EMPLOYER HEALTH TAX CHANGES GOOD FOR B.C.
Refinements to the system aid public service, says Alex Hemingway.
For the most part, the B.C. government’s refinements to the employer health tax are good.
The tax replaces the deeply unfair medical services plan premiums. By eliminating MSP premiums and replacing them with a payroll tax on employers, B.C. is catching up with most of the rest of Canada.
We at the Canadian Centre for Policy Alternatives have long argued that MSP premiums are B.C.’s least fair tax and should be scrapped and the revenue replaced by fairer taxes. That’s because whether you make $45,000 or $450,000, you pay the same flat dollar amount in MSP premiums (though those with very low incomes get assistance).
Rising MSP premiums, along with income tax cuts that overwhelmingly favoured the wealthiest few, are part of the reason that overall tax fairness was eroded so badly in B.C. between 2000 and 2016. So, eliminating MSP premiums is a big step toward restoring fairness to B.C.’s tax system.
The EHT creates a more level playing field for businesses and increases the purchasing power of households, which, from a business perspective, means more customers. Small business does well under the EHT because the large majority of small businesses will be exempt. According to government estimates, 96 per cent of revenues will come from the largest five per cent of employers.
After implementing the EHT, B.C. will still have low payroll taxes compared with other provinces and Canada already has among the lowest payroll taxes across the entire OECD.
The EHT applies to large employers of all kinds, including public sector bodies like school districts, universities and health authorities, for which the province is the ultimate funder. These employers will realize substantial savings from the elimination of MSP premiums as they typically covered MSP for their employees. But some will end up paying more overall in EHT than they did in MSP. To address this, the government has pledged to provide compensatory funding to ensure there are no “cuts by stealth” resulting from the switch from MSP to EHT.
Municipal governments have also pressured the province to provide them with similar compensation. Some municipalities will realize a net savings under the shift from MSP to EHT, while most will face modest cost increases that would have to be absorbed or covered by small property tax increases. The provincial government has declined to provide compensation to these municipalities, which is reasonable because unlike school districts or health authorities, municipalities control how much revenue they raise.
Another significant change to the EHT design relates to charities and non-profits, which, as in other provinces, will get a break.
In general, an employer must pay the EHT if its payroll is above $500,000. They will only pay the full rate if their payroll is above $1.5 million. The province announced last summer that if charities and non-profits have a payroll under $1.5 million they’ll pay no EHT and the full rate only kicks in for those with a payroll above $4.5 million. The thresholds apply separately to each branch location of a charity or non-profit in B.C., which provides some additional breathing room.
For a concrete example of how the EHT works, consider how it applies to us at the Canadian Centre for Policy Alternatives B.C. office. We’re a non-profit charity with 15 staff members that has always paid staff MSP premiums. That means CCPA-BC will save about $17,000 per year from the elimination of the MSP. We had originally expected to pay about $10,000 per year in the new EHT, which would partly offset those savings ( but would still leave us better off ). With the recently announced higher threshold for charities and non-profits, though, we’ll be exempted from the EHT entirely.
When it comes to replacing the MSP with the EHT, there is one remaining problem.
The government is only replacing about $1.9 billion of the $2.6 billion in foregone MSP revenues annually with the EHT. Indeed, in their official media release, the government trumpets this as “a net reduction in taxation.”
Given the pressing economic, social and environmental needs facing B.C., reducing our province’s fiscal capacity shouldn’t be an option.
When measured as a share of the economy, provincial government revenue has declined markedly since the late 1990s. Under B.C.’s new government, this decline has levelled off but hasn’t been reversed. Thus, shoring up our fiscal capacity should be a high priority.
One way to close the revenue gap between the MSP and the EHT would be a new top tax rate of 22 per cent on incomes over $200,000, which we recently recommended in our Budget 2019 submission to the legislature’s standing committee on finance and government services. This measure alone would add over $500 million in provincial revenue annually and only affect the most affluent tax-filers.
There’s no question that eliminating the MSP and replacing it with the EHT is a major step forward for tax fairness in B.C., and refinements to the policy as it moves toward implementation have been sensible. What remains is to bridge the revenue gap and ensure that B.C. has the resources to invest in services to tackle the major social, economic and environmental challenges we face.
Alex Hemingway is an economist and CCPA-BC’s Public Finance Policy Analyst. His work focuses on the state of B.C.’s public services, including education, health care, social services and regulation. He also investigates the taxation system and its relationship to inequality and the capacity of government to provide high-quality and accessible public services.
The EHT creates a more level playing field for businesses and increases the purchasing power of households, which, from a business perspective, means more customers. Alex Hemingway, Canadian Centre for Policy Alternatives By eliminating MSP premiums and replacing them with a payroll tax on employers, B.C. is catching up with most of the rest of Canada.