@NCCapitol

Nearly a quarter of NC House members have close ties to companies with PPP loans

Entities tied to at least 30 members of the North Carolina House of Representatives were approved for more than $4.8 million in forgivable federal loans over the last year. Most of those lawmakers voted last month to approve a tax break on that money, and on the other Paycheck Protection Program loans that went to businesses across North Carolina.

Posted Updated

By
Travis Fain, WRAL statehouse reporter, Ali Ingersoll, WRAL data journalist,
and
Ashley Talley, enterprise executive producer
RALEIGH, N.C. — Entities tied to at least 30 members of the North Carolina House of Representatives were approved for more than $4.8 million in forgivable federal loans over the last year.

Most of those lawmakers voted last month to approve a tax break on that money, as well as the roughly 269,000 other Paycheck Protection Program loans that went to North Carolina businesses.

Just how much of a tax break lawmakers, or their family businesses, will get if that bill ultimately passes depends on a case-by-case analysis. But the answer for many will be either 2.5 or 5.25 percent of the loan, based on tax rates that differ depending on how a business is set up.

Because this benefit is available to so many people across the state, voting on the measure didn't violate legislative ethics, according to the General Assembly's Legislative Ethics Committee.

A few members whose businesses got loans recused themselves anyway. If every member involved had done so, roughly a quarter of the 120-member body wouldn't have voted on a tax policy expected to save businesses – and cost state coffers – some $600 million.

The policy explained

The Paycheck Protection Program was meant to keep people employed during the pandemic, and it offered federal funding via loans that would be forgiven if businesses didn't lay people off.

A forgiven loan is normally taxed like regular income, but the federal government made an exception for PPP loans, allowing a pair of tax breaks. Each state can conform with those policies or go out on its own when it comes to state income taxes.

North Carolina already conforms by not taxing the forgiven loans themselves. House Bill 334 would mean an additional break, letting businesses deduct from their taxes expenses covered by the forgiven loans.

Some feel this is a double dip, essentially giving people the same tax break twice. But, as lawmakers have noted, most other states have already made the move.

Many believed this deduction was part of the Paycheck Protection Program when it was first created. But at some point last year, the IRS said otherwise, interpreting the law to say businesses couldn't take the write-off. Congress addressed this when it passed a second round of PPP funding in December, making it clear businesses could take the deductions and saving business owners what some considered a surprise tax bill.

But that only kept the tax break intact at the federal level.

House Bill 334 would extend that to state taxes in North Carolina. So far, only the House has backed it. The Senate is sitting on the measure, even as a May 17 deadline to file income taxes approaches.

Senate President Pro Tem Phil Berger said Thursday that, instead of passing the tax break, his chamber is considering using federal money from coronavirus stimulus funds to make taxpayers whole.

"That is the subject of much conversation at this point in time," said Berger, R-Rockingham.

Drama and methodology

Even though the bill ultimately passed the House last month 113-1, it generated controversy.

Rep. Julia Howard, R-Davie, who chaired the House Finance committee at the time, said leadership pressed her to move the bill through committee, and she openly worried about passing policy that would benefit lawmakers whose businesses took these loans.

Eventually, the Republican leadership jettisoned Howard – the legislature's longest-serving current member – from the committee, stripping her of an important role. Howard was the loan vote against the measure in the House.
Because of the controversy, WRAL News tallied PPP loans extended to businesses that House members or their close family have an interest in by pulling Statements of Economic Interest on all 120 members. The private businesses listed on these disclosures, which are required by law, were then run through a publicly available database of PPP loans.

Lawmakers also disclose publicly traded companies in which they own at least $10,000 stock, but those companies were not included in this analysis. Neither were companies where House members may work, but where they're not in leadership and neither they nor a close family member own a controlling interest.

Two nonprofits that received loans were included, but neither likely will be affected by the tax break in the bill, because nonprofits generally are exempt from state income taxes.

Because the Senate has not moved the tax bill forward, senators were not included in the count, but a number of those lawmakers took PPP loans as well.

The PPP database lists loans offered, so it's possible some companies involved did not accept loans, despite appearing in the database. WRAL spoke to, or reached out at least twice via email to, every lawmaker included in the count, explaining the process and asking for comment.

At least 30 of the House's 120 members list entities on their disclosure forms that were approved for loans. For 13, the loans topped $100,000. Most of the rest ran five figures. The smallest was less than $2,700.

Calculating benefits

Each case has its own particulars.

Rep. Brian Turner, D-Buncombe, owns part of a business that got the biggest loan in this survey at more than $800,000. Turner said it's a family business, that he doesn't make day-to-day decisions and that he's not on the payroll.

He said he didn't realize it received PPP funding until WRAL asked about it.

"I probably had to sign something at some point as part of the PPP loan, but honestly, until you emailed and I looked it up, I didn’t even remember that we had done that," he said.

Several lawmakers said businesses listed are owned by close family members. The state's disclosure rules generally require lawmakers to list companies owned by spouses and any other family members with whom they live.

House Speaker Tim Moore got $25,000 in loans at his law firm in Kings Mountain. Moore, R-Cleveland, said last month that he's already filed the firm's annual state income taxes and that he won't amend that filing.

That means he wouldn't get the tax break for tax year 2020. But because half the loan came this year, the business would be eligible for the break next year if House Bill 334 becomes law.

Rep. John Bradford, R-Mecklenburg, who co-chairs the House committee that writes tax policy, owned two businesses that received loans. But one, he said, he sold last year, so any tax benefit goes to the new owner. The other, he said, is a startup that didn't turn a profit last year.

"I don’t think there’s going to be any tax advantage for us because you have to have profits to take advantage of deductions," Bradford said.

He said PPP loans worked as they were supposed to, saving jobs across the state, and that business owners shouldn't pay a surprise tax on the money just because North Carolina doesn't align its policies with the federal government's.

Bradford and others from both sides of the aisle made that argument during a press conference on the bill last month, bringing small business owners to the legislature to plead for the break.

“The story line really should be … what took North Carolina so long to conform with the federal government’s ruling?" Bradford said. “I’m not benefiting from it at all, but my employees benefited from it because it saved their jobs."

"This is truly a bipartisan effort," House Minority Leader Robert Reives said at the press conference. "Our businesses, small businesses, are what make up North Carolina."

Reives' law firm got a loan of about $263,000.

"This is a good bill for workers and small businesses," Reives, D-Chatham, said in a statement this week. "The PPP program helped me and my partners keep our employees in their jobs even as court closures and pandemic disruptions drastically cut our revenues.”

Calculating the value of the tax breaks House members voted on is difficult.

Accepted loans are only forgivable if certain metrics were hit. Businesses had to keep their employees on at the same salaries and spend at least 60 percent of their loan on payroll costs.

Once that threshold is cleared, the loan is forgiven, and the deduction in House Bill 334 can generally be calculated based on the state's income tax rates, which depend on how a company is organized. A corporation normally pays 2.5 percent, but for a business organized as a partnership or sole proprietorship, the rate is 5.25 percent.

Which means that, on a hypothetical forgiven loan of $100,000, the savings would typically be between $2,500 and $5,250. WRAL spoke to two certified public accountants about the calculations.

Unemployment tax

When behind-the-scenes drama over the bill became public with Howard's concerns and, eventually, her removal from the House Finance committee, House leaders added a major sweetener to the bill.

The federal government has forgiven income taxes on the first $10,200 of unemployment benefits people got last year. Again, the state had to decide whether to conform.

At first, the Republican majority at the General Assembly had no plans to do so on unemployment benefits. Then, House leadership added it to the PPP bill.

Analysis by the General Assembly's fiscal research staff estimates the PPP portion of the bill will save businesses $600 million across the state. People who were unemployed last year would save another $250 million, according to the left-leaning North Carolina Budget & Tax Center.

The addition of the unemployment benefit made Rep. Charles Graham, D-Robeson, whose home health care business took a PPP loan of more than $700,000, waver on an initial decision to recuse himself from voting on the bill.

Graham was excused from voting the first time the measure hit the House floor, without the unemployment amendment. He voted for it the second time, with the amendment.

"That's when I said, 'Oh, well, this is a good business bill,'" Graham said this week. "I thought from the beginning it's a good business bill, but I changed my vote at that point."

But when the bill came up for a third vote, Graham went back to recusing himself.

"I didn't want to be viewed as a legislator who's trying to help his personal cause, and I just, I just felt comfortable doing that," he said.

Rep. Allison Dahle, D-Wake, recused herself from all three votes. Though she doesn't own a business that got a loan, Dahle said she filled out the loan paperwork for the law firm where she works.

Rep. Deb Butler, D-New Hanover, recused as well, because the law firm bearing her name got a loan of $8,400.

"It is a change of tax policy," Butler said. "For all the right reasons, I would agree. ... Nevertheless, right is right, and that is what felt right to me."

General Assembly rules give lawmakers leeway to determine whether something represents a conflict of interest, but the general rule is that they can vote on something that benefits them only if it benefits them because they're part of a large group of people. House rules also say lawmakers have a general duty to participate in the law-making process unless they have a conflict.

Moore had the legislature's ethics commission write up a formal opinion for the PPP vote.

"lf the financial benefit or detriment that accrues to the legislator from changes in the law is no greater than the financial benefit or detriment that could reasonably be foreseen to accrue to all persons or businesses that accepted a PPP loan, then the legislator may vote on the bill," the House and Senate lawmakers who chair the commission said in that opinion.
Correction made 6/17/2021: This post has been edited in the second paragraph to update the total number of PPP loans made in North Carolina as of June 2021, based on numbers from the Small Business Administration. The initial post gave an SBA figure only from one round of the program, as opposed to the entire program.

Data: House lawmakers and PPP loans

* These entities received PPP loans, but they're nonprofits and already tax exempt, so they would not get the tax break included in House Bill 334.