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The Progressive Economics Forum

Ontario’s Health Premium

Yesterday, I appeared before the Standing Committee on Finance and Economic Affairs at Queen’s Park. The committee is reviewing the Ontario Health Premium, as required by the legislation that implemented this levy.

My assessment of the premium starts from the premise that the Government of Ontario needs more revenue not only for healthcare, but also for industrial development, education and training, environmental initiatives, childcare, social housing and other priorities. In general, citizens are willing to accept additional levies to finance important public services. My concern is that the health premium raises relatively little revenue in an extremely inequitable manner.

There is reasonably widespread agreement that Ontario’s provincial public services are underfunded. The provincial government’s explanation is that Ontario pays too much Equalization to other provinces, creating a $20-billion gap between Ontario and the federal government. I have debunked this mythology elsewhere.

The real issue is the political will (or lack thereof) to set Ontario’s provincial tax rates at the levels needed to properly finance provincial programs. Ontario public services are underfunded because Mike Harris cut taxes and Dalton McGuinty has failed to reverse these tax cuts.

Hugh Mackenzie estimates that, even with the $3-billion health premium, the provincial government loses $15 billion annually from tax cuts. In other words, for every dollar the health premium generates, the Government of Ontario still loses five dollars from Harris-era tax cuts. So, the first major problem with the health premium is that it simply does not raise enough revenue.

The second major problem is that it raises this revenue in an extremely inequitable manner. People with higher incomes should pay proportionally more. Canada Revenue Agency data indicates that the fewer than 5% of Ontario taxfilers making more than $100,000 collected more than 25% of total personal income. A progressive system is important not only for the sake of fairness, but also because much of Ontario’s potential tax base is concentrated at the top end of the income scale.

However, the health premium is regressive, taking proportionally more from lower incomes. Someone making $25,000 (e.g. working full-time for just over half the average hourly wage) pays $300, which is more than 1% of their income. Someone making $200,000 pays $750, which is about one third of 1% of their income. Someone making $1,000,000 pays $900, which is about one tenth of 1% of their income.

The particular design of the premium aggravates this regressivity. The premium’s stepped structure applies not to gross income, but to taxable income after deductions. Taxpayers at certain income levels can vary their deductions to move between steps. For example, by claiming an extra $600 of RRSP contributions, someone making $200,600 could reduce their health premium from $900 to $750. This $150 savings constitutes an immediate 25% return on the RRSP contribution on top of the income-tax advantages.

Of course, most Ontarians do not plan their taxes this aggressively, but those with the means to do so are undoubtedly concentrated at the upper end of the spectrum. For example, the fewer than 5% of Ontarians who make more than $100,000 posses one quarter of personal income but one third of RRSP contributions.

The regressive nature of the premium could be mitigated if employers paid it for their employees.  Indeed, when the premium was introduced, many collective agreements already had language requiring that employers pay provincial health premiums. Unions initially succeeded in enforcing these provisions through arbitration.

However, the Premier and Finance Minister quickly jumped in to “clarify” that the Ontario Health Premium is not a premium, but a tax to be paid by individuals. Thanks to this intervention, most subsequent arbitrations ruled that employers do not have to pay.

Finally, it’s worth noting that Ontario is out of step with most other Canadian provinces. Five provinces have not had heath premiums for years. Quebec and Nova Scotia have modest premiums associated with their provincial drug plans. Only Alberta and BC have higher health premiums than Ontario. However, Alberta is eliminating its premium in 2009, which will leave Ontario and BC in a league of their own.

Comparison of Provincial Health Premiums (Using 2005-06 Equalization Tables)

 Province

 Actual Revenue

 Revenue at National Average Rate

 

 Actual Revenue

 Over Base

 Newfoundland

 $0

 $80 million

 0%

 PEI

 $0

 $24 million

 0%

 Nova Scotia

 $14 million

 $159 million

 9%

 New Brunswick

 $0

 $122 million

 0%

 Quebec

 $816 million

$1,322 million

 62%

 Ontario

$2,427 million

$2,260 million

 107%

 Manitoba

 $0

 $190 million

 0%

 Saskatchewan

 $0

 $163 million

 0%

 Alberta

 $897 million

 $579 million

 155%

 British Columbia

$1,461 million

 $717 million

 204%

 

There are many possible alternatives to the health premium. Reversing the Harris-era tax cuts would generate $15 billion more than the premium. Because other provincial governments also cut taxes during this era, some commentators would argue that it is unrealistic for Ontario to fully reverse the Harris tax cuts. However, simply setting Ontario income taxes at the average rate maintained by the other nine provinces would generate an additional $7.6 billion annually (120% of $24.8 billion is $29.7 billion, versus $22.1 billion actually collected).

 

Comparison of Provincial Income Taxes (Using 2005-06 Equalization Tables)

 Province

 Actual Revenue

Revenue at National Average Rate

 

Actual Revenue

Over Base

 Newfoundland

 $0.8 billion

 $0.5 billion

 154%

 PEI

 $0.2 billion

 $0.1 billion

 139%

 Nova Scotia

 $1.6 billion

 $1.2 billion

 135%

 New Brunswick

 $1.1 billion

 $0.8 billion

 130%

 Quebec

$14.2 billion

$11.0 billion

 129%

 Ontario

$22.1 billion

$24.8 billion

  89%

 Manitoba

 $1.9 billion

 $1.5 billion

 131%

 Saskatchewan

 $1.4 billion

 $1.2 billion

 120%

 Alberta

 $6.0 billion

 $7.4 billion

  81%

 British Columbia

 $6.1 billion

 $6.9 billion

  89%

 Non-ON Average

 NA

 NA

 120%

 

Currently, Ontario’s highest provincial income tax bracket begins at only $71,000. Establishing another tax bracket for income over $100,000 would generate more revenue without affecting the 95% of Ontarians who earn less than that. However, modestly higher income taxes for at least some of the bottom 95% would be needed to collect the full $7.6 billion annually.  In any case, it is possible to raise far more revenue in a far more progressive manner than the Ontario Health Premium.

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Comments

Comment from Lee Ritchie
Time: August 27, 2008, 7:34 am

obviously the author does not live in poverty. i certainly couldn’t imagine paying more taxes than what i do now. i barely manage to make ends meet as it is.

Comment from Kingston
Time: October 10, 2008, 8:59 am

I personally like the idea of increasing taxes for the higher income bracket. With our economy struggling this will have raise the money needed and decrease the burden for lower income families.

Comment from Tony
Time: October 13, 2008, 5:38 pm

Some good points, but a lot of misguided thoughts as well. First off, the Health Premium is GARBAGE. It’s a terrible tax in every possible way. It’s overly complex (meaning wasted money to administer it and to pay accountants to do our taxes), it hurts income which is the worst place to tax in terms of hurting the economy and it manages to actually be both progressive and regressive at the same time (the marginal tax rate peaks for people earning $48,000). It’s also not indexed to inflation and is therefore increasing every year due to ‘bracket creep’.

The solution for it is dead simple: harmonize the GST and PST. This will bring in approximately $2.5 to $3B more in revenue for Ontario, it will dramatically reduce administrative costs (the Feds will foot the bill, helping with McGuinty’s supposed $20B ‘gap’ in funding), it will help business by eliminated extra waste of dealing with two sales taxes applied differently to different things, and it will help the economy by moving away from the most damaging income taxes toward less damaging sales taxes.

However, that being said, the rest of Ontario’s income tax system needs a top-to-bottom overhaul as well. Ontario actually has FIVE separate tax brackets already, adding a sixth is absolutely NOT the answer! We have 3 ‘natural’ tax brackets and then two ‘artificial’ tax brackets through the absolutely stupidity of two surtaxes.

Everyone likes to scream ‘tax the rich’…. that is until the rich realize that they aren’t making any money and they pack up and move to another jurisdiction and… oops.. turns out the rich were the people that owned and operated the companies we work for and without them we’re all out of a job. No, more tax on the rich is not the answer. Besides, the top tax rate that kicks in at about $75,000 in Ontario is already 3rd highest in the country, only NB and NS have higher top tax rates and their top bracket doesn’t start until $93,000 and $113,000 respectively, and neither have a Health Premium on top of that.

Long story short, the rich in Ontario are already the highest taxed of any Province in Canada.

Here’s some REAL solutions:

1. Harmonize GST and PST as mentioned above

2. Eliminate the useless Health Premium, if you need more funds, get them through the existing tax system, not a whole new extra tax.

3. Eliminate the surtaxes, tax on tax is just wrong on principle.

4. Raise our personal exemption. We start paying taxes at about $8600. We have poor people paying thousands in taxes only to be given thousands back in social assistance. Take money away with the right only to give it back with the left, all the while wasting 50% along the way because it has to go through a dozen government departments.

Personal exemption should be at least $15,000.

5. Set up 2 tax brackets, one for $15,000 to $50,000 at 10%, the next at $50,000+ at 15%. Index the brackets to inflation.

6. Implement a carbon tax, starting at $10/tonne and raising to $40/tonne. Harmonize with the Feds. if they implement one. Replace ALL the mish-mash of excise taxes on fossil fuels with this one, all-encompassing carbon tax. After hitting $40/tonne, index to inflation.

7. Quit wasting money by throwing targeted government funds at large corporations.

8. Cut corporate tax rates from the current 14% general/12% manufacturing to a flat rate of 10%.

Implement these 8 steps and Ontario will have the funds it needs for programs AND it will become an economic powerhouse. Sadly in the last Ontario Provincial election only the Green Party proposed even half of these changes, and they didn’t win any seats despite the strength of their platform.

Comment from Waterloo
Time: January 26, 2009, 1:22 pm

I know you are talking on a macro scale. On a personal level, however, the premium is unfair because even if one is not eligible for any coverage by OHIP still has to pay this premium. That means, among other categories, international graduate students still have to pay this premium from their pocket despite their income is mainly (over 75%) going towards tuition.

This is unfair!

Comment from unTax
Time: February 26, 2009, 8:03 pm

Why doesn’t anyone protest the raising of MPP salaries on the one hand when we have a huge “gap” in funding in the province. Why is McGuinty and his croonies not talking about reducing wasteful spending in government.

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