That was the warning to retailers from both the Government and Opposition on Wednesday as the House of Assembly passed the Payroll Tax Act 1995 and the Payroll Tax Rates Act 1995.

Shadow Finance Minister Mr. Eugene Cox raised the issue first. If it was true, as Finance Minister the Hon. David Saul had said, that the new 11.5 percent tax combining the old employment tax and the hospital levy meant no increased cost to employers, then retailers should keep that in mind.

Mr. Cox had "a warning to those retailers who are already thinking about jacking up their prices, as some have already done, presumably,'' that "they are only harming themselves.'' It was moves like that which were sending shoppers overseas.

Dr. Saul agreed.

"There is no question that each year like clockwork, regardless of what is stated in the Budget, there are firms in Bermuda with regular monotony that take the opportunity of the Budget to ratchet up the prices of their goods, regardless of whether the Budget taxed that item or not,'' he told the House.

"That is wrong, it's immoral, it's indefensible, and they are cutting their own throats,'' Dr. Saul said.

In introducing the Payroll Tax Act 1995 and the closely-related Payroll Tax Rates Act 1995, Dr. Saul said Government introduced the employment tax in 1973 and the hospital levy three years later.

Having the two taxes was "most confusing,'' both to those who paid, and those who administered.

"This new tax, although with a new name, is a simplification of the old two,'' he said.

The only material change was that the two taxes added up to 11 percent, and the new tax would have a rate of 11.5 percent.

In introducing the Payroll Tax Rates Act, Dr. Saul said that as well as the standard 11.5 percent rate, a rate of 8.5 percent would apply to hotels and guest houses and businesses with a payroll between $100,000 and $200,000, while a rate of 6.5 percent would apply to businesses with payrolls below $100,000. The rate for charities, churches, and approved schools would be four percent, while Government and Government boards would pay 3.5 percent.

Mr. Cox repeated his charge from the Progressive Labour Party's Budget Reply that Dr. Saul "seemed to be setting the stage for a general introduction, some time in the future, of income tax.'' Although the Minister said "it's no big thing,'' the new payroll tax would raise $107 million, up more than 18 percent from what the two individual taxes raised last year.

And contrary to what Dr. Saul said about the Budget not hurting the little man, bread and alcohol had gone up since the Budget was read, and the cost of newspapers was about to rise. "We're seeing the impact of these new taxes,'' Mr. Cox said.

Mrs. Lois Browne Evans (PLP) said she well remembered when Government introduced the employment tax in 1973. That was "a hallmark year,'' she said, because it showed that the Opposition was right when it said through the 1960s that Government could not provide needed services "without a form of direct taxation or some taxation based upon our income or our payroll.'' In the late 1960s, Government brought a Canadian tax expert to Bermuda who said income tax was "the fairest and most equitable form of taxation,'' Mrs.

Browne Evans said.

That was "a dirty word'' then, and "might still be a dirty word to some people even now,'' she said.

"We have watched the contortions of various Ministers of Finance endeavouring to fund the necessities of life in this Country and to perform as a reliable and responsible Government with all sorts of inequitable forms of taxes,'' she said.

Mr. Cox had mentioned that commodities like bread were going up, she said.

Those had to be purchased by rich and poor alike, with no distinction in the price.

Government would need more money to fund the Airport, and what further unfair taxes would be brought in then? "The small man needs greater relief,'' she said. "I wish he would stop calling it the poor man's Budget.'' Community and Culture Minister the Hon. Wayne Furbert said that when one considered the extra costs Government faced, it was commendable that the payroll tax reflected only a 0.5 percent increase.

If small businesses needed help filling out the forms for the tax, as some members claimed, they should come to the Small Business Development Corporation, which would provide the service for free, he said.

Mr. Furbert noted that the threshold at which small businesses received lower rates had been increased to $100,000 from $66,000. That change would benefit 190 small businesses, he said.

Mr. Stanley Morton (PLP) said any increase in the payroll tax was "an additional expense'' which would affect the economy. "Don't give people the impression that it's not going to effect them and it's only going to effect the big man,'' he said.

Dr. David Dyer (UBP) noted that self-employed people had their taxes calculated on the basis of notional incomes. He had a concern about self-employed people like taxi drivers, who had fixed rates which they could charge and therefore were facing higher rates of taxation without receiving higher incomes.

In response, Dr. Saul said there were "preferential rates'' to help small businesses. Not only had the threshold for the first preferential rate been raised to $100,000, but companies with payrolls below $200,000 would also receive a special rate.

As for the 18 percent increase in revenues through the tax, Dr. Saul said that was due to an improved economy.

The fact that bread, newspapers, and alcohol were going up "can not reasonably be attached to this Budget,'' Dr. Saul said. "It would be miraculous if it has gone, like a dose of salts, right through the economy that quickly.'' When the House moved into committee to consider the bills clause by clause, Dr. Saul noted that the number of weeks someone could work without being considered an employee had been reduced to four from 13.

And the definition of an employee had been improved to tighten another loophole. Gratuities paid at the end of a contract would no longer be exempt from the tax.

As for Dr. Dyer's concern about the taxi driver, Dr. Saul said notional remuneration was not used automatically, and anyone with a special case should bring it to the attention of the Tax Commissioner.

The bill also identified special rates for special circumstances, like when an employee was on jury duty, Dr. Saul said.

The Hon. Harry Soares said he crunched numbers with several different examples, and found that in every case employers paid less under the new tax, while employees paid 14 percent more.

He noted that for a company with a payroll of $200,000, the annual tax burden under the new act would drop to $9,000 from $13,800. "This is a tremendous benefit in here for smaller firms,'' he said.

But he was concerned about what happened at the edges of the tax "bands.'' For instance, if a company with a payroll of $99,999 increased it by $1, its tax burden would rocket to $4,000 from $2,500.

"My concern is that because of this there may be a temptation for some employers to perhaps not realistically look at their staff,'' he said, urging Dr. Saul to take another look at the problem. "I think there is a way of doing it, and it can be done quite easily.'' Mr. Ottiwell Simmons (PLP) expressed similar concerns.

"What I see about this form of layout ... is it is a disincentive for a small firm to grow into a larger firm,'' Mr. Simmons said. "I'm not sure if that is good for economic development. The tax system should be such that it encourages firms to grow.'' And instead of paying four percent, Mr. Simmons did not feel charities should have to pay tax at all.

He also noted that the latest increase in the tax would be borne by employees.

Employers "must be in a better position to pay these taxes than the employees,'' he said. It was "the rich feasting off the poor.'' Dr. Saul said it was not true that employees were paying "the lion's share'' of the payroll tax. In fact, the employee's share was up to four percent, while the employer paid 7.5 percent, he said.

The Finance Ministry had "wrestled with'' the problem of the threshold between tax bands. But "wherever you draw the line in the sand ... it's tough luck when you get to whatever the line is,'' he said. He was open to suggestions.

Mr. Soares then pressed for a third income bracket to be added to the existing bands of zero to $100,000 and $100,000 to $200,000.

Dr. Saul replied that two bands were reasonable but he would review the possibility of introducing a third band.

Mr. Soares claimed Government was inconsistent in failing to apply the principle used for stamp duty to payroll tax. MR. EUGENE COX: Urges tighter controls on banks.

MRS. LOIS BROWNE-EVANS: 1973 a `hallmark.' DR. DAVID SAUL: `Wrong, immoral and indefensible.'