Cutting taxes on maternity/parental EI leave sounds great, but proposals by both Liberals and Conservatives would help high earners most of all.
In the lead up to the 2019 federal election, poll after poll has pointed to affordability as a top concern among Canadians. As such, many policy ideas have been proposed to address this key concern.
Among the proposals, the Conservative Party of Canada and the Liberal Party of Canada have put forward plans to reduce the amount of tax paid by new parents on their Employment Insurance (EI) benefits. The Liberals are proposing to make it tax exempt at source (so parents never pay any tax on their maternity/parental EI benefit), while the Conservatives are planning to introduce a non-refundable tax credit (so parents can claim back what they paid when they tax file). Both plans would cost $1 billion a year.
While the idea of providing greater support to new parents sounds like a good policy goal, a closer look shows that both proposals fall short of good public policy.
The problems start with using maternity/parental EI as the basis for the proposed tax exemption or non-refundable tax credit (depending on the party). To claim maternity/parental EI benefits, a new parent outside of Quebec must have accumulated at least 600 insured hours of work in the previous year, which is about 86 full-time work days. (New parents in Quebec would also be eligible for the proposed tax credit, though the province has a separate system of maternity and parental leave benefits, the Quebec Parental Insurance Plan).
There are certain workers, however, who contribute to EI, but who do not have enough hours to qualify for maternity/parental EI benefits. This includes those who are arguably most in need of EI benefits, such as people working part-time or the precariously employed. Around 30 percent of mothers with newborns do not qualify for maternity/parental EI benefits. Often, these families have lower incomes.
Among those who do receive maternity/parental EI benefits, the amount they can receive increases as their insured earnings rise. In 2019, the maximum maternity/parental EI benefit a new parent could receive was $28,095, or 55 percent of the worker’s earnings, whichever is lower. However, as women’s average earnings were $37,000 in 2017, a new mom with average employment earnings would get about $20,000 in EI maternity/parental leave benefits.
Anyone receiving an EI maternity/parental leave benefit in a tax year with no other income would have to pay 15 percent of the benefit amount in taxes. In that case, these two proposals would mean that a family could receive a tax exemption or tax credit of up to $4,214.
It’s important to remember lower-income families would not receive this much even if they were to qualify for EI maternity/parental leave benefits. Below, in table 1, we show how much new parents could receive through either proposal, based on their income. An analysis by Jennifer Robson at Carleton University shows that under the current tax rate structure, a quarter of families receiving maternal/parental EI earn less than $32,867 before starting leave. This means a quarter of new parents would qualify for no more than $2,609 from the proposed policies. Meanwhile, the maximum benefit of $4,214 would be available only to those earning over $53,100 before starting leave and with no other sources of income during their leave (employer top-ups, for example). If the Conservative Party were to also implement its Universal Tax Cut proposal, the maximum tax credit amount would be lower.
Not only do both Liberal and Conservative proposals fail to provide any help to the 30 percent of mothers who do not qualify for maternity/parental EI benefits, they also provide the biggest financial support to those who have the highest earnings prior to having children.
But there is a crucial difference between the two proposals. Table 1 shows the full tax exemption amounts a family could receive under the Liberal plan. But they represent a maximum under the Conservative plan. Because the Conservative plan would be delivered as a non-refundable tax credit, the amount received could end up being lower.
Non-refundable tax credits can only lower one’s tax liability to zero. This means that if a new parent qualifies for a tax credit of $3,000 but only owes $1,000 in federal taxes, that person would receive only $1,000. You won’t get the other $2,000. If your federal taxes owing is $0, this non-refundable credit would not help you, whereas a refundable credit would. Under the Liberal plan, when the tax exemption is applied at source, the amount received is not affected by how much tax a family owes at the end of the year.
These are technical but fundamental differences. For years, social programs and benefits have been designed by stealth. As Ken Battle, a leading social policy thinker, has written, “technical amendments to taxes and transfers… are as difficult to explain as they are to understand and thus largely escape media scrutiny and public attention.” The proposals sound great, but a deeper dive shows that they might not benefit people quite in the way it is assumed they will.
To the Liberals’ credit, their EI maternity/parental benefit proposal has been accompanied by a more progressive one: the party is proposing a 15 percent boost to the Canada Child Benefit (CCB) for families with children under one. The CCB is a refundable tax credit (which means that an eligible family will get the benefit whether they owe taxes or not). By increasing the CCB for families with children under one, even families with lower incomes would benefit regardless of tax liability or EI eligibility.
The Liberals have also promised to provide adoptive parents with 15 weeks of maternity leave, and introduce a Guaranteed Paid Family Leave — a new program to support new parents who do not meet the qualifying criteria for EI maternity/parental leave benefits. But the details on the latter proposal are thin, and as we have shown here, it’s the details that really matter. In particular, we do not yet know how much these other policies will cost. The EI proposals alone (as put forward by both the Conservatives and the Liberals) will cost approximately $1 billion a year.
Ultimately, what might make for good politics in this election period might not make for good policy. As policies and their impacts often outlast the governments that make them, the imperative to dig deeper and go beyond political sound bites is that much more important.
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