Why would Ottawa even consider a tax that won’t increase revenue, but hurt middle-class Canadians?Release Date: 01/03/2017 Source: Financial Post Staff Reference: Wendy Hope
by Frank Swedlove
Special to the Financial Post
There has been talk recently about the idea of taxing employer-paid health and dental plans as part of the federal government’s efforts to eliminate tax credits that benefit higher-income Canadians. This action would be misguided at best; its outcomes would harm the individuals it seeks to help the most, while inflicting collateral damage on the health and well-being of Canadians.
Let’s start with who this would really affect the most. While supporters of this policy idea say that employer-paid health and dental plans mostly benefit the wealthy, it is actually middle-income and lower-income Canadians who will feel it the most. More than three-million Canadians who make less than $20 per hour have workplace coverage. Making their benefits taxable will mean a significant reduction in the quantity and quality of health coverage for two reasons:
First, employers would significantly pull back on providing health benefits. When Quebec made employee benefits taxable, there was an almost 20-per-cent reduction in coverage by employers. This means millions of middle- to low-income Canadians will be pushed out of their employer plan and required to apply for individual health coverage if they want protection.
Second, even if a refundable Medical Expense Tax Credit (METC) against individual insurance costs was introduced (as has been speculated about in the media and was recommended by the Advisory Panel on Healthcare Innovation chaired by David Naylor), a huge gap will remain. Why? Because healthy, younger individuals often forgo purchasing insurance and will therefore have no protection against unexpected health costs. At the same time, older individuals, who typically have more complex health needs, would have to apply for coverage. When applying for individual health coverage, insurers always consider the health status of the applicant. Individuals with existing and serious health issues may not qualify for coverage, while those with moderate health concerns will be charged higher rates.
Even if these gaps and higher costs for coverage for lower income Canadians could be overcome, the unintended costs, and lack of actual savings, associated with this misguided idea should give the government serious pause. To begin with, taxing employer health benefits will trigger the requirement for CPP and EI contributions by employers and employees on those amounts. These incremental CPP and EI contributions will fall on lower-middle-income Canadians who earn below $55,000, and on their employers, to the tune of over $1 billion annually. The result? Many employers will have to choose between offering benefit plans and sustaining employment levels, and individuals will have less money to help them get through the week.
In addition, taxing employer-paid health and dental benefits would provide limited savings, if any, to the federal government. Analysis — including in the Naylor report itself — clearly shows that introducing a refundable tax credit for individual insurance would likely cost more to the treasury than the savings from taxing health benefits. Similarly, costs to government from the METC will rise as individuals seek to recoup the increased out-of-pocket health-care expenses they incur.
Finally, it’s important to highlight that reducing Canadians’ access to health insurance will result in serious public-health impacts. Private coverage pays for many of the preventative health-care services that we know are the key to keeping people healthy and out of hospitals and doctors’ offices. Reducing access to these services will reduce the health of Canadians and put additional pressure on the provincial health budgets at a time when they can least afford it.
Should the government pursue a tax system that it is as fair, efficient and simple as possible? Certainly. But let’s do it in a way that raises everyone up rather than taking everyone down.
Frank Swedlove is president and CEO of the Canadian Life and Health Insurance Association.