Late in North Carolina’s legislative session last summer, lawmakers quietly passed a $336 million tax cut – one of the largest tax cuts the state has seen in the past decade. Originally intended to target “small businesses” – defined as those with less than $850,000 in annual revenue – the final legislation removed the cap and exempted the first $50,000 of pass-through income for any size pass-through business. That’s a roughly $3,500 tax break that is now available to law firm partners, doctors, dentists, and in some cases the same lawmakers who passed the legislation.
An article in the Raleigh News and Observer this week finally shone some light on this expensive and ill-targeted tax break, and illustrates the provision’s effect with examples like this:
"…lawyers who are equity partners at Womble Carlyle Sandridge & Rice, the state’s largest law firm, will each receive that tax break for income they earned in North Carolina. The Winston-Salem based firm brought in $279 million in 2011, and generated profits equal to $590,000 per partner, according to The American Lawyer, a trade publication.”
That is, because it’s a structured as a pass-through firm, the partners report its profits and pay its taxes. The proponents of the tax cut argue (as usual) that it will spur private-sector job creation- close to 4,000 jobs over the next two years, according to a study they cite. But as the article points out, the cost of the tax break is equivalent to 6,400 state employee positions. You do the math there. As Gary Hancock, a lobbyist interviewed for the article, said:
"...it makes no sense to provide a tax break – particularly to those who don’t need it – while cutting teachers and other public employees who perform needed services…As a general proposition, tax breaks for the wealthy while we are starving public schools and public services is bad government.”
The News and Observer story was cited in a scathing editorial from the Charlotte Observer which had this to say:
“When many of the people being helped by a tax break end up criticizing it, questioning it or refusing comment on it, something’s badly amiss. N.C. lawmakers in the Republican-dominated General Assembly should take note of this reaction to a tax break they gave to businesses in last year’s legislative session…. At a time when lawmakers are slashing funding for schools, law enforcement and other vital services, a perk for those who don’t need it is misguided and feels callous."
The Observer editorial characterizes the state’s current tax system as “inadequate, outdated and unfair” and in need of real reform. We concur. And given the enterprising journalism and good policy analysis available, it’s time to get that process started.