Thursday, 5 November 2020

Mending payroll tax


Tasmania’s state budget next week is a wake-up call that our tax system won’t deliver the revenue we need.

Even before COVID-19 the budget was in trouble. For the past three years, spending has exceeded receipts despite a relentless pattern of infrastructure deferrals and underfunding of crucial services.

The recent federal budget sent a clear message that the Feds were content to leave states to fend for themselves whilst they pursued their own plans to direct most budget assistance to private businesses to resurrect the flailing economy.

Encouraging businesses to buy new plant and equipment is ill directed when existing plant is idle due to insufficient demand. A lot of new plant will be labour-saving and sourced from overseas. The stimulus effects will be muted. The jobs recovery is premised on shaky assumptions.

Lower personal taxes are also seen as the way for people to spend more with local businesses. Unfortunately, this misses the crucial point that what a lot of people would prefer is more public goods, like better health, aged care and social housing. Not only that but more jobs will eventuate as the multiplier effects are superior.

All states are facing similar revenue shortfalls. Payroll tax is the largest contributor to states’ taxation revenue, comprising about one-third. The origins, history and the underlying rationale of payroll tax have largely been forgotten as it has evolved to only apply to larger employers at a higher rate.

To make matters worse, the taxable base now includes superannuation contributions as well as ordinary labour remuneration.

If payroll tax is a disincentive to employ, as most people believe, it’s only because a fair and efficient tax has been spoiled by policymakers. It is not a coincidence that the voluminous 2010 Henry Tax Report included payroll tax in the chapter on Consumption Taxes. Despite using labour income as its tax base, a uniform tax on all labour income is a pre-consumption tax. As a tax it is more closely related to GST than most people think. With a low rate it would be fair and efficient.

The way to achieve this is to replace the current eight separate payroll tax collection systems across states and territories with a uniform levy on labour income via the Australian Taxation Office. The Single Touch Payroll system would be an easy way, with few tweaks needed, to collect a levy to be divided in accordance with the relativities for payroll tax already calculated by the Commonwealth Grants Commission as part of the GST split. Tasmania collects less payroll tax than the national average due to lower payrolls. We have about 2 per cent of the nation’s population but currently collect only about 1.4 per cent of the nation’s payroll tax. We would therefore receive 1.4 per cent of the uniform labour levy pool.

In 2018-2019 Tasmania raised about $350m in payroll tax out of a nationwide total of about $26bn. But if the levy were designed to raise say $35bn that would mean Tasmania’s share would be $490m, an increase of $140m. Just what the state needs. A levy of about 3 per cent on labour income would be required. What could be fairer than spreading the burden to include all employees including politicians and state public servants, rather than relying on a few larger businesses and their employees to carry the can.

The only labour income of any significance missing from the net would be some income from sole proprietorships, partnerships and trusts. The tax system currently distinguishes business income from non-business income. Applying the labour levy to a portion of business income received by individuals, say 50 per cent, would ensure most taxpayers were making equitable contributions to the state’s coffers.

Rather than the recent personal tax cuts and the future Stage 3 personal tax cuts of up to $130bn, the nation would get a much better bang for bucks by collecting a levy on taxpayers to fund much needed state government services.

Lifting payroll taxes from local government would provide a further $15m to spend in the Tasmanian community. Hobart City Council for instance would have another $4m to spend, Launceston about $2.5m.

It’s time to face reality. The current federal government is more concerned about its own survival than the other two levels of government which both need more revenue but are reluctant to do anything. Payroll tax is a large contributor. However, it is in serious need of an overhaul. Let’s fix it and get Tasmania moving.

(Published in The Mercury 5th November 2020)


  1. Another good article John.

    Never mind that most large businesses are capital rather than labour intensive, so the ideology of payroll tax makes even less sense. It is essentially a tax on capital not labour.

    Yes our tax system needs reform as Ken Henry made clear, but we also need political reform. Otherwise our democracy and Federation are in danger.


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