The free-market case for taxation of health and dental plans

Plans to tax employer-provided health and dental insurance may result in fairer distribution of medical coverage

The free-market case for taxation of health and dental plans
The upcoming federal budget is set to include a new plan to tax health and dental benefits enjoyed by employees. While the change could negatively impact millions of Canadians, it could be worth supporting from a free-market standpoint, according to a piece published by the Financial Post.

According to the commentary jointly written by Brian Lee Crowley and Sean Speer of the Macdonald-Laurier Institute, Canadians who receive health and dental insurance from their employers enjoy a considerable tax subsidy, while others must purchase insurance with after-tax income and limited government support.

This has resulted in roughly 40% of the population being forced to pay out-of-pocket for non-insured services. Out-of-pocket spending currently accounts for over $30 billion per year, or roughly 14% of total healthcare spending in Canada. The load is borne disproportionately by less affluent households, unattached individuals, and senior couples whose healthcare expenses take a bigger bite out of their disposable income.

“And it’s likely to get worse,” the pair said. “New research on job precariousness in Canada shows that fewer Canadians will be able to rely on long careers with a single employer or have access to auxiliary benefits such as workplace health insurance.”

The solution, according to them, is a tax swap. Revenues gained from taxing workplace health and dental insurance could be used to enable a refundable tax credit, which would defray the costs of buying private insurance.

“One such proposal, as suggested in a report last year from the Advisory Panel on Healthcare Innovation, is to provide an annual tax benefit of up to $750 for individuals with incomes less than $44,000 and up to $1,500 for families with incomes less than $89,000,” they said. “[H]ouseholds with incomes below $100,000 would be better off. The growing costs of out-of-pocket spending on health care could be slowed. And government policy would be better aligned with what Finance Minister Bill Morneau has called ‘job churn’ and the prospect of multiple careers and employers.”

The authors noted that the benefit depends on what the government actually does with the money. “Just grabbing the tax revenues would amount to a $3-billion tax hike on 13.5-million taxpayers that would ultimately lead to fewer Canadians having insurance and to more out-of-pocket spending on health care,” they said, citing the case in Quebec, where taxation of employer-provided insurance without a tax swap resulted in decreased workplace insurance and no corresponding increase in individually insurance.

“If the plan amounts to a tax grab, it’s a bad deal that Ottawa should send back to the drawing board,” they concluded.

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