Unfair exemptions to employer health tax cost province $2.4 billion annually

Focused on austerity, the government appears to be ignoring tax policies that have the potential to bring in billions to the provincial treasury.

The ruthless slashing of public sector funding – including the current freeze on base funding to Ontario’s hospitals – appears to be more ideologically based than on sound economic policy.

As we have previously noted, cutting public spending also creates a fiscal drag on the economy. Public sector workers spend their earnings in the community, generating economic activity. When government puts the squeeze on them, it puts the squeeze on everybody by reducing economic growth.

We have seen how both the Harris and McGuinty governments reduced revenues by slashing the corporate tax rate. Less discussed are substantial exemptions to the Employer Health Tax (EHT), introduced in the late 1980s to replace the previous OHIP premiums.

When the EHT was introduced, it featured a graduated rate structure – the only one of its kind in Canada. For employers with annual payrolls of less than $200,000, the rate was 0.98 per cent. For employers with more than $400,000 in payroll, the rate increased to 1.95 per cent.

In the late 1990s the Harris government changed the structure again, giving a blanket exemption on the first $400,000 of payroll. Pitched as an assist to small business, the majority of the benefit – 54 per cent – went to larger businesses, or those in excess of $400,000 in payroll.

Late last year economist Hugh Mackenzie prepared a paper for the Ontario Health Coalition, showing this exemption cost the provincial treasury $2.33 billion in 2009-10. The cumulative effect from both the initial exemptions and the broader Tory exemptions to the EHT amounts to a whopping $33 billion from 1990-91 to 2009-10. That would put a sizeable dent in the provincial debt.

Mackenzie argues that as an assist to small business,  the EHT exemption was a poorly targeted one. Payroll is a poor indicator of the size of a business. The economist notes, for example, a business which contracts out a significant portion of its work and which pays its owners in the form of dividends could easily qualify as a small business for EHT purposes. He says professional practices also routinely structure themselves so that support staff are technically employed by a single purpose corporation owned by the partners. Lawyers, doctors and other professionals could be exempt from the tax under these rules.

Public Medicare is a huge cost advantage to Canadian business, yet the portion paid by the EHT has been sliding. When it was first introduced, the EHT covered 17 per cent of health care costs. By 2008-09 it was down to 13 per cent.

While simply eliminating the exemption would immediately raise about $2.4 billion, Mackenzie also models what it would look like with a modest increase to 2.5 per cent from 1.98 per cent. Combined with an elimination of the exemption on the first $400,000, it would have raised $4.3 billion more in 2008-09 and brought business contribution back up to 17 per cent. Last year Ontario finished the year with a $13 billion deficit. Had this modest plan been put in place, it would have reduced that deficit by about a third.

A simple and modest tax reform that would bring in a minimum of $2.4 billion annually is something Ontario Finance Minister Dwight Duncan should be looking at instead of making citizens wait even longer for basic health services.

6 responses to “Unfair exemptions to employer health tax cost province $2.4 billion annually

  1. This exemption also benefits many non-profit organizations – in fact many developmental service organizations with multiple sites are able to use each site separately and get multiple exemptions – thereby freeing up dollars for services. In addition small business is one of the few areas actually creating jobs in Ontario. Eliminating and increasing the exemption would do more harm than good – both to your members and to small business.

  2. The catch-22 is these non-profit agencies also rely on funding from the province, which is forfeiting this money that could better support such agencies. Hugh Mackenzie does note that it is mostly large businesses that benefit since everyone get the exemption on the first $400,000 in payroll.

  3. These arguments for EHT taxes are repressive. Taxing business is the best way to destroy the economy. Hidden taxes are lame. The Socialist argument that the taxes are then spent on government employees who in turn spend that money is a zero end game – one only need look at the full sweepping effect to understand why (if you don’t have the luxury of taking economics). 100% taxes mean everything goes to the government, the businesses cease operation and the government therefore ceases to function with no revenue to tax. Where do you stop? 80% taxes will give you the same result. Yet if we want to the opposite end of the spectrum and 0% corporate tax, government still functions and the businesses are free to expand, hire people and those people pay income tax. There is a balance. But take too much and you start to see the collapse of the labour market and a decrease in tax revenue – you will see the flight of job growth to places where business can better operate like Mexico. Freedom is so important to keep taxation in check. But the most important thing a government has to do is balance the budget, stop postphoning tax cuts reduce the size of Federal and Provincial government who spend faceless tax victims money and increase the size of regional government whose representatives spend your money right in front of you.

  4. Some people believe all taxes are unfair, that is until they show up at a hospital desperately needing help. Business taxes in Ontario are already the lowest among neighbouring jurisdictions. What did businesses do with the additional money? They didn’t pay it to shareholders. They didn’t “expand, hire people,” as you say. They horded it. The problem of “dead money” is even greater in Canada than the U.S. It’s stifling our economy, not contributing to it. We’ve been to those other places and have seen the hell capitalists are willing to force people to work in to move from “misery to poverty.” Those people do not have the “freedom” you like to talk about. Neither do increasingly numbers of people struggling to get by here. The prescription you talk about — reducing taxes on business — have accomplished one thing — widening the gap between rich and poor and seriously damaged the world economy.

    • Some people do think all taxes are unfair, but there are, I’m sure, very few who actually do.

      You are right, business taxes in Ontario are favourable compared to surrounding jurisdictions.

      Not sure where you are getting your information that companies in general are hording money. There are always many examples of companies sitting on cash, there always is. A company has only two purposes for storing excess cash, one is reinvestment in the pursuit of profit, the other is to pay out shareholders.

      Not sure what you mean by “hell capitalists are willing to force people to work in to move from misery to poverty,” you are suggesting that capitalism raised people to poverty from misery… sounds like a good thing, but sounds like you are saying it’s a bad thing going from very bad to bad.

      Anyway, my friend, there is a balance in taxation and I can assure you over time that the balance is at a much lower tax level than it is today and application of tax funds is much better served in smaller regions, like municipalities and counties than it is with big government.

      And never forget that government doesn’t exist without capitalism, but capitalism will still exist without government. The issue at hand is that government itself permits capitalism to operate. When people stop realizing this, and so many uneducated people don’t understand the association, is when we get into trouble. Is government greed worse than capitalist greed?

  5. What is government greed? People getting access to health care and education? Having someone inspect the food supply so you are not buying tainted meat? Having municipalities plow the snow in winter and maintain the roads in summer? Public transit? Your example of capitalism existing without government — would you really want to live in Somalia right now? That’s your perfect example of capitalism without government. They haven’t had a government there since in the 1990s. I doubt very much you would want to move there. The managers of the factory we met with Nicaragua will tell you about the impact of savage capitalism, where workers are caught in a spiral of ever declining wages and working conditions, where a 50 hour work week will not even come close to sustaining your family. Have you forgotten the recent tragedy in Bangladesh already? Clearly we can aspire to better than that and there is a role for government, and that role requires taxes to be effective. You admit that taxes are comparatively low, but still say they are too high. Compared to what? Doesn’t the state already subsidize business by educating workers, by providing health care, by providing a modern infrastructure to do business in? Stop providing those things, and businesses will certainly be there at the table demanding those things — paid by someone else. Did you know that more than one dollar in three of government spending is done directly in the private sector? You cut government spending, you cut private sector income too. Regarding dead money, see http://www.theglobeandmail.com/report-on-business/economy/free-up-dead-money-carney-exhorts-corporate-canada/article4493091/

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