Average workers will ultimately pay for Horgan government's new payroll tax

In a recent news release, B.C. Finance Minister Carole James called Medical Services Plan (MSP) premiums “unfair” and argued her government’s new replacement Employer Health Tax (EHT) is a “much fairer and progressive approach.” More broadly, the Horgan government’s rhetoric about the new tax suggests it will push the burden onto employers and away from workers.

In reality, the new EHT, like the MSP premiums it’s supposed to replace, will cost average British Columbians—in the form of reduced wages and job opportunities. And will further erode the province’s investment climate.

Beginning in January 2019, the new EHT will be levied on employers with payrolls over $500,000. The tax, which increases with an employer’s payroll costs, is expected to generate almost $2 billion of annual revenue in 2019/20. It will replace the revenue from MSP premiums, which are currently being phased out (although for 2019, both the MSP and EHT will be in force at the same time creating a taxation double whammy).

Just because employers will pay the tax on behalf of their employees, it doesn’t mean that employees won’t pay the tax. They will—and here’s why.

Employers view payroll taxes as part of the overall compensation paid to workers. As these taxes increase, there’s less money available for the wages and benefits for employees and investments in innovation, expansion and tools that improve worker productivity. Therefore, over time, wages will not grow as fast as they would otherwise without a payroll tax. So workers ultimately bear the cost of payroll taxes through reduced pay.

This logic has considerable empirical support. A recent Fraser Institute study analyzed data on payroll taxes and average wages and found that increasing the employer payroll tax rate reduces the average hourly wage of workers. Based on the results, just a one percentage point increase in the average payroll tax rate would reduce annual wages by between $137 and $605.

This is not the only Canadian-based study to come to such a conclusion. Economists based at HEC Montréal similarly found that “payroll taxes are passed almost entirely to workers in the form of lower wages.”

Moreover, in a review entitled “Payroll taxes: Killers of jobs, killers of wages,” leading labour economist and University of Toronto professor Morley Gunderson summarized the evidence on payroll taxes as follows: “much of the burden of the payroll tax—evidence suggests approximately 80 percent—is ultimately shifted to labour in the form of lower wages even if it initially is ‘paid for’ by employers. This is especially true for lower wage workers, who are less skilled and are not sufficiently mobile to ‘escape’ the tax. Thus, the appeal of taxing rich corporations through a payroll tax is based largely on a false image.”

Gunderson also notes it takes time for employers to shift the tax burden to labour, so in the intervening period, they may respond to higher labour costs induced by the tax by reducing employment and output.

Finally, another problem with B.C.’s new EHT is that it’s yet another tax rate hike by this government, on top of higher taxes on personal income, corporate income and the carbon tax. Put differently, the EHT is another blow to B.C.’s competitiveness and will send more negative signals to investors and entrepreneurs that the province is not an attractive place to invest.

Even the Horgan government’s own MSP task force warned against using a payroll tax to replace MSP premiums, noting that: “A payroll tax would reduce the competiveness of B.C. businesses at a time when they are facing several competiveness challenges, including expected increases to the minimum wage, CPP [tax] increases, and recent tax reform in the U.S. which improve the competitive position of many U.S. businesses.”

Bottom line—when the new EHT is implemented in January, B.C.’s competitiveness will take another hit and ordinary workers will ultimately foot the bill.