BC Election Series: MSP Premium Commitments and the potential for 55% Personal Income Tax Rates

This is the second in a series of policy staff blogs on the platforms released by the three main parties contesting the current BC election: the BC Liberals, the NDP, and the Greens.

For a cross-platform comparison of the three parties' election commitments, check out our summary document.

Blog 2: MSP Premiums and Future Personal Income Taxes in BC

All three parties contesting the May 9 election have made significant promises in respect of Medical Services Plan (MSP) premiums.

In Budget 2017, the Liberal government proposed to lower premiums by 50% for people with annual household incomes up to $120,000, effective January 1, 2018. The NDP and the Greens have gone further, pledging to fully phase out MSP premiums by the end of the next government’s mandate. The Liberals also say they’d like to eliminate premiums over time, but have not specified a timeline for doing so.

The NDP and the Greens say they would replace the revenue lost from scrapping MSP premiums by looking to some combination of personal and payroll tax. Specifically, the Greens’ platform speaks of rolling MSP premiums “…into the payroll tax and personal income tax to ensure that they are administered in a more equitable and progressive manner” (p. 74). The New Democrats intend to establish a “non-partisan MSP Elimination Panel…[to]advise on how to protect health care funding, while phasing out this unfair flat tax” (p. 12). In devising something to replace MSP premiums as a revenue source, the Panel “will be required to ensure low and middle income families come out ahead.” From this statement we may infer that an NDP government would not increase personal income taxes on an across-the-board basis, but instead target any increases at the upper portion of the income distribution.

BC Government Revenue from MSP Premiums
2010-11	$1.78 billion
2011-12	$1.92 billion
2012-13	$2.05 billion
2013-14	$2.16 billion
2014-15	$2.25 billion
2015-16	$2.43 billion
2016-17	$2.53 billion
2017-18	$2.32 billion*
2018-19	$1.72 billion*
* Based on Budget 2017 proposal to reduce premiums by 50% as of January 2018.

As MSP premiums have risen over time, they have grown to become an important revenue source. Last year (2016-17), the government collected $2.5 billion in premiums. In 2010-11, the figure was slightly less than $1.8 billion. By 2016-17, MSP premiums were generating almost the same amount of money as business income tax and equalled 26% of all personal income tax collected by the province.

The Liberals’ plan to slice MSP premiums in half next year will cost the government about $810 million in foregone revenue by 2018-19. The fiscal plan tabled in Budget 2017 took this revenue loss into account. As noted, like the other parties the Liberals have spoken about phasing out remaining MSP premiums but they have made no definitive commitment to doing so. In contrast, the NDP and the Green Party platforms propose eliminating premiums within four years. This means that a government run by either of these parties would face an annual financial shortfall approaching $2 billion by 2020, solely as a consequence of getting rid of MSP premiums.

How might this revenue hole be filled?

In truth, we don’t know. It’s impossible to say precisely what a future government would do. But we can provide some informed speculation.

Because the NDP and the Green platforms voice strong support for more “progressive” tax policies – i.e., shifting a larger share of the overall provincial tax burden to taxpayers with above-average incomes – a plausible working assumption is that all or the bulk of the revenue foregone by doing away with MSP premiums would be recouped via higher taxes that fall on the top 30%, 20% or 10% of BC taxpayers.

How would this translate into the tax rates facing highly skilled workers in BC -- managers, professionals, entrepreneurs and researchers? Our back-of-the-envelope estimates suggest that top combined federal-provincial marginal tax rates on upper-income earners, which stand at 47.7% today, could easily climb to 55-56% (or more) under the tax plans contemplated by the New Democrats and the Greens. This includes higher income taxes stemming from the elimination of all MSP premiums, as well as promises that both parties have made to boost tax rates for higher income earners separate from future decisions on MSP premiums. The NDP, for example, has pledged to legislate a new, higher tax bracket for individuals with incomes of $150,000 and above. The Greens, for their part, envisage phased increases in income tax rates for people earning over $108,460 a year, starting in 2017-18 and extending through 2020-21 (see pages 73 and 77 of the Green platform document). So even before a future government considered higher income taxes to offset the loss of MSP premium revenue, BC’s top marginal tax rate would almost certainly have been pushed up to 50% or more.

At a time when talent and entrepreneurial skills are at the heart of what it takes to build a competitive, knowledge-driven economy, this strikes us as a risky policy direction. This is especially true when policy-makers in the United States are considering significant reductions in personal income tax rates – rates that, in most American states, are already lower than those in BC and other parts of Canada.

To develop a top-performing economy, British Columbia needs more high-paying jobs, more fast-growing firms, more exporters, a larger number of corporate head offices, and a stepped up pace of innovation. All of these things will be much harder to achieve if BC becomes known as a jurisdiction that imposes punitive tax rates on the most productive segments of the working population.