Small-business payroll tax hike 'unintended' result of Liberal EI pledge

The Liberal campaign pledge to cut employment insurance rates but not as much as the Conservatives would have could result in an unintended payroll tax hike for small employers, unlessa small-business job credit is renewed for 2017.

If Finance Minister Bill Morneau sticks to his party's campaign pledge, the EI premium paid by employers is expected to fall to $2.31 per $100 in wagesfrom$2.63, starting in 2017.

That's a significantly smaller cut than the Conservatives pledged in the2015 federal budget: theTories would have dropped premiums to $2.09 if re-elected.

The promised Conservative cut was to follow a two-year freeze in EI rates that ended up giving thenfinance minister Joe Oliver a tidy surplus to shore uphis bottom line.

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But in recognition of the extra cash available, Conservatives added a small-business job credit in 2015 and 2016 to refund roughly15 per cent of the employer premiums paid on payrolls under $500,000.

Under the Conservative plan, the job credit wasn't necessary after 2017, when all employers would payan even lower rate as the freeze lifted and EI rates adjusted according to a seven-year balancing formula.

But because the proposed Liberal EI premium cut is smaller, the new premium $2.31 per $100 in wages will actually be higher for 2017 than the $2.24 small businesses are paying in 2015 and 2016 once the small business job credit is factored in.

'Unintended consequence'

"If the government is very committed to job creation and economic stimulus, kind of the last thing you're going to want to do is raise effective EI rates for the smallest businesses in Canada," said Dan Kelly, the president of the Canadian Federation of Independent Business.

The CFIBwas generally unhappy about the Liberal campaign pledge and has been meeting with MPs and ministers during the pre-budget season to sound the alarm.

"We believe that that rate reduction is owed to employers and employees, so we are critical of that," Kelly told CBC News.

"We aren't, though, saying that the Liberals intended to raise rates for small firms. We actually think this is an unintended consequence of their other actions."

Most Liberals he spoke to were surprised, he said. "I'm optimistic that they'll look at this."

To remedy the situation, the CFIBproposes one of two things: an extension of the small-business job credit or a permanent lower EI premium rate for small employers.

During the campaign,Liberals said their plan would result in an extra $2 billionper year in revenue for the government. They also denied it was a tax hike in disguise.

Annie Donolo, a spokeswoman for Morneau, told CBC News on Friday thatit would be premature to speculate on measures that may or may not be included in the March 22 budget.

Stimulusor boutique payout?

Both Liberal and Conservative governments have introduced some form of small-business hiring or job credits to provide an economic boost to small employers.

Stephen Harper's government introduced a hiring credit for small businesses in 2011 and expandedit in 2013, to encourage employment after the economic downturn.

The small-business job credit they replaced it with for 2015 and 2016 was intendedto partially advance the EI premium cut.

Critics questioned the extent to which these credits stimulated economic growth, rather than being a small carrot for specific smallbusinesses.

It's difficult to isolate the role of job credits in economic growth, Kelly said. But surveys his organization conducts suggestthe payroll premiums employers owefor things like EI and the Canada Pension Plandoinfluence their staffing decisions.

"Payroll taxes have a very direct impact on the number of employees and the salaries that are paid to jobs. And even unions would admit that employees end up paying the burden of payroll taxes through lower wages, fewer hoursor fewer jobs," he said.

A study prepared for Employment and Social Development Canadaonthe effectiveness of thehiring credit found that in 2011, 61per cent of all businesses in Canada were eligible.Roughly 56 per cent employed five or fewer staff.

Small and new businesses were more likely to trigger the credit, which was based on an employer increasing its payroll year over year.The average tax relief was$386 per recipient business, or roughly 15 per cent of the premiums paid. Thetotal program cost was$208 million.

More than just businesses gettingrefunds

The small business job credit introduced for 2015 and 2016offered a simpler 15 per cent premium rate cut across the board to all smallemployers.

"A credit isn't just about job creation,"Kelly said. "It does have the same effect if a job that might have disappeared sticks around. Or instead of cutting wages the employer is able to keep them at the current level."

But the administrationof thesetax credits makes it difficult to target only certain employers' payrolls.

Both of the previous Conservative government'scredits helped all small employers, not just those claiming business income and generating economic activity.

Not-for-profit organizations such as charities, as well as individuals who employed domestic help, for example, also received money back from the government.