In an interview with Vaughn Palmer earlier this summer, the Premier confirmed her government has changed its tune on the Medical Services Plan (MSP) tax, finally admitting that it’s unfair and in need of reform.
MSP is an unfair tax because it takes a bigger share of income from lower- and middle-income British Columbians than from upper-earners. A two-parent family living on $40,000 a year pays $1,800 in MSP, a whopping 4.5% of their household income. A family making $400,000 per year pays the same $1,800 but that only represents 0.45% of their income.
No other province charges a tax like this. So why does BC still have MSP?
When Christy Clark was asked this very question in her interview with Vaughn Palmer in July, she replied that MSP “turned out to be a very complicated thing to try and change.” Yet other provinces that used to have similarly structured health premiums—Ontario and Alberta—successfully managed to scrap theirs within a single budget cycle.
Both provinces faced the exact same challenge as BC does today. A number of employers currently pay the tax on behalf of their staff, and so rolling MSP into personal income tax would hand out big savings to them while sticking families with the entire bill.
Ontario solved this dilemma in 1989/90, over twenty-five years ago, by replacing health premiums with a combination of personal and business taxes. This solution continued the practice of sharing the health tax costs between families and businesses (which makes sense, since they both benefit from public health care).
Modest income tax increases replaced two thirds of the revenues from the Ontario version of MSP, and a new levy on employers raised the other third. The levy, which is still in place today (the Employer Health Tax), is a tax of up to 1.95% on total wages, salaries and other compensation paid by the business, with progressively lower rates for smaller businesses.
Alberta avoided the problem by simply scrapping its health tax in 2008, handing out tax cuts to everyone, and betting on oil revenues to finance ongoing spending. We all know how that ended.
In a recent report for the Canadian Centre of Policy Alternatives, I modeled what it would look like to follow Ontario’s example and replace MSP with a combination of personal income tax and a business tax, roughly in proportion to the share of MSP currently paid by individuals (60%) and employers (40%).
The personal income tax increases required are smaller than you may expect. All but the richest 10% of families would pay less than they do today in MSP. A family of four with income of $90,000 would save about $1,500 a year, and even an individual with income of $80,000 would save close to $300. Plus, the overall tax system would become considerably more fair as a result.
Employers who currently cover MSP would see savings because the employer portion of MSP would be shared across all businesses — not just the “good” employers that currently offer benefits.
What about the workers whose MSP is now paid by their employer? They won’t personally save from the elimination of MSP and may have to pay somewhat higher income tax — but unless they’re top earners the increases would be small.
Unionized workers could seek to negotiate for the employer’s savings to be passed on as wage increases through bargaining. If the Premier wants to make sure scrapping the MSP doesn’t just end up being a give-away to large employers, her government can lead the way by passing on the savings in its own collective bargaining.
Non-unionized employees would find it harder to negotiate for a share of the employer’s savings in their annual reviews (one clear benefit of having a union). Even if they aren’t successful, the income tax increases they can expect would be smaller than what they’d pay in MSP if they changed jobs and the new employer didn’t cover it.
Replacing MSP with fair taxes is the right thing to do. And it doesn’t have to be complicated. Ontario provides a blueprint to follow. All that’s needed now is political will.
Iglika Ivanova is a Senior Economist and Public Interest Researcher at the BC Office of the Canadian Centre for Policy Alternatives and author of the report BC should eliminate the MSP. Here are two better options.