Could a shift away from “payroll tax” make Queensland more competitive?
The tax is paid by employers based on the volume of wages paid to employees, and has long been accused of stifling growth in the business community.
It recently came under the spotlight again after Queensland’s Liberal National Party (LNP) State Council successfully carried a motion calling for the tax to be phased out.
The payroll tax in the state is currently 4.75 percent, rising to 4.95 percent for employers paying more than $6.5 million in Australian taxable wages.
While the motion is not binding, it is a sign of the general mood of the party’s key leaders, and something for the state government to consider.
But what would the impacts of removing the tax be?
No Incentive for Tax Change: Think Tank
Australian Institute for Progress executive director Graham Young supports the idea of abolition, arguing that payroll tax is like “income tax” but collected via businesses instead of individuals.“Much better to collect the tax directly from the person earning it,” he told The Epoch Times.
“And why bump up the cost of hiring someone just because you have a larger, more successful company?”
But Young says any policy changed is heavily dependent on the Commonwealth distribution of GST revenue.
“If you increase your tax take by increasing coal royalties, you will lose GST distributions, which will be shared by other states,” he said.
“The opposite is also true. If you cut your taxes, the Commonwealth Grants Commission will cut your GST distributions.
“It’s an Alice-through-the-looking-glass world federally, where if you try to do anything other than be average and borrow, you will be punished.
Federal Flynn MP Colin Boyce has campaigned against the Commonwealth’s “horizontal fiscal equalisation” formula used to balance the redistribution of GST revenue among states.
This redistribution can be contentious especially after Victoria was awarded a larger share last year because of its struggling economy—the result of government policy.
Boyce says Queensland is missing out on more than $2 billion annually, or about $600 per person, that could otherwise go to local hospitals, roads, and schools.
He has called on the state government to reconsider its royalty regime, which he says has cost mining jobs and investment, and has also seen the budgets of less productive states boosted through GST.
Economist Says Removing Payroll Tax Unlikely to Spur Growth
Economist Saul Eslake says abolishing payroll tax would “undoubtedly be popular” with business groups, who often label it a “tax on jobs.”However, he is unconvinced it would boost employment.
“Payroll tax is the largest single source of tax revenue for most Australian state governments, including Queensland,” he said.
“Abolishing it would require some other tax(es) to be increased, or a new tax to be introduced, which would almost certainly have some offsetting impact on employment.”
Eslake says that while all state and territory governments exempt small businesses from payroll tax to differing degrees, employment has grown more slowly (3.6 percent) with exempt businesses compared to medium or large entities—79.3 percent and 78.3 percent, respectively.
“The evidence suggests that payroll tax-free thresholds, ostensibly to ‘help’ small business, actually in practice encourage small businesses to keep their payrolls below the level at which they would become liable to pay payroll tax,” Eslake said.
He also rejects the “tax on jobs” label, comparing payroll tax to the GST.
“GST is effectively a tax on ‘value added’—mostly wages and profits—and yet no one says GST is a tax on jobs,” he said.
International Comparisons and Employment Impact
Another difference is that exports are exempt from GST, but not from payroll tax.“So there is no reason to think that abolishing payroll tax would make any difference to employment,” Eslake said.
He also notes that most advanced economies impose larger payroll-style taxes under the banner of social insurance contributions, without “any obvious adverse effects on employment.”
“Most other ‘advanced’ economies have much bigger payroll taxes than Australia—except that they don’t call them payroll taxes, they call them social security taxes in the U.S., or ‘social insurance contributions’ in Western Europe,” he said.
“And they account for a much larger proportion of government revenue than they do in Australia, without any obvious adverse effects on employment.”
