NH Watchdog - LLC Tax still alive


The LLC Tax Isn’t As Dead As You Think

By Charles M. Arlinghaus
From the print edition of the Union Leader

The governor and the legislature are sending mixed signals on the possible repeal of the controversial LLC tax. The governor has said he is working on a plan to repeal the tax but we haven’t heard about any details of the negotiations with legislative leadership. Complicating matters, the House leadership today is planning on rejecting a bill to do precisely what the governor says he and the leadership want to do.

Last year, at the very end of the budget process, at 10:00 at night on the last day of the committee of conference negotiations, without public hearing or even legislative language, House and Senate budget negotiators broadened the interest and dividends tax to change the way LLCs and partnerships are taxed in New Hampshire.

Opponents claim the new tax is unfair to small businesses in New Hampshire and changes us from one of the best to one of the worst states in the country in which to start a small entrepreneurial business. Small businesses rose up against the tax and an enhanced regulatory scheme that sought to limit their income.

Under a regulation called “reasonable compensation,” state tax auditors had taken to aggressively trying to redefine a small businessman’s income as profits or as a distribution. Every dollar of income redefined went from not being taxed (we don’t have an earned income tax) to being taxed at 8.5% as profits and then an additional 5% under the new law.

Under the aggressive regulatory regime, the state could compare small entrepreneurs to average salary tables with the burden of proof on the businessman to prove his worth to the state at the cost of hiring lawyers and accountants to defend himself. Any fix to the so-called LLC tax issue will need to deal with that regime as well.

The governor’s staff finally leaked word a few weeks ago that he and the legislative leadership were working on a plan to “repeal the LLC tax.” Like all legislation, the devil is in the details and this plan is being developed in secret.

If the governor and legislature really intended to just repeal the tax, they would need no planning. A simple bill to repeal the tax and do nothing else is before the House today. Leadership doesn’t want it passed. The only reason not to pass it is because you aren’t really planning on a repeal, you’re doing something more clever.

Similarly, why would a simple repeal need to be negotiated? There’s nothing to discuss. There’s no complicated language. But we know that discussions are going on. We know that some legislative leaders are involved but others are not. For example, the Democratic chairman of the Senate Finance committee has been working on this issue and has a particularly thoughtful bill covering the new tax and the reasonable compensation issue. Yet he’s not one of the Democratic leaders privy to the negotiations.

In another oddity, the Democratic House leadership does hope to pass a bill rewriting some of the reasonable compensation issues and thereby directly impacting the whole LLC issue. The bill is sponsored by Rep. Susan Almy, head the of the tax-writing Ways and Means committee.

Surely, Rep. Almy as the chief tax-writer must be part of the private negotiations over tax rules. Can we reasonably expect the legislature to vote on her tax changes when we know that this very subject is being discussed in secret and a plan with the support of the governor and leadership will emerge shortly? Why pass a bill that changes something that’s already obsolete?

The governor was right to recognize that there is a problem with the dynamic created by his new tax and the auditing scheme. But to change and regain the confidence of the small business community he can’t merely say “repeal” like it’s a magic word, offer no details, and oppose a bill that actually does repeal.

What is even worse in the age of transparency is to secretly negotiate a deal while the legislature goes about its business as if no negotiation is going on. This whole issue blew up because it was done in darkness outside the normal process. A private process leads inescapably to the conclusion that something suspicious is going on. It’s time to peel back the curtain and let us all in on the secret.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free market think based in Concord, New Hampshire.