HOUSE AND SENATE REPUBLICANS SUPPORT TAX RELIEF

Raleigh – Senate and House Democrats have hyped their recent proposals to create jobs in North Carolina. These proposals leave much to be desired. None of them address the high rates of taxation which is the main problem. These initiatives are clearly designed more for cover than for real job creation.

We received a measure of good news this past week. The unemployment rate in North Carolina receded to a 12-month low of 10.8 percent in April, down from 11.1 percent in March and a record high of 11.2 percent in February. But this good news was overshadowed by the details. With a 7,500 net gain in jobs, 6,000 of the gain was in government employment!!! Is that where they are leading us?

It is the private sector which actually creates productive jobs. Republicans have consistently urged the reduction of marginal tax rates as the way to invigorate employment and bolster our economy. Democrats are focused on the preservation of government jobs.

Unfortunately, recent proposals by Democrats in the General Assembly do not reduce tax rates. Rather, they provide a superficial, expensive approach that will result in few new employment opportunities in our state.

Section 31.2 (a) of SB 897, (the Senate Democrats’ budget bill) caps the individual income tax rate on net business income from a small business at 6.9%, the same rate imposed on corporations. But, if they are operating as a “C” corporation, they are effectively paying a rate of 14.65 percent tax which is the income tax plus the rate paid on dividends. And, this section defines a small business as one whose annual gross receipts do not exceed $850,000. This definition effectively excludes many small employers. A builder who sells 5 houses would not qualify. The criteria should be income, not receipts.

House Democrats introduced H 1721, H.E.L.P. Small Business Act. While some of the provisions are helpful, none will be significant factors in job creation.

A partial analysis of H 1721:

Section 1.1 – INCREASE TAX BENEFITS FOR SMALL BUSINESS EQUIPMENT PURCHASES

• State tax break for small business equipment purchases

Analysis: Section 1.1 is referring to the enhanced Section 179 expensing, which allows small businesses to expense equipment in the year it’s purchased rather than over several years. In 2008, Congress increased the amount that can be expensed from $125,000 to $250,000 and added a 50% bonus depreciation for qualifying equipment exceeding the $250,000 limit.

This provision extends the higher limit and bonus depreciation for another year and will help (or more accurately – will keep from slowing) economic recovery.

Section 1.2 – INCREASE TAX BENEFITS FOR INVESTMENTS IN SMALL BUSINESSES

• The total tax credit allowed is $8 million (raised from $7.5 million). But if it is oversubscribed, the Secretary reduces everyone’s credit pro rata. That means an employer could hire and invest without knowing until the end of the year what the credit is worth.

Analysis: A recent Congressional Budget Office (CBO) report discussed the relative ineffectiveness of tax credits targeted to small businesses compared to a tax cut that applied to businesses of all sizes.

“Moreover, small firms that do expand have proportionally higher average payroll growth than large firms that expand, so a larger fraction of the tax cut would fund payroll growth that would have occurred anyway. Consequently, CBO concludes, restricting eligibility to small firms would decrease the employment effect per dollar of budgetary cost.”

Section 1.4 – TAX BENEFITS FOR SMALL BUSINESSES THAT PROVIDE HEALTH INSURANCE

• Small Business Health Insurance Credit – provides a credit of $250 per employee to businesses that provide health insurance to employees making less than $45,000. Applies to businesses with fewer than 25 employees. The credit was previously enacted and expired this year.

Analysis: This credit is too small to make any difference in job creation. $250 per employee will barely cover one month’s insurance premium for even one young, healthy person. This section may be a good idea – but is irrelevant to the job crisis.

Section 1.5 Tax Benefits for Putting People Back to Work

• $1,000 tax credit available to small businesses that create a new, full-time job. The rebates would go to businesses with 25 or fewer employees at the beginning of the taxable year. The rebate will be in the amount of $1,000 per eligible employee who is hired and stays at the company for at least 3 years.

Analysis: The CBO report estimates that the federal proposal of reducing payroll taxes for firms that hire new workers would add between 8 to 18 full-time-equivalent jobs over two years per million dollars of tax credits – about $80,000 per job created.

• Tax credits for new hires cost a lot of money with little measurable results.

• The CBO report says that such tax credits are less effective than a broad-based approach would be. In other words, limiting the tax credit only to “small businesses” (however defined) would have less job impact than a tax cut that applied to businesses of all sizes.

• Other organizations have similar doubts:

• The National Federation of Independent Businesses is “skeptical” about these types of tax credits to create many jobs.

• “If this proposal turns out to be a tax credit based on new hires, we’re doubtful this type of credit will produce many new jobs.”

• “We’re skeptical that it’s going to be a big job creator,” said Bill Rys, tax counsel for the National Federation of Independent Business. “There’s certainly nothing wrong with giving a tax break to a business that’s hired a new worker, especially in these tough times. But in terms of being an incentive to hire a lot of workers, we’re skeptical.”3

• Moody’s was also skeptical, saying:

“A lot of it is just confidence,” said Gus Faucher, the director of macroeconomics at Moody’s Economy.com. The tax credit, he said, “may help a bit around the margins, but small businesses need to be convinced that the expansion is going to keep going. I’m not sure the tax credit is going to be that useful into getting them to hire unless they’re convinced that the demand is going to be there.”

• Employers look to hire the most qualified candidate who will create the most value for their firm; regardless of how long they have been unemployed. A small rebate is unlikely to change hiring decisions.

Republicans in the House and Senate support initiatives that would provide new vitality to North Carolina’s economy and real job creation based on sound economic principles:

• Reduce the marginal rates of taxation. NC has the highest income tax rate in the region, both personal and corporate.

• NC businesses need significant regulatory relief.

Rep. John Blust (R-Guilford) introduced an amendment to H1721 in the Finance Committee this morning which would require: “The tax rate imposed on the net business income of a taxpayer may not exceed five percent (5%). For purposes of this subsection, the term business income does not include income that is considered passive income under the Code.” The Blust amendment was rejected on a partisan vote with all Democrats voting against its adoption and all Republicans voting in favor.

Senate Republican Leader Phil Berger (R-Rockingham) said, “The Senate budget does little to aid the job creation efforts of small businesses. Democrats will not abandon their habitual spending hikes and their added spending means we cannot have the kind of broad-based tax relief we need for the economy to get back on the right track.”