The payroll tax hikes for big business announced in last week's WA budget will cost 1,300 jobs but more than half of those could be saved through tax relief for smaller companies, the state's Chamber of Commerce and Industry says.
The tax hikes will affect businesses that employ more than 400,000 West Australians, it says.
The Labor government hopes to raise $435 million over four years along, with another $400 million through lifting goldmining royalties, to prop up the budget, which faces large deficits for years.
However, it will likely need the support of the Liberals to pass legislation, given the WA Nationals said this week they would block the measures targeting big business along with upper house conservative crossbenchers.
CCI chief economist Rick Newnham told a business breakfast in Perth on Wednesday the tax hikes would be bad for the economy.
"The money has to come from somewhere and the first place these businesses will be forced to look is wage freezes, job cuts and fewer working hours," he said.
"You cannot quarantine this to one section of the business community.
"These costs will be passed on through the supply chain to small and medium businesses that are already struggling from the downturn in WA's economy."
To protect small and medium-size businesses, the chamber was calling for an increase in the payroll tax threshold of $100,000 from $850,000 to $950,00 to help offset the 1,300 jobs that will be lost.
Mr Newnham said CCI research found lifting the threshold by $100,000 would create nearly 900 jobs, with a $283 million economic benefit to the state.
The budget should have focused more on spending restraint, not increased taxes, he said.