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)

 

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)

 

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.