Too much tax slack

June 4, 2012 

It’s conventional wisdom, no doubt with a large kernel of truth, that job creation rises or falls largely with the fortunes of small business. No wonder that in a state where unemployment has ranked among the nation’s worst, lawmakers have looked kindly on small business tax breaks as a salve for recession-linked joblessness.

But thanks to Dan Kane’s report in the Sunday N&O, we now know that the General Assembly followed its tax-cut generosity out the window. (We’d call the tax breaks approved by lawmakers last year a stimulus program, but that might insult the sensibilities of the Republicans in charge on Jones Street, since “stimulus” is one of the cusswords the GOP likes to use against President Obama.)

The idea was to let small business owners duck state taxes on the first $50,000 of income – meaning they’d save on the order of $3,500 each.

With the owner of a neighborhood dry cleaners, say, chances probably are good that the $3,500 gets put back into the economy in some fashion. And when lots of people spend a little more, that can spur hiring somewhere along the line.

Initially, the break was to go only to owners of businesses with revenues of less than $825,000. But by the time it cleared both the House and Senate, the size limit had disappeared. So now the partners in lucrative ventures such as North Carolina’s largest law firms qualify for the tax break, along with the guy running a little old garage. At one big law firm, Charlotte-based Moore & Van Allen, profits per partner last year averaged $855,000, Kane reported.

For folks fortunate enough to be in that boat, an extra $3,500 won’t make much difference in their finances. They’re certainly not under any pressure to spend the money. But considering all the people eligible for the tax break, it’s expected that the annual hit to the state budget will be in the range of $336 million.

That’s a whopping sum at a time when vital state services are under enormous strain. Perhaps there’s a valid argument for cutting small businesses some slack on their taxes – but lawmakers need to tighten up on eligibility so that, for some highly compensated professionals whose pay comes in the form of partnership income, this tax break doesn’t amount to an unneeded and unproductive gift.

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