This opinion article by Business Council of Australia Chief Executive Bran Black was published in The Australian Financial Review on 5 December 2024.

It’s always puzzled me that we spend so much time talking about creating jobs, and so little time talking about how we punish businesses when they do.

It’s a perverse version of the carrot and stick approach – huge amounts of effort and public dollars go into programs to generate jobs by incentivising businesses to hire, and at the same time our states and territories wield a stick to financially penalise companies when they do.

That stick is payroll tax.

For the uninitiated, payroll tax is a state or territory tax on businesses levied on how much they pay their employees. When they hire more, or pay their existing employees more, that tax hit gets bigger – often to the tune of many millions of dollars.

It was introduced in 1941 by the federal government and got handed over to the states in 1971. Times have changed, and now it’s a tax that hurts Australia more than it helps.

Some states have higher payroll taxes than others, which means it costs a nationwide business more to hire someone in that state than in the one next door.

In our Regulation Rumble report for 2024, the BCA ranks states and territories based on how punitive on jobs their payroll tax regimes are. South Australia was the most jobs-friendly jurisdiction, with the lowest payroll tax rate for large employers. On the other end of the spectrum, Victoria and the ACT need to seriously review the competitiveness of their settings.

It’s not just the existence of payroll tax that’s a problem. It’s how inconsistent the approach to payroll tax is on a state and territory basis.

As I write, I am looking at a table of over 30 different kinds of payroll tax conditions, and how each of them is different state by state. Only 10 of them are completely consistent across all Australian jurisdictions.

The table shows the way we treat payroll tax for fees paid to golf professionals by golf clubs. Except in WA and the ACT.

It shows that there are exemptions for maternity leave pay. Except they are handled differently in Victoria.

If ever there was a case study to highlight the problems our federation causes for getting more jobs and higher pay for Australians, this table is it.

Indeed, think about this challenge from the perspective of a national employer, having to navigate this productivity-sapping inconsistency.

In a nutshell, payroll tax shouldn’t exist. As Matt Comyn, CEO of CBA, said in March, it “makes us less competitive”.

And if you think this position is simply big business being big business, take a look at the support for scrapping or drastically reforming payroll tax from other groups. For instance, the Electrical Trades Union has pointed out that while it made sense last century, it has become “problematic” and gets “in the way of employing people”.

But while payroll tax needs to be a central component of any national discussion on tax reform, it’s clear we won’t be getting rid of it soon.

After all, it makes up about 30 per cent of each state’s total tax revenue. The sensible move away from it will therefore require careful planning to replace that revenue.

What we can do – and quickly – is begin fixing the extreme maze of payroll tax inconsistencies faced by businesses across state lines. We can help our businesses run more efficiently, and in so doing take steps towards addressing our national economic growth challenge without stoking the inflation fire.

A way to do this is using federal funds to incentivise states and territories to align their payroll policies. This is important because there’s plenty of work involved in achieving a reasonable degree of harmony, and not much immediate payoff for each state and territory.

The BCA has advocated for this to come in the form of a National Reform Fund.

In the context of payroll tax, this fund would reward states and territories with financial incentives as they harmonise their payroll tax structures. Such a fund should also help them to cut red tape and grow productivity in other areas, such as planning rules.

Pleasingly, the government has responded to these calls with the announcement of a $900 million National Productivity Fund.

While this is an excellent start, the way it is built needs to allow for the funds to be increased over time, and operate over many years to drive difficult, but enduring reform.

It’s not controversial. It’s achievable. Most importantly, it pays off. Last time the federal government incentivised states, through national competition reforms, the $5 billion national investment produced an annual $60 billion national dividend.

That’s the light at the end of the reform tunnel.