CONTINUING TO IMPROVE THE EMPLOYER HEALTH TAX (2024)

Issue

The Employer Health Tax taxes every eligible BC employer on their payroll, taxing business growth, hiring and job creation in our province. While the province has committed to increasing the exemption threshold for the tax from $500,000 to $1,000,000, this positive change only applies to businesses with under $1.5 million in payroll, and more can be done to provide cost reductions and increase competitiveness for BC’s business community.

Background

The Employer Health Tax came into effect in 2019 and is an annual tax which requires businesses to pay tax on their annual payroll over $500,000. Businesses with payrolls between $500,000 and $1.5 million are required to pay 2.925% on their total payroll over $500,000, while businesses with payrolls over $1.5 million are required to pay 1.95% on their total payroll. In its first full year, the Employer Health Tax taxed businesses $1.897 billion.

In Budget 2024, the province announced changes to increase the exemption threshold to exempt more businesses from this tax. Under the new rules, the exemption threshold would increase to $1 million, meaning businesses with less than $1 million in payroll would be fully exempt from paying the tax. For businesses with payrolls between $1 million and $1.5 million, they would pay a tax equal to 5.85% on that remuneration under a new notch rate applicable to this cohort of employers. For employers with over $1.5 million in payroll, nothing changes, and they pay the same 1.95% tax on their total payroll.

While the Budget 2024 change was positive, it does not fully meet the needs of the business community or provide broad-based tax reductions. While this change represents real savings for those businesses that will now be exempt – up to $14,625 for a business with $1 million in payroll – it provides little to no savings to businesses with larger payrolls. This is evidenced by the fact that this exemption is expected to save businesses $100 million out of the now $3 billion in EHT taxes, just over a 3% reduction.

The increase in the exemption limit to $1,000,000 in payroll only partially benefits businesses over that amount. Because of the way the tax is applied, it does not benefit larger employers (over $1.5 million in payroll) at all.

First, for businesses with between $1 million and $1.5 million in payroll, while the first $1 million is deducted, their notch rate was increased from 2.925% to 5.85%, which means that these businesses see diminishing tax savings until the $1.5 million mark at which there are no savings at all. (See Table 1)

_{Table 1 – EHT Payable by Payroll Under Current and New Rules}

^{Source: Employer health tax overview, Government of British Columbia[1]}

The new rules will not affect businesses with over $1.5 million. They will continue to pay 1.95% on their full payroll because this change does not exempt the first $1,000,000, as might be thought.

Instead, the payroll exemption should work like a true exemption, and the Employer Health Tax should apply only to payroll over $1,000,000. This is how an exemption would more commonly be understood to work and is how the similar Employer Health Tax in Ontario functions, which also has a $1 million payroll exemption.

For example, in Ontario, a business with $1.5 million in payroll pays a 1.95% Employer Health Tax rate - the same as in BC. However, in Ontario, the payroll exemption is deducted. In this example, the Ontario business would pay the 1.95% EHT on the $500,000 remuneration after deducting the $1 million exemption, totalling $9,750.

By comparison, the same business operating in BC would pay the 1.95% EHT on their full $1.5 million payroll, with a tax owing of $29,250.

Additionally, a shortcoming of thresholds in general is that the amounts often do not adequately increase over time or are not indexed to inflation. BC’s new employer health tax should avoid this by ensuring the payroll thresholds are indexed to inflation based on the consumer price index (CPI) through regularly scheduled reviews and threshold increases.

Indexing or increasing the thresholds will prevent a scenario where, over time, the exemptions become less meaningful as the amounts are no longer relevant. Had the current $500,000 threshold been linked to the BC Consumer Price Index starting in 2019, it would now be at $575,462. Instead, inflation eroded the exemption, resulting in businesses paying more in EHT now than they would have paid if the exemption had inflated.[2] In addition, using the BC annual average Consumer Price Index to make these inflation adjustments would allow the EHT to keep up with increases to the minimum wage, which are calculated using the same index.

THE CHAMBER RECOMMENDS

That the Provincial Government:

1. Fully exempt the first $1,000,000 in payroll of all businesses from the Employer Health Tax, allowing businesses with more than $1,500,000 in payroll to deduct that amount from their total remuneration before calculating their taxes owed.
2. Ensure the payroll exemption thresholds increase over time to account for inflation through a regularly scheduled inflation adjustment indexed to the BC Consumer Price Index.