Jack M. Mintz is the Palmer Chair and Director, School of Public Policy, University of Calgary.
The Conservative government has announced good news for small business employers with a reduction in the Employment Insurance premiums. Employers with fewer than 15 employees will pay 39 cents per hour less through a tax credit claimed against their EI payments.
This is the opening move by the Conservatives for a tax-reform agenda that will culminate with the Spring, 2015, budget. After years of belt tightening, the government is on track to almost balance the federal budget this year, even with this EI premium cut, which costs about $250-million this year. With an expected surplus of more than $8-billion in 2015-16, more tax reductions are on the way in time for a supposedly scheduled Fall election, which could be moved up to the Spring.
By reducing EI premiums for small businesses, Finance Minister Joe Oliver is hoping the cut will help spur job creation. In the short term, this is probably a wise course of action since wages are sticky. Lower employer premiums will help improve employment prospects to some extent.
This policy announcement, however, creates a new precedent by being focused on only some employers – EI itself is mandatory insurance for all employers who pay the same premium. It would make sense to reduce premiums for employers who have a better historical experience in keeping their employees. This policy reform has nothing to do with layoff experience.
It is also poor policy by steepening the wall of taxation faced by growing firms. Special breaks for small business are politically popular but they have bad economic consequences since successful firms lose tax relief as they become larger.
At least this EI tax credit is more broad-based than the ineffectual new-hire tax credit programs used in the past, which are complex to administer and had little take-up.
A far better policy would be a broad reduction in the EI premium. In 1994 reform, the Chrétien government undid the exuberant 1970s Trudeau government relaxation of eligibility requirements that raised unemployment rates by at least a percentage point, as some studies suggested. These deficit-cutting reforms resulted in premiums in excess of benefits by 1997. Then-minister of finance Paul Martin announced a 5-cent reduction, which was half of what could have been at that time to reduce the EI surplus.
Mr. Martin was reluctant to cut EI premiums since he was strongly advised that the high personal and corporate tax rates were a serious impediment to growth, more so than EI premiums. After all, the economy was picking up speed with the U.S. boom during the Bill Clinton years, but Canadian per capita growth in incomes was still abysmal. EI premiums were subsequently reduced, but only grudgingly.
Eventually, the EI account was balanced by the Conservatives with a pledge to keep it that way. This rule was blown up by the Great Recession of 2008-9, when unemployment ramped up. Eventually, with relatively good job growth from 2009-13, EI premiums grew, with current premiums more than benefits.
As such, EI reform should be on the front burner rather than tinkering with small business rates. Some aspects of EI, particularly regional benefits, undermine the incentive for people to take up jobs that are becoming increasingly available elsewhere, like the booming West. Experience-rating recommended in the past by several commissions is more sensible policy.
So treat this EI premium cut a marker for Conservative tax reductions in the federal budget. Hopefully, the tax cuts to come are broad in application rather than too narrowly designed and distortive.