The former South Australian Government's 2019 reform to remove payroll tax for small businesses has produced some perverse consequences, preventing firms from growing and reducing jobs and wages, new research by the e61 Institute has found.
To provide payroll tax relief to small businesses, South Australia increased the tax-free threshold from $600,000 to $1.5m, with the marginal tax rate increasing steeply beyond that.
This resulted in companies “bunching’ just below the $1.5m threshold. After the change, the number of companies with payrolls between $1.35m and $1.5m increased by 21%.
Meanwhile, the number of firms with payrolls between $1.5m and $1.65m decreased by 18%.
Of the extra firms that bunched below the threshold, 34.5% had cut their wage bills while 31% had stopped growing. The other 34.5% of firms had not been growing prior to the change.
The businesses that slashed their wage bills decreased their payrolls by $5.9m overall, roughly $52,500 per firm. This significantly outweighed the increase of $3.5m - or $2,500 per firm - of smaller businesses’ payrolls, who paid less tax as a result of the reform. This equalled a net wages reduction of $2.4m.
“South Australia’s decision to cut payroll taxes for small businesses appears to have created a barrier to firm growth,” said e61 Research Economist Rachel Lee.
“Many of the firms that bunched just below the tax-free threshold were growing firms that likely would have crossed the threshold if not for the policy change.
“These small, growing firms are the ones that do the most to drive aggregate job creation and innovation in the economy.
“Our findings highlight that firms do respond to changes in payroll tax rates and that in some cases, providing protections to small businesses can be costly to firm growth.”
The South Australian government reformed payroll tax in 2019 by increasing the tax-free threshold from $600k to $1.5m, maintaining the maximum deduction at $600,000 and creating a variable rate from 0% to 4.95% for payrolls between $1.5m and $1.7m. The payroll tax rate for larger businesses - those with payrolls above $1.7m - was unchanged at 4.95%.
The combination of the new tax rate schedule and the maximum deduction entitlement remaining unchanged at $600k meant that the effective marginal payroll tax rate increased from 4.95% to roughly 27% for firms with payroll between $1.5m and $1.7m.
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Charlie Moore: 0452 606 171