Liberals face revolt if health tax used to pay down deficit

Posted on December 6, 2016 in Governance Debates – Full Comment
December 5, 2016.   JOHN IVISON

The reaction on social media to the story the Trudeau government is considering making workplace health and dental coverage a taxable benefit was volcanic.

As Postmedia revealed Saturday, the department of Finance is reviewing the measure, which costs the government $2.9 billion in forgone revenue and lowers the tax bills of 13.5 million Canadians.

If it does prove to be a flagrant tax grab, the Liberals may have to pry health plans from the cold, dead hands of rebellious taxpayers.

But let’s credit the Grits with more political savvy than that.

Francois-Philippe Champagne, the parliamentary secretary for finance minister Bill Morneau, told the House of Commons that Finance is reviewing tax credits to “ensure tax fairness and to simplify the tax code.

“We are not looking at any measure in isolation and no decisions have been made,” he said.

The best guess is that the government is set to adopt the recommendations of the advisory panel on health care innovation, which reported without fanfare in July last year. The blue ribbon panel, chaired by former University of Toronto president David Naylor, suggested changing the tax treatment of employer-provided health insurance, in exchange for broadening tax-based support for the purchase of private health insurance by individuals.

This “tax swap” would see health and dental plans taxed, just as life insurance paid by employers is included as taxable income. In exchange, the government would use the money saved to bring in a refundable tax credit, perhaps expanding the existing Medical Expense Tax Credit, which would be available to all Canadians, not just those with employer funded plans.

The panel suggested the maximum tax credit would be $750 for a single person earning less than $44,000 or $1,500 for a family with income below $89,000.

This policy could be defended on the grounds that it would remove a distortion from the tax code that sees the relatively well-off (public servants and people who work for large companies) have their health and dental costs subsidized, while the four in 10 Canadians without workplace policies have to buy insurance from after-tax income.

Those most affected by high out-of-pocket costs are the poorest one-fifth of households – the advisory panel report suggested that 37 per cent of the lowest earning quintile pay more than five per cent of household income on healthcare, compared to just 14 per cent of the top quintile.

The government may opt not to act — the risk is that it leads to a decline in private health insurance and a rise in the amount of out-of-pocket spending on health because employers drop their plans and employees don’t buy their own coverage.

“Such an outcome would obviously undermine the goal of shifting a greater share of health care financing from public to private. It would depend in large part on the generosity of the new tax credit and how many people used it to purchase individual plans,” said authors Sean Speer and Ian Lee in a recent report on the prospect of a fairer health care system for the Macdonald Laurier Institute.

Such an outcome would obviously undermine the goal of shifting a greater share of health care financing from public to private

When Quebec started taxing health and dental coverage, there was a one-fifth drop in the number of workplace health insurance coverage plans, without an offsetting increase in the number of individual plans. But in that instance, there was no switch to a new broad-based tax credit.

It will require careful calibration, but this is a policy Finance has been trying to foist upon successive governments for nearly a decade. The Conservatives looked at it but decided that it would cost more to bring in than it saved. The advisory panel model suggests that the net cost might be $800 million.

But for a government that claims to be focused on low and middle-income Canadians, this is a move, like the reform of child-care benefit, that would end tax breaks that disproportionately help the better off. Under the new tax credit, households with incomes below $100,000 would pay less tax, while higher-income households would pay more.

Even many Conservatives might find common ground with this switch. Maxime Bernier, the Tory leadership candidate, has said he will abolish “boutique tax credits” that he said are nothing more than “politically-motivated subsidies.”

The move to more privately financed healthcare would make the existing system more sustainable (30 per cent of Canada’s total spending on health care is already privately financed — half of which is paid out of pocket on prescription drugs, long-term care, vision care and dental services).

But that is only if the Liberals can resist the temptation not to end the current tax treatment of health and dental coverage just to reduce their burgeoning deficits.

That would amount to the exploitation of hard-working Canadians to haul the Liberals out of a hole of their own making.

At the risk of answering my own question, surely the Grits aren’t that hoggish quite yet?

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