Jack Knox: Payroll tax sticks Island restaurateur with the bill

Jack Knox mugshot genericLance Steward doesn’t feel like a tycoon.

Doesn’t use $50 bills to light $100 cigars. Doesn’t take the Lear jet to Bill and Melinda’s for the weekend. Doesn’t own a nuclear power plant like Montgomery Burns on The Simpsons.

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What Steward feels like is a mom-and-pop business owner, which is what he and wife Liz Steward literally are. They opened Duncan’s Just Jakes restaurant in 1991, expanded into the Craig Street Brew Pub next door in 2005, then took on a Lake Cowichan outlet — Jakes At The Lake — five years after that.

“Not until we were in business 15 or 20 years did we make any profit,” he says. It has only been in the past few years that they have been able to pay a dividend to the friends and family who together invested $1 million in the enterprise, fuelling its growth.

“I run a business where I pay some employees more than I make,” Steward says. He drives a 2007 Chevy Silverado, not a Rolls-Royce.

So imagine his surprise at learning that he’ll be among those shouldering the burden as the provincial government replaces Medical Services Plan premiums with a payroll tax on what it considers to be big businesses.

“It probably is going to cut my profit in half,” he says.

The new measure, unveiled in last week’s provincial budget, takes effect Jan. 1, 2019. It applies to all employers, public and private sector alike. Those with a payroll of at least $1.5 million will pay a tax of 1.95 per cent on that payroll. Those with payrolls over $500,000 will pay a lesser, graduated rate. Those with payrolls under $500,000 will pay no tax.

The government expects the new Employer Health Tax, as it is known, to bring in $1.9 billion in 2019-20, which is less than the $2.6 billion raised through MSP premiums in 2016-17, before the phase-out began.

For many employers, who already pay their employees’ MSP charges, the change is a matter of swapping one expense for another. Medical premiums out, payroll tax in. The amounts don’t match, but at least there’s some offset.

Not for the Stewards. They’re typical of the food and beverage industry in that they pay extended health benefits for career employees, but not MSP. So when they get dinged 1.76 per cent on what is expected to be a $1.4-million payroll next year, it will all be new expense.

Victoria’s Mike Holmes, one of the Stewards’ minority investors, has been circulating an email that paints a picture Steward says is pretty typical of a high-employment, low-margin pub/restaurant business: $5 million a year in sales and $2 million in payroll, which, after other expenses, leaves a profit of maybe $300,000 to $350,000.

That profit can’t be confused with actual cash, though. Out of that figure comes debt repayment, income tax, equipment replacement and other costs, leaving maybe $150,000 for shareholder dividends and reserves. The new payroll tax will take another $40,000 out of that number, on top of the $50,000 such a business already pays in federal and provincial income tax.

As a result, Holmes argues, medium-sized small businesses will be discouraged from growing. Instead, the new measure will encourage them to suppress their payroll. “It takes no account of actual profitability and penalizes those companies who employ many people. It could not be better designed to help destroy employment.”

To some, this will all sound like small-picture stuff that ignores the big headline, which is that B.C., the only province to charge MSP premiums, is phasing them out. There’s a lot that’s unfair about the way the premiums are charged, so good riddance to them. Self-employed people and workers who have been paying the full freight for premiums that others consider to be a God-given part of their compensation package will be thrilled that the teeter-totter has finally tilted.

But if MSP premiums are a form of regressive taxation that doesn’t take income into account (the average worker pays the same rate as Montgomery Burns), the same can be said of a tax that is assessed on how much a business pays its employees, not how much it earns.

Or, as Steward says, “I still can’t believe we’re not considered a small business.”

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