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Expanded Incentives Bill Bogs Down Over Service Providers

Hundreds of businesses in South Carolina rely on them, though many folks probably don't know what they are.

And whether businesses that use "professional employer organizations" should receive taxpayer-backed incentives has been the subject of a simmering dispute in the General Assembly.

A “professional employer organization,” or PEO for short, is a company that provides human resources, payroll, employee benefits, workers’ compensation and other support services to typically small businesses in exchange for a fee that usually is a percentage of the client company’s total payroll.

Unlike temporary employment agencies, PEOs enter into “co-employment” contracts with client companies “typically involving all of the client’s existing worksite employees in a long-term relationship,” according to the National Association of Professional Employer Organizations’ (NAPEO) website.

PEOs allow growing companies to focus on the "business of their business" instead of on the "business of employment," according to the website.

There are at least roughly 12,000 worksite workers in South Carolina employed through PEOs, according to information from NAPEO. Based on a national average of 13 PEO workers per client company, that works out to more than 900 companies in the Palmetto State that use PEOs, though the exact number is unknown.

Nearly 75 PEO suppliers are licensed to operate in South Carolina, including 13 based in the state, according to the S.C. Department of Consumers Affairs.

An amended version of an S.C. House bill (H. 3506) would extend job-development credits to companies that use PEOs. Under state law, certain new or expanding businesses can receive the credits, which are refunds of a portion of a company’s employee state withholding taxes based on the workers' hourly wages and location of the company, in exchange for meeting specified job-creation and investment requirements.

The incentive has to be approved by the S.C. Coordinating Council for Economic Development, made up of the heads of 11 state agencies involved with economic development. Typically, approved job-development credits means those tax dollars would not go to the state’s general fund.

In fiscal 2009, the latest year for which data were available, $70.3 million was claimed in job-development credits, according to a June 2011 report by the state Board of Economic Advisors.

The total potential cost of H. 3506 to the state is unknown, as no fiscal impact statement has been done on the PEO part of the bill.

Hired or Leased Labor?

The bill got hung up last week in a conference committee made up of members of both chambers after committee member Rep. Brian White, R-Anderson, raised concerns about PEOs.

“It gets back down to the philosophical point of why we actually offer … the tax credits,” White, the House Ways and Means Committee chairman, told the six-member panel. “This (the amended bill) basically says you can go lease employees, so I think there’s a little bit of difference in the leasing of an employee than in hiring an employee.”

Another committee member, Sen. Phil Leventis, D-Sumter and author of the PEO-portion of the bill, said he didn’t want to see those companies that use PEOs “made second-class citizens because they choose to outsource their  payroll, some insurance,” noting there are “at least 600” such businesses in the state.

“A company with 25 to 200, 300, employees probably operates more efficiently because of that,” Leventis said.

Leventis acknowledged, though, that the committee appeared to be at an impasse on the bill, which first passed the House last year and was amended this year by both chambers; and requested that it meet again after “a week or so.”

Committee member Sen. Billy O’Dell, R-Abbeville, said he wanted the “two warring parties to try to come to some kind of compromise.”

“This is a very important economic development bill for our state, and we need to create jobs,” he said.

The bill, sponsored by Rep. Dwight Loftis, R-Greenville and a member of the conference committee, also would:

  • Lower the job-creation thresholds for “qualifying service-related” companies to receive job tax credits, which can be deducted from an approved company’s income taxes based on the number of new jobs created and the location of the company;
  • Add data processing centers, such as a Google-type company; and firms specializing in research and development in “physical, engineering and life sciences” to a list of “technology intensive” businesses eligible for job tax credits;
  • Increase the maximum annual credit claimed by a company against its corporate license tax to $400,000 from $300,000, and allow the credit to be claimed for “refurbishment of buildings” owned or controlled by a county or municipality if the buildings are used “exclusively for economic development purposes”; and
  • Allow counties to expand fee-in-lieu-of-taxes (FILOT) agreements, which significantly reduce property tax bills of companies, from 40 years to 50 years for “enhanced investment” projects.

Contacted after last week’s conference committee meeting, Leventis disputed White’s characterizations of the PEO industry.

“They’re not temps, and they’re not leased employees,” he said.

Leventis said he added the PEO section to the bill after a Sumter County company, Porter’s Fabrications, was informed by the state Revenue and Commerce departments that it was ineligible for job development credits because it uses a PEO, even though the Coordinating Council for Economic Development earlier had approved the credits.

Leventis said the company, which has a plant in North Carolina, receives similar tax breaks from the Tar Heel State. He said the S.C. Revenue and Commerce departments drafted the PEO part of the bill to “clarify” existing law.

Spokespersons for both agencies did not respond last week to written requests from The Nerve for comment. Efforts to reach officials at Porter's Fabrications were unsuccessful.

Helping Existing Businesses

Ironically, Leventis said despite White’s opposition to the PEO part of the bill, White and the Sumter House delegation helped Porter’s Fabrications receive other state incentives to offset the loss of job development credits.

The Nerve attempted to interview White immediately after the conference committee meeting last week, but he declined, saying he had to go cast a vote on the House floor. White did not respond to a later phone message from The Nerve.

Contacted last week, Adam Peer, the state government affairs director for NAPEO, said despite White’s comments during the committee hearing about leased employees, “PEOs don’t supply the labor force at all.”

“They work with existing small businesses with existing workforces, but they are co-employers,” he said. “They provide the expertise that a small business couldn’t hire on its own.”

Besides expertise, PEOs often can often provide better health insurance and other employee benefits that small companies typically could not afford or manage, according to NAPEO's website.

Peer said the “crux” of the PEO language of the S.C. House bill, which he noted his organization helped draft, is “not to disadvantage small businesses from tax credits (and other incentives) that they would otherwise qualify for just because they use PEO services to provide for their workers.”

“The benefit goes to the small business, not the PEO,” he said.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org.

Economic Development General Assembly Incentives Legislation Corporate Welfare