We were amazed to learn that Minister Geneviève Guilbault had been seduced by the French idea of taxing companies on the basis of their payroll to ensure the financing of public transport, as reported by journalist Maxime Bergeron of The Press1.
Not only do Quebec businesses already bear a greater tax burden than their French and Canadian counterparts, but this form of taxation clearly goes against the objective of reducing the tax burden of Quebecers set by his government.
Lack of knowledge of the Quebec tax system?
We must first remind Minister Geneviève Guilbault that the Government of Quebec already finances its activities on the basis of a payroll tax. Levied since the early 1970s and better known under the misnomer of the contribution to the health services fund (HSF), this form of taxation has become over time an important source of revenue for the Quebec state. And for good reason: in addition to being much more aggressive than in the other provinces where such a tax is in effect, companies have no loophole to reduce – or even avoid – this tax burden. In fact, almost all of them pay an annual contribution to the health services fund, whether or not they make a profit.
During the 2021-2022 fiscal year, the Government of Quebec thus collected $7.4 billion through the contribution to the health services fund, which represents approximately 57% of the tax paid by businesses in the province during the same year.
All things considered, the relative value of the payroll tax levied in Quebec was then practically identical to that levied in France. In principle, Québec therefore does not have any additional leeway to tax the payroll of businesses, especially since the latter bore a higher income tax than their French counterparts. And even if the province had such leeway, it should resist the temptation to import this way of doing things from abroad.
Who graps all, looses
If at first sight the contribution to the health services fund seems to be an effective tax tool to ensure the contribution of businesses to the tax effort of the province, we must keep in mind that the point of incidence of business taxation is very often different from the target objective.
Even if they assume the obligation to pay the tax burdens that fall on them, nothing prevents companies from shifting the bill to a third party, whether to shareholders through less generous dividends, to consumers through higher prices, or again to the company’s employees through lower salaries.
In short, it is not because we collect revenue from businesses that they ultimately bear the cost.
In the case of payroll taxes, the effect has been clearly measured by the Center for Productivity and Prosperity – Walter J. Somers Foundation2 : most of the tax is passed on to workers through lower wages.
By linking the administrative data of millions of Canadian workers to the companies that employ them, our analyzes showed that each percentage point of taxation levied on corporate payrolls reduced wage growth by 0.47% per year. This means that after five years, the deduction of the contribution to the health services fund should deprive an average Quebec worker of approximately $4,000 in salary increases.
Such a finding is something to think about in a context where Premier François Legault hammers on all the platforms that he wants to bring Quebecers’ incomes to the same level as their Ontario counterparts.