Capital Goods - July 2010

Small business: Give me a break

By Scott Mooneyham

Democrats in the legislature and governor’s mansion have been stumbling over themselves to scrape together enough money to give a modest tax break to small-business owners. Republicans say it’s an election-year gimmick and, coming on the heels of last year’s $1 billion tax hike, a pretty pathetic one. They’ve got a point about the elections. With the party in power’s standing among voters on the shakiest ground it has been in a while, Democrats are trying to make some inroads with the restaurant owner and the shopkeeper, the plumber and the electrician.

Democratic pols aren’t talking about their competing tax-break proposals in those terms, at least not publicly. No, in a state with 10% unemployment, this is about jobs. And jobs. And jobs again. “It will help them sustain their businesses right now,” says state Sen. Dan Clodfelter, the Charlotte Democrat who co-chairs the powerful Senate Finance Committee. “It helps avoid further job losses.”

As of this writing, the Democrats who rule in Raleigh hadn’t quite agreed on what “it” is. Gov. Beverly Perdue wants to offer $1,000 tax credits to businesses with no more than 25 employees that hire anyone who has been unemployed at least two months. Her plan would renew a $250 tax credit per employee for small businesses that provide employee health insurance, give additional credits to businesses creating jobs in counties with the highest unemployment rates and bestow capital-gains relief for investors in some startup companies. House Democrats cobbled together a similar plan. As in Perdue’s, most tax breaks would be aimed at businesses with 25 or fewer employees. They would provide the $250 health-insurance tax credit for employees earning less than $45,000 and a $1,000 job-creation tax credit. Unlike the governor, the House authors tie the $1,000 credit to keeping the job for at least three years.

Senate Democrats take a different approach. They’ve crafted a plan to limit small-business tax rates to the 6.9% rate larger corporations pay. Now, income in sole proprietorships, limited liability companies and S corporations is taxed at the owners’ personal rates, up to 7.75% on earnings above $100,000. Clodfelter says the plan could lower taxes paid by a quarter-million companies in the state.

As good as these ideas may sound to a cash-strapped business owner who has had to survive a 20% or 30% drop in business since 2008, the plans don’t add up to huge savings. The price tag for Perdue’s plan is $17 million. The House proposal would cost $80 million over three years. The Senate’s comes to $40 million annually — less than a quarter of 1% of the state’s general operating budget.

But North Carolina, unlike the federal government, has to balance its budget. The Democrats behind the proposals say the state can’t afford any more, not when they’re cutting school funding and eliminating in-home health-care programs for the elderly. “We are limited as to what we can do moneywise, but it’s our hope that we can encourage [businesses] to add jobs,” says House Majority Leader Hugh Holliman, a Lexington Democrat.

The Republican response: fat chance. The loudest critic of these little-bit-of-help-for-the-little-guy proposals has been Holliman’s Republican counterpart, House Minority Leader Paul “Skip” Stam. He has called them a gimmick. He has called them an insult. He has called them paltry. “Will anyone hire anyone because of that tax credit? I don’t think so,” the Wake County lawyer says. He and fellow Republican legislative leaders say broader tax relief is needed.

Call them what you want, the proposals have put the Republicans in a bind. In politics, words don’t mean a lot. Votes become the ammunition to mow down opponents. So Senate Democrats rolled the tax-cut proposal into their budget bill. Just three Republicans voted for it. Protests not withstanding, some GOP senators can look forward this fall to being cast as foes of small-business tax cuts designed to create jobs. In the House, Republicans failed in an attempt to amend the legislation to make the breaks bigger and broader. When it came time for a committee vote on a stand-alone bill, they voted for it.

Most small-business owners couldn’t care less about the political posturing and angling. They’re happy to get attention from a body that usually reserves its fawning for big banks and utilities. Gregg Thompson, director of the state chapter of the National Federation of Independent Business, sees the proposals as meaningful. He would like them to be the start of a policy focus on ways to boost small business. If not, small-business owners can always hope that the party in power is as worried each election year as this one is.

Scott Mooneyham is the editor of The Insider, www.ncinsider.com.