The State of North Carolina should fully conform with all taxpayer relief provisions associated with the Federal CARES Act Pandemic Relief Package. This is especially important for the tax treatment of Paycheck Protection Program (PPP) loans. The PPP was a Federal stimulus effort to prevent employers from releasing their workers, which would have added additional strain to the unemployment system. North Carolinians would have experienced even more prolonged waits for unemployment assistance because of the added number of people in the system. Our best estimates indicate the Unemployment Trust Fund could have been drained of an additional $950 million if employers had not participated in the paycheck protection program.

Unemployment Insurance is not a state benefit. It is not funded by the state, nor the employees of our businesses. It is an insurance plan completely funded by employers. Unemployment benefits are not intended to fully replace income, they are intended to act as a bridge to new employment. As such, they do replace a portion of normal wages, which would be taxed.

Unemployment benefits replace a portion of income. This a material distinction, as we can think of having two separate buckets for federal assistance. In one bucket, we have more normal categories, like unemployment benefits, and our people have historically paid taxes on this income. In another bucket, we have one time, extraordinary events, like stimulus money going to directly to individuals. This money was not taxed. We also had stimulus money going to businesses, via PPP loans, and that money should not be taxed either.

Essentially, the PPP stimulus was provided to employers who desperately needed liquidity. This was an extraordinary event, provided for the good of the economy. Employers who took this stimulus, and paid the money to their employees, can’t deduct the expenses for tax purposes. This means the cash is gone from their account, but on paper it looks like they had a profit. These “paper profits” would cause the employer to have a tax liability because they participated in a stimulus program to keep their employees on payroll. This would result in small business owners owing taxes because they paid money to employees for the greater good of the NC economy. Employers already pay for unemployment insurance. They would have been better off to terminate the employees and let them be paid out of the Unemployment Trust Fund. Are we really going to consider letting business owners bear an unnecessary cost for helping sustain the health of our state’s economy?

If NC fully conforms with federal codes, our best estimates indicate the state would forego roughly $600 million of tax receipts associated with this extraordinary event. Choosing to forego the receipt of future tax revenue should not be confused with an expense. That is a terrible argument advanced by those who lack financial understanding.

My colleagues on the left enacted mid recession tax hikes in 2009. They raised taxes five times in the 10 years prior to losing majorities in both chambers of the NCGA. All government entities have an unquenchable thirst for “more tax dollars, and I urge fiscal conservatives to avoid this mindset. Government should not forcefully take more from the people during times of economic difficulty.

The State of NC shouldn’t think about these extraordinary events through the lens of normal operations. We shouldn’t saddle business people with a surprise state tax liability just because they helped distribute federal stimulus dollars to the people of North Carolina. I worked with Senator Chuck Edwards and Senator Dave Craven to file Senate Bill 104 requiring that NC not burden small business owners who participated in the Paycheck Protection Program.
 

Senator Jim Perry
Majority Whip - North Carolina State Senate
Co Chairman, Healthcare
Co Chairman, Appropriations on Health and Human Services