North Carolina loses $470 million in tax revenue
RALEIGH (WTVD) -- After an 18-month-long investigation, the News and Observer and its McClatchy newspapers discovered taxpayers have been cheated out of hundreds of millions of dollars and say some of it is tied directly to federal stimulus projects that were supposed to prop up the American economy and put people back to work during the great recession.
Doug Burton is a Raleigh contractor. He says he's losing business because he follows the law with his employees.
"They got families. I mean they need to be treated equally. It's just the right thing to do and it's what is required by law to do," said Burton.
Joshua Lawson builds houses for different companies to support his wife and three children. He makes under $30,000 a year.
"I thought if I grow up to build houses I was going to have a good life and it turned out if you make over $12 an hour building a house now you are lucky," Lawson lamented.
Both fall victim to an illegal practice steadily growing in construction and other industries. It's called worker misclassification. As a result, companies are skirting the law and not paying business taxes.
"The practice of misclassification - which is when a company treats workers who ought to be employees as independent contractors - the practice has upended their industry," explained Raleigh News and Observer investigative reporter Mandy Locke.
Workers treated as independent contractors don't get benefits. This isn't allowed under the American Recovery and Reinvestment Act implemented by Congress and President Obama in 2009. Workers are required to be hired as employees. Companies that hire them as cheap labor can underbid their competition on projects since it saves them as much as 20 percent in taxes and insurance.
"The economy also probably contributed to people going this route to try to get costs out of their bid and stuff. So the economy beat us down and then losing bids to people that are misclassifying employees was also a big problem," said Burton.
For more than a year and a half, Locke examined payroll documents. She talked to workers and contractors hired for multi-million dollar federal stimulus projects. She interviewed a former inspector general hired to make sure the government-backed money went to legitimate projects.
"He confessed it was going out the door so quickly with so few protocols to make sure it was being overseen. We were worried a golf course was going to be built with federal money," said Locke "Misclassification of employees was so far down the list of things that could go wrong. It just wasn't on anybody's checklist of responsibilities."
Locke filed a Freedom of Information Act request under public records law and received tens of thousands of payroll reports filed by North Carolina companies and others in 28 states.
The reports showed the contractors who promised the federal government they would pay workers a fair wage actually put them in a vulnerable position. They gave them 1099 forms and didn't pay payroll taxes.
Some of the contractors say they were unaware of the rules because they were never told about them.
Such illegal practices are pervasive in the construction industry especially in North Carolina where there are few unions, and companies are willing to break the rules at the expense of honest business owners like Doug Burton and vulnerable workers like Joshua Lawson. Companies doing it the right way are at a disadvantage because their bids on projects are going to be higher.
The government actually enabled the companies that weren't doing it right. They turned in their payroll reports into the local housing authorities - whose job it was to make sure the wages established by the federal government were paid to workers - but some of those local housing officers say they weren't trained properly by HUD to look for this problem.
"They were looked at for a moment or a few moments, and then they were tucked away in a filing cabinet, or a box in some closet, and that's where they lived until we requested records and started looking through them. Really, no one else had inspected them," said Locke.
And what is worse, almost half of the companies working on federal stimulus projects never filed payroll taxes. Some even wrote on the payroll form that their workers would. So, what did all of this cost taxpayers, the federal and state governments?
"We came up with the tax figures that should have been paid and the rates of which they would have been paid if somebody had been an independent contractor off the books and NC. We believe $467 million dollars in state, federal taxes is lost each year from the construction industry alone," said Locke.
That's frustrating for some state lawmakers.
"I am gravely disappointed, gravely disappointed that the stimulus dollars would be sent down here with a structure that was not appropriate, that was not protecting our tax dollars," reacted NC Senator Tamara Barringer (R-Wake). "Think of the teachers we could hire. Think of the schools we could build. Think of the infrastructure, the roads that we could build that would support our economy. I don't know so much that it's a surprise, but it's just shock."
Almost $470 million dollars is roughly the size of North Carolina's budget shortfall that legislators were grappling with this year to meet the state's obligations. That amount of money could have satisfied any gaps in funding without any of cuts that the legislators had to make.
You'll want to pick up Sunday morning's News and Observer and read all of Mandy Locke's report. You can also submit comments to the story by tweeting me at @danielsabc11 or reporter Mandy Locke at @mandylockenews.
