued on several grounds, with varying validity. It reduces the visibility of public health care costs; employers that pay the MSP premiums will benefit rather than their employees; it leaves untouched an unnecessarily complex method of collecting revenues and in fact complicates the system; and it curtails the province’s revenues for supporting various unmet public needs.

Proponents of charging premiums for health care have argued it’s useful in making the cost of services visible to the public. However, as flat levies unrelated to the individual’s use of the services, the premiums serve no effective purpose in encouraging economizing behaviour. This point has been recognized by all of the other provinces, which have abandoned their earlier use of premiums to help finance health care costs.

Many employers directly pay their employees’ MSP premiums as a fringe benefit, and thus those firms might be expected to capture the gain from reduced premiums. Yet employer premium payments are a taxable fringe benefit, so even in the short term their employees will save on income taxes. Over the longer term, the reduced premium burden on employers will shift into higher employee monetary compensation.

Restricting the premium cuts to households with net incomes below $120,000 makes for additional operational complexity in an already complex system. The B.C. budget states that everyone will need to register in order to access the premium cut; those who fail to register will be stuck with the higher premiums even if entitled to the relief.

With the budget’s proposed system, provincial bureaucrats will need to determine which households had incomes below $120,000 and communicate that information annually to all employers, who are charged with collecting and remitting the premiums. Thus, additional burdens will also be imposed on businesses as tax collectors.

A simpler system would be to cut MSP premium collections and remittances by half for all residents. If the province wished to limit relief to those with incomes below $120,000, the additional premiums could be assessed on higher-earning households via a few lines on the provincial income-tax schedule. Employers currently paying for those workers’ premiums could then reimburse them for the added impact.

An oddity in the budget’s proposal is that the premium reduction cuts off sharply at household incomes of $120,000. A couple with an income of $119,999 will save $900 in annual premiums, whereas a couple earning just one dollar more will save nothing. In economic jargon, that’s a marginal effective tax rate of 90,000 per cent, which will induce tax planning by some people to skirt below the critical threshold.

Another possible critique of the premium reduction is that it curtails the revenue-raising potential of provincial finances. For the incumbent government with its sizable budgetary surplus, this was not an immediate concern; it was also consistent with the B.C. Liberal Party’s stress on tax reduction (despite their 15 years of MSP premium hikes).

Yet, the provincial economy’s current buoyancy will not continue indefinitely, and the next downturn will again strain the budget. The NDP has expressed periodic interest in eliminating MSP premiums, but replacing rather than forgoing those revenues. This goal would be achieved by raising the rates of other taxes to achieve a simpler and more progressive system.

The budget’s proposed MSP premium cuts will come into effect only in 2018 and contingent on re-election of the Liberal administration. This delay provides time for the NDP to formulate an alternative plan to trim the premiums, but with offsetting tax hikes to support valued public programs. We await an illuminating electoral test of differing priorities for the scope of government.