Tax Break For Business Goes Further
For a lot of reasons, it makes sense for political leaders to do what they can to encourage small business growth, even if it costs money during a down economy.
Republican leaders in the North Carolina legislature are taking some heat for a tax break touted as a way to help out small businesses, but that will also benefit larger, wealthier companies, including the state's biggest law firms.
Dan Kane of the The News & Observer of Raleigh, in a recently published story, detailed how a budget provision creating the tax break included no limits on the size of the recipient companies. The only prohibition is that it cannot go to firms that pay corporate taxes, typically public-owned, multi-state corporations.
The 2011 change allows around 460,000 business owners to avoid taxes on the first $50,000 of income. That means the law partner pulling down a half a million a year will get the same $3,500 tax break as the corner body shop owner.
Still, the tax break should mostly benefit those targeted.
Here's why: Nationally, 90 percent of businesses have 20 or fewer employees. Assuming North Carolina mirrors the national figures, then most of the 460,000 business owners who benefit should fit in most everyone's definition of a small business.
Even businesses that don't fit into many people's definition of a small business fit into the government's definition. The federal government typically defines small businesses as those with 500 employees or less.
That's not to suggest that, if your goal is to spark job growth, you should be throwing tax breaks at firms with 200 or 300 employees, especially when cutting public sector jobs.
National studies and statistics, including those from the U.S. Bureau of Labor Statistics and the U.S. Small Business Administration, show that 65 percent of new jobs each year come from start-up companies.
Ninety-five percent of the start-ups begin with 20 or fewer employees.
Start-up companies do experience job churn, creating jobs one year only to go out of business and lose those jobs the next. But the numbers aren't as great as you might believe.
According to the SBA, almost half of new companies survive five years or more.
Start-ups and other firms with 20 or fewer employers also are far less likely to horde any cash resulting from the tax break. Most of those companies need capital, meaning the money should circulate through the economy.
So, legislators might have done a better job targeting the tax break
An early proposal would have restricted it to those firms with less than $825,000 in revenue. The limitation apparently got dropped because there is no easy way to make it work.
But there are ways to reconfigure the tax code to make a tax break a break for some and a wash for others. It's whether the politicians have the will and wisdom to do so.
Whether they do or not, small business is the right place to look for job growth.
Scott Mooneyham writes for Capitol Press Association in Raleigh. Contact him at email@example.com.
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