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Tories' New Tax Credit Slammed As 'Job Killer'

It took very little time for the Small Business Job Credit, announced by the Conservative government on Thursday, to start attracting negative attention.

Many economists say the move will do little to spur hiring — and may in fact prevent it.

The tax credit reduces the Employment Insurance premiums that small employers pay. (It doesn’t change the premiums that workers pay.) For the next two years, businesses that pay less than $15,000 in annual premiums will see their premiums reduced to $1.60 for every $100 earned, down from the current $1.88. By one estimate, this will mostly apply to companies with 20 or fewer workers.

Finance Minister Joe Oliver says this will reduce the EI burden on small businesses by $550 million a year and will therefore spur job creation.

But many economists disagree. The main problem, they say, is that the tax credit applies only to small businesses. That creates a disincentive for small businesses to expand employment, because adding to the payroll would mean losing the tax credit.

“Say you’re a business just over the $550,000 payroll cap. Why not just fire your summer student or cut back her hours to get yourself under the cap? Your reward for firing a student ... a tax break!” writes David Macdonald, a senior economist at the Canadian Centre for Policy Alternatives.

Both Macdonald and Laval University economic prof Stephen Gordon point to the Finance Department’s own research to show that small business tax breaks cause businesses to stop hiring just below the cut-off for the tax break.

The chart below shows the number of small businesses “bunching up” just below the cut-off for a small business tax break. Economists sometimes call this a “taxation wall.”

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“Once again, instead of simply reducing EI contribution rates, the Conservatives have created yet another boutique tax credit,” Gordon writes at Macleans.

Because ultimately workers pay employers’ share of EI premiums, through reduced market wages, Gordon says it would have made more sense for the government to simply reduce everyone’s EI premiums.

“If the government had simply reduced EI premiums paid by firms, workers would have been—after a certain transition period—the main beneficiaries,” he writes.

Other economists argued that by reducing EI premiums only for small businesses, the government is essentially shifting more of the burden for covering EI on workers and big businesses. And since raising taxes on small businesses would be an unpopular move, it could prove difficult to undo this.

“Creating a separate [premium] rate for small businesses in the EI program… that’s never happened before,” Colin Busby of the C.D. Howe Institute told the Globe and Mail. “That’s going to be hard to reverse in the future.”

“I would have preferred broad-based tax cuts,” Jack Mintz, director of the University of Calgary’s School of Public Policy, told the Globe. “If we keep giving these things to small businesses, what happens when they become big businesses? It becomes a disincentive to growth.”

Not everyone agrees the tax credit will fail as a job-creation measure. The Canadian Federation of Independent Business, which represents more than 100,000 small and mid-sized companies, estimates the tax credit will create the equivalent of 25,000 jobs per year over the next few years.

"It's a big, big deal for small business,'' CFIB president Dan Kelly said. “It's good news for people looking for jobs” and good news for those working in small businesses where wage growth has been limited, he added.

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