Taxing businesses more to pay state’s debt is a risky move

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There was a strong sense of deja vu in Tuesday’s state budget, not least for medium and large businesses. Indeed, it could have been 2021 all over again, with Treasurer Tim Pallas employing exactly the same playbook he used back then to justify imposing extra taxes on employers.

The surprise centrepiece of the 2021 budget was the mental health levy, a new tax on companies with payrolls over $10 million nationally that was expected to raise between $800 million and $900 million a year indefinitely to fund new healthcare and mental health services.

The many faces of Tim Pallas during Victoria budget lockdown.Credit: Joe Armao

The money had to specifically come from business because, said Pallas at the time, that was “appropriate and fair”. “It’s fair to say there have been some big winners from the pandemic – and after a year defined by widespread sacrifice, it’s only fair they pay their share.”

It was an uncannily similar sell this week when Pallas unveiled what the government calls its “COVID debt repayment plan”, which imposes another levy on business payrolls and hikes land tax for the next 10 years, ostensibly to pay back the additional debt raised during the pandemic.

“It’s only fair that those that did well contribute to the repayment effort,” Pallas told parliament. He repeated the refrain for business leaders on Wednesday, noting profits had jumped 24 per cent over the past three years compared with the preceding three years and pointedly noting those results were primed with taxpayer support.

The realpolitik is clear: ordinary voters would have little sympathy for greedy businesses and landlords.

Private schools, too, took a hit, with around 110 of the state’s highest-fee non-government schools losing their payroll tax exemption from July 2024, netting the state more than $420 million in revenue over three years.

“It plays into a bit of old-fashioned class warfare,” writes state political editor Annika Smethurst.

On top of the mental health levy, which affected some 9000 firms, the new payroll tax lift adds either a 0.5 per cent or a full 1 per cent levy paid on the Victorian share of wages, depending on the size of payroll. Large businesses have also just copped a 42 per cent increase in levies to prop up WorkCover, which as of July 1 leaps from 1.27 per cent of remuneration to an average of 1.8 per cent. That compares with 1.23 per cent in Queensland and 1.48 per cent in NSW.

Nor must we forget that businesses which own property will also be stung by the increase in land tax, as will commercial tenants in the form of rent increases.

It should be noted one significant reform in the budget is the removal of stamp duty on commercial property in favour of a land tax. The move was hailed as an example of the government working well with business, and it shines all the more brightly for being an exception.

Debt reduction is a priority given the debt explosion from $25.4 billion in 2018-2019 to $135.4 billion in 2023-24 and an expected peak of $171.4 billion by 2026-27. But the COVID portion is relatively minor: the bulk results from massive government spending on infrastructure, health and education.

Said economist Saul Eslake: “It would seem to me the so-called ‘COVID levies’ are in effect actually paying for the pre-election spending.”

Whatever you want to call it, he said, “the ‘COVID debt repayment plan’ is just a way of describing the tax increases that are in the budget to pay for expenditure commitments”.

In fact there was little in this budget to suggest the government is doing much on the spending side to lower its borrowings: while it says it is seeking efficiencies in the public service through attrition and redundancies, the 4000 job losses flagged are likely to be much lower once staff are redeployed.

The state’s major employers have every right to question why their share of the burden should be so much greater than anybody else’s.

Politically savvy this impost may be, yet the additional cost to larger companies risks embedding an already widely held belief that Victoria is an increasingly expensive and inhospitable place to do business, which could deter investment and job creation – the things the government is counting on to eventually drag the state out of the financial swamp.

Patrick Elligett sends an exclusive newsletter to subscribers each week. Sign up to receive his Note from the Editor.

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