In 2005, following the election of a new government, the Slovenian social partners are again calling for at least the gradual abolition of the payroll tax on employers, which was introduced in 1996. However, abolition seems unlikely because of government plans in other areas, notably pensions, which will place a burden on the state budget.
Slovenia has a special payroll tax, the 'tax on paid-out pay', that employers must pay on their employees' wages over a certain level. For almost nine years, the social partners have demanded the abolition of this tax. After the general election held on 3 October 2004, the party which formed the new government, the Slovenian Democratic Party (Slovenska demokratska stranka, SDS), promised to prepare amendments to the Law on Payroll Tax (LPT) with the aim of gradually reducing the tax burden on pay. The government intends to create a business-friendly environment and critics of the payroll tax believe that its abolition would improve the situation considerably - Slovenia is the only EU Member State with such a tax.
'Tax on paid-out pay'
The LPT determines that the payroll tax is to be levied on legal and natural persons that pay out wages and are, according to the relevant laws, liable to make contributions for pension and disability insurance, compulsory health insurance, maternity insurance and unemployment insurance. The tax is calculated and paid out of gross pay. There is no payroll tax payable by the employer if the monthly gross pay of an employee is below SIT 165,000 (EUR 687). The tax rates are set out in the table below.
Payroll tax rates
| Employee's gross monthly pay | Rate of employer's payroll tax |
| Up to SIT 165,000 (EUR 687) | No tax |
| From SIT 165,000 (EUR 687) to SIT 400,000 (EUR 1,667) | 3.8% |
| From SIT 400,001 (EUR 1,667) to SIT 750,000 (EUR 3,125) | 7.8% |
| Over SIT 750,000 (EUR 3,125) | 14.8% |
The tax is calculated at the time of payment of (monthly) pay and paid six days after the payment date. The tax is calculated before the company's profit statement and forms a part of the revenue of the state budget.
The Economic Outlook and Policy Services (Sluzba za konjukturo in ekonomsko politiko, SKEP) of the Chamber of Commerce and Industry of Slovenia (Gospodarska zbornica Slovenije, GZS) calculates that in 2002 the payroll tax represented 4.2% of total state budget revenues, rising to 4.3% in 2003 and 4.4% in 2004.
Jasna Kondza of the Institute of Macroeconomic Analysis and Development (Urad RS za makroekonomske analize in razvoj, UMAR) calculates that, because of its progressive scale, the average tax burden of the payroll tax rose from 4.4% of the total paybill in 2002 to 4.7% in 2003 and to 5.0% in 2004 (although in 2004 the government increased the lower gross monthly pay threshold above which employers have to pay the payroll tax from SIT 130,000 to SIT 165,000).
Temporary payroll tax becoming permanent?
Employers have had to pay the payroll tax since the second half of 1996. At that time, because of continuous complaints from employers about the burden of social security contributions on labour costs, the government lowered these from 42% to 38% of pay. However, at the same time the government introduced the payroll tax, presenting it as a temporary and transitional measure. Soon after its introduction, employers began to maintain that the payroll tax is a heavier burden for them than the social security contributions had been before the government lowered them. In 2004 the average tax burden of the payroll tax was 5% of the total paybill (see above), while in 1996 the government lowered social security contributions by 4 percentage points.
However, commentators argue that it is more probable that the payroll tax was introduced under the influence of similar so-called tax-based incomes policies (TIPs) introduced in several central and eastern European countries during the transition period. According to the International Labour Organisation (ILO), in these countries economists persuaded politicians to introduce some form of TIP to prevent hyperinflation (see Wages policy, International Labour Office, Geneva 1992). TIPs mean that any pay increase above a government-determined level are subjected to heavy taxation to discourage enterprises from granting such increases and workers from pushing for them (this is seen by critics as a distortion of the process of free collective bargaining). Such a TIP, it is argued, is likely to be inappropriate where wage flexibility is required to provide incentives, promote productivity and induce enterprises to value labour more.
Value-added tax (VAT) and excise duties were introduced in Slovenia within the framework of the economic reforms. The Law on Value-Added Tax (Zakon o davku na dodano vrednost, ZDDV) came into force on 7 January 1999 and took effect on 1 July 1999. This sought to provide a modern tax system conducive to the support of exports and consistent with the EU tax environment.
When introducing VAT, the government promised to abolish the payroll tax in 1999. This, however, did not happen because the government set lower VAT rates than initially proposed by the Ministry of Finance (Ministrstvo za finance, MF) and VAT could thus not replace the payroll tax as a source of budget revenue. The Ministry maintained that the state simply had no other source from which to replace the revenues from the payroll tax.
In the tripartite social agreement for 2003-5 (SI0307101F), the social partners and the government agreed that it was necessary to examine the possibility of abolishing the payroll tax, compensating for the lost state revenue through a 'more complete' property taxation and from other sources of tax. Nevertheless, the pay threshold above which payroll tax is levied was to increase in 2005 by the inflation rate in 2003 and 2004 (or to SIT 150,000 a month). Taking into account the public finances situation, the possibility of raising the threshold for 2004 was also to be examined in September 2003.
By 'more complete' property taxation, the government social partners meant above all the introduction of a tax on fixed property (real estate) such as buildings and land (as exist in all 'old' EU Member States except in Ireland). However, the introduction of such a system has been delayed because of the large number and incomparability of different evaluation methods needed for such taxation, and inadequate real estate and land registers. The introduction of the tax on fixed property is opposed by a number of powerful interest groups.
Early 2004 saw a conflict between trade unions (SI0210102F) and employers (SI0211102F) over the revision of the pay terms of sectoral collective agreements (SI0403101F). Negotiations over new sectoral agreements became deadlocked, with trade unions taking industrial action in support of demands for increased wages for the lowest-paid workers. Following this warning strike, the government sought to ease the deadlock in the negotiations, offering to increase the gross monthly pay threshold above which employers have to pay the payroll tax from SIT 130,000 to SIT 165,000 (in addition to raising the level of general income tax relief). The change cut the payroll tax on employers by a greater amount and earlier than determined in the 2003-5 social agreement, and made it possible for them to increase employees' take-home starting pay by SIT 5,000 (EUR 21) a month. The government made this offer to the social partners on the condition that a new overall pay policy agreement, including adjustment of pay to inflation, was to be concluded (SI0404102N).
In this way, the pay of 39% of employees was exempted from payroll tax. The government made this change within the framework of the tax reform in order to relieve the tax burden on pay and lower labour costs particularly in labour-intensive sectors where the gross pay is lower than average. In the textiles sector, over 80% of all wages are now exempt from payroll tax, in the leather sector nearly 70% and in the woodworking sector nearly 60%.
New talks on payroll tax sought
Samo Hribar Milic, the general secretary of the Slovenian Employers' Association (Zdruzenje delodajalcev Slovenije, ZDS), says that employers strongly support the abolition of the payroll tax. According to SKEP, data show that the payroll tax is above all a fiscal instrument for feeding the state budget and not an economic policy instrument. The increase in the pay threshold above which payroll tax is levied has not fundamentally relieved the tax burden on labour, the employers argue. It is thus necessary to prepare a plan for the abolition of the payroll tax. The present system means that more and more pay is taxed and subject to higher tax rates. One of the many consequences is that the employers are not able to employ highly educated and trained experts, although a knowledge- and skill-based economy demands such workers. The employers are not able to pay highly educated workers appropriately high pay, it is claimed.
Furthermore, Janez Prasnikar of Ljubljana University says that it will not be possible to introduce profit-sharing (financial participation) in Slovenia (SI0412303F) without abolishing the payroll tax.
Because the payroll tax represents an important part of state budget revenues, ZDS does not believe that the government will abolish it rapidly. Nevertheless, Mr Hribar Milic stresses that the current social agreement expires in 2005 and states that the social partners and the government should begin to discuss the payroll tax within the framework of the negotiations on a new social agreement very soon.
Commentary
Economists in Slovenia, especially neo-liberal ones, believe that the country's 'gradualist' approach to transition is over. However, the social partners would be content with at least a gradual abolition of the payroll tax. Such abolition is most unlikely, in view of a government proposal for a new formula for the adjustment of pensions that would result in higher pensions. However, if adopted this would also mean a heavier burden for the budget and might damage the stability of public finances and hinder the adoption of the euro single currency.
In addition to the concessions promised to pensioners recently, the government has also made a concession to students. In Slovenia, secondary-school and university students may obtain temporary and periodic work through a student or youth organisation (a student 'service' or student job agency) on the basis of a referral from this organisation, without signing a contract of work or an employment contract (SI0207101F). Parliament has passed amendments to the Law on Personal Income Tax (LPIT), requested by students, that exempt students from making advance tax payments for income earned through a student service if the sum does not exceed SIT 100,000 (EUR 417) per referral. The amendments meet the student's demands only partially as the age limit for a special student tax relief, set at 26 years, will not be eliminated now but as part of a comprehensive tax reform package to be carried out in the near future. There is a danger that in order to compensate for these concessions the government will reduce certain workers’ rights, such as cutting sickness benefits (SI0505301N). (Stefan Skledar, Institute of Macroeconomic Analysis and Development)