EI tax credit unlikely to boost hiring, analysts say

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Economists and public-policy analysts say Ottawa's new tax credit reducing small businesses' employment-insurance payroll costs will do little to stimulate the country's stagnant labour market, and will leave workers and larger companies footing more of the bill for the EI program.

"This is just a tax cut," said Angella MacEwen, senior economist at the Canadian Labour Congress, who criticized Ottawa for choosing to hand money back to employers as the EI program heads toward a surplus for the first time in years, rather than improve EI access for the long-term unemployed or expand training incentives. "We're just giving a no-strings-attached Christmas bonus to some small businesses."

Economists said the new Small Business Job Credit, unveiled by the federal government Thursday as a job-creation initiative, is essentially a replacement for the Hiring Credit for Small Business that was introduced in 2011 and expired last year. The new credit, which effectively reduces small businesses' EI contributions by up to about $2,200 a year, is more generous than the maximum $1,000 under the previous program – but economists said it's likely too small and too narrowly focused to encourage much hiring.

Only businesses with roughly 20 full-time equivalent employees or fewer are likely to qualify for the new credit. Statistics Canada data show that businesses with under 20 employees account for only 20 per cent of all employment in Canada.

"Many [small employers] are at the margin of profitability. For them, payroll taxes are significant," said Tyler Meredith, research director at the Institute for Research on Public Policy. However, as incentive to hire new staff, he questioned whether the amount of money was big enough to make a "material" difference.

Ms. MacEwen said the previous Hiring Credit "didn't really make a difference for small business in terms of hiring." Indeed, she said, it actually discouraged hiring at the upper limit of qualification for the credit, as adding employees for any company near the cut-off would push them over the limit and they would lose the tax break.

Experts also noted that because the new tax credit (costing an estimated $550-million over the next two years) will be funded from Ottawa's EI account, it effectively raises the share of the cost of the EI program for larger employers and for workers, whose premiums aren't being reduced.

"I would have preferred broad-based tax cuts," said Jack Mintz, director and Palmer Chair in Public Policy at the University of Calgary. "If we keep giving these things to small businesses, what happens when they become big businesses? It becomes a disincentive to growth."

Colin Busby, senior policy analyst at the C.D. Howe Institute, said the new program is effectively "creating a separate [premium] rate for small businesses in the EI program. That's never happened before. That's going to be hard to reverse in the future."

"I'm not sure it's a good precedent," Mr. Mintz agreed.

Economists feel the annual $225-million price tag of the tax credit is modest, and won't disrupt Ottawa's plans to balance its budget in 2015. However, Mr. Busby expressed concern that the new program "puts at risk balancing the EI account by 2017," as Ottawa has pledged to do. "You could get back into a cycle of unstable EI rates" if Ottawa has to adjust premiums to keep the EI account adequately funded, he warned.

But Mr. Meredith said that with the EI account approaching balance, the new tax credit may mark the start of a broader discussion in Ottawa about what the long-term goals of the EI program should be beyond short-term assistance for the unemployed, and who should be footing the bill.

"It's a good opportunity for a re-set," he said. "We need to be talking about what we want this to pay for."