MSP premiums

A really dumb tax
May 1, 2002

As the hefty increases in monthly Medical Services Plan premiums officially take effect today (May 1) for most British Columbians, we should pause and reflect on how dumb a tax medicare premiums really are.

Most provinces raise the money they need for medicare from general tax revenues, primarily provincial income taxes that are based on taxpayers' ability to pay (and in some cases, such as Ontario, on an employer payroll tax). Only BC and Alberta continue to buck the trend with individual premiums--unconvinced by arguments that have proven to be compelling in every other province.

Premiums may not be the dumbest form of taxation ever visited on Canadians, but they certainly are near the top of the list. Here's why.

First and foremost, premiums are a regressive form of taxation that favours the rich and punishes the not-so-rich. Under the new BC rates, a family of three or more that doesn't qualify for premium assistance pays $108 a month or $1,296 a year regardless of income. A family of three with net income of $33,000 pays the same flat fee as a family with net income of $1 million. The $1,296 works out to 3.9 percent of net income for the family struggling to make ends meet and 0.1 percent for the millionaire family.

The increases in premiums are particularly galling because the Liberal government's "dramatic" cuts in provincial income taxes last year turned out to be much more dramatic for the rich than for the poor. The increase in family premiums is $432 a year--the same or more than the income tax savings for anyone making $30,000 or less.

MSP hikes also increase inequality in another way. People who have steady jobs with decent pay are more likely to have their employers pick up the tab for MSP premiums. People with unstable and low-paying jobs are more likely to be stuck paying MSP premiums out of their own pockets.

Moreover, many of the employers who do cover MSP premiums for their employees are public sector employers--municipalities, health boards, school boards and post-secondary institutions. These lower levels of government and institutions have just been hit with a huge new expense. In effect, the province is clawing back some of the money it gave them in the first instance.

Bad as premiums are, they would be even worse without the complicated system of premium assistance that eases the burden on the poor. Families or single people with "adjusted net income" below $24,000 can get a break on their premiums or have them eliminated altogether. Adjusted net income is net income minus a variety of personal deductions allowed by the Medical Services Plan for calculating premium assistance.

However, the assistance system is not all that simple or all that fair. There are five levels of assistance ranging from 100 percent to 20 percent. Each level has a fixed rate, and there are "notches" between the levels. A family of three or more with adjusted net income under $16,000 - let's say $15,999 to take the most extreme example possible - gets premium assistance of 100 percent. A family with adjusted net income of $16,001 gets 80 percent assistance, but has to pay $21.60 a month or $259.20 a year. That's a huge tax penalty for a mere two dollars of additional income.

Premium assistance is based on income as verified by the Canada Customs and Revenue Agency from its tax records for the preceding one or two years. For people in changing financial circumstances because of job changes or job losses, retirement, illness, maternity leave and the like, current premium obligations are likely to be out of sync with their current financial realities. The income tax system largely avoids this problem by making income tax deductions at source from payroll cheques or pension cheques that are indicative of current income - not income one or two years earlier.

And then there are the administrative burdens and overhead costs associated with both collecting premiums and running the premium assistance program. There are roughly 1.7 million family units in BC, and that means roughly 1.7 million MSP accounts to keep tabs on month after month. Governments in BC both past and present just can't fathom the idea that having a sizeable administration to handle MSP premiums and premium assistance may not be the most efficient use of public resources. Surely we could find better, easier and fairer ways of supporting vital public programs like medicare.

Steve Kerstetter is a freelance social policy consultant in Vancouver and a research associate of the BC Office of the Canadian Centre for Policy Alternatives.