Workers, not businesses, will ultimately pay B.C.’s new payroll health tax
A key policy announcement in B.C.’s 2018 budget is the elimination of Medical Services Premiums (MSP) in 2020 and introduction of a new payroll tax—the employer health tax (EHT).
Some claim this tax swap will lift the financial burden off individual British Columbians and place it on businesses. In reality, however, the new EHT will ultimately be borne by workers through lower pay.
The EHT will be implemented in 2019, one year before MSP premiums are eliminated. It will apply to businesses with annual payrolls of more than $500,000 and has a maximum tax rate of 1.95 per cent. The rate is phased in as a business’ annual payroll increases. And the maximum rate is applied to a business with a payroll of $1.5 million or more.
Again, superficially, replacing the MSP with the EHT makes it seem like workers will generally pay less, since businesses will directly pay the EHT. But who really pays the cost of a payroll tax?
A payroll tax increases the total cost of labour. Businesses can respond by reducing employment, accepting lower profits, passing the costs to customers, or shifting the costs to workers by reducing their wages or benefits.
Research on who actually incurs the costs of payroll taxes has consistently found that workers—not businesses—bear significant part of the tax burden, even if businesses are the ones who directly make the tax payments to the government.
Simply put, businesses look at payroll taxes as part of the overall compensation paid to their workers. As these tax costs are absorbed by businesses, there’s less money available for the wages and salaries of their employees. In other words, over time, worker compensation will not grow as fast as it otherwise would without a payroll tax. Therefore, workers ultimately pay a portion of the cost of a payroll tax such as the EHT—a finding confirmed by empirical research.
To understand the magnitude of the possible impact, a recent Fraser Institute study measured the impact of payroll tax hikes on worker wages. It found that a 1 per cent increase in the employer portion of payroll taxes is associated with a 0.03 per cent to 0.14 per cent reduction in the hourly wage rate. In dollar terms, this suggests that a one percentage-point increase in the un-weighted average combined employer-portion payroll tax rate (10.52 per cent) would translate into annual wages that are lower by between $137 and $605.
Bottom line: British Columbian workers will pay for the new employer health tax.