Written by Tom Cleary

Payroll tax is a rigid and inefficient tax as it currently stands, however it poses a significant, meaningful opportunity for future state governments to engage in meaningful, generational tax reform that will leave businesses and workers better off. The functionality of payroll tax is rather simple; if a business registered in NSW pays wages and salaries above $1.2 million to Australian workers, it is required to pay 5.45% on the balance of the wages. While some exemptions are in place, this applies to nearly every aspect of a business’s payments for their labour such as salaries, superannuation, contractors and apprentices. In the 2022-23 state budget, payroll tax contributed to $11.054 billion or approximately 27.8% of NSW revenue, making it quite a significant aspect of revenue.

Payroll tax in NSW has been met with criticism for many years. Those critics see payroll tax as an inefficient tax that places a burden on businesses, as it increases administration costs and reduces the ability of a business to hire more people or pay their existing workers greater. The Australian Chamber of Commerce and Industry (ACPI) argued in its submission to the Board of Taxation Review in 2014 that “payroll tax is not only one of the most damaging taxes in terms of its impact on economic activity, but it is also one of the most insidious given its low level of visibility… unlike Australia’s progressive tax system little is known about the distributional impact of payroll tax”.

Payroll tax, by its nature as a tax on labour, effectively punishes business owners for hiring workers and creating jobs. Businesses that would otherwise hire workers in any other situation may be turned off as a direct result of the tax burden that is associated with hiring them. Of the businesses that were surveyed by the ACPI on the impact of payroll tax in 2021, 90% of them either agreed or strongly agreed that payroll tax comes at the cost of jobs. In addition, the impact of payroll tax holds negative implications on young people. 

As mentioned before, the existence of payroll tax means businesses generally see themselves as limited in their opportunities to hire more people. With this in mind, this will ultimately mean lesser opportunities for more inexperienced people to gain employment, as businesses will make a decision to not hire younger and more inexperienced workers to give them some much-needed experience, instead preferring to employ those who are older and more experienced in order to maximise the productivity of their workers. In the same survey, just over 75% of businesses either agreed or strongly agreed that payroll tax makes it difficult for young people to enter the job market. 

To add further, payroll tax weakens the profitability of businesses. The impact of payroll tax, in addition to pre-existing federal company tax, minimises business profits and thus limits opportunities for expansion, re-investment, or creating more jobs through the hiring of extra workers. During shocks, these taxes place pressure on businesses as revenues decrease and can result in layoffs or the business closing altogether. However, unlike company tax which is dependent on business income, payroll tax in these scenarios remains constant as it is evaluated based upon a company’s workforce. A case of payroll tax placing pressure on businesses in this manner can be seen through the most recent major shock, being the pandemic, where over two thirds of businesses surveyed by the ACPI believed that the waiving and deferral of payroll tax by state and territory governments was a key factor in their survival. In NSW in particular, where payroll tax was temporarily decreased to 4.85% during the pandemic, it was argued that 36,000 businesses saved on average $34,000 for the duration of the pandemic.

Furthermore, it punishes workers. Not only is payroll tax a barrier to employment, as mentioned previously, but it leaves workers generally worse off. Critics argue that payroll tax is a ‘hidden income tax’ for workers as taxes need to be paid to the state government by the business that they work for for hiring them in the first place, instead of that money being given back to them in the form of higher wages. Ideologically, this makes sense with liberal principles, as it should be workers that are allowed to determine what they are allowed to do with their own money, rather than the state. This sentiment is shared with many in the business community, in the same study conducted by the ACPI in 2021, it was found that three-quarters of businesses indicated that removing payroll tax would lead to an increase in either the number or employees or wages.

The additional income which is negated by the impact of payroll tax can theoretically help boost consumption. The Henry Tax Review, which was published thirteen years ago, found that for every dollar raised from payroll tax, it caused a welfare loss to the broader economy of 40 cents.

Ideally, payroll tax should be reduced over a long period of time, with the intention of ultimately abolishing payroll tax altogether. Of course, considering payroll tax comprises a significant chunk of state revenue, alternate means of revenue will need to be considered. This could be implemented in a number of ways but should be primarily carried out through consumption-based taxes, this could include an increase in gambling tax, or an increase of the GST to a rate similar to that of New Zealand, which is currently at 15% without exemptions (by comparison, Australia’s GST is 10% with exemptions placed for basic foods, education, and health services), the revenues of which are generated through this increase will be distributed back to NSW.

In times of cost-of-living pressures and an impending recession, making the steps to reform payroll tax is necessary. Australian businesses and Australian workers deserve a better deal. Payroll tax reform will help to achieve just that.

Tom Cleary is the President of the Freedom Club and the Vice President of the Conservative Club.