WELCOME TO "NEW TAX-SHIRE"

SMALL BUSINESS OWNERS BRACE FOR BIG TAX HIKES

The brand new Limited Liability Company (LLC) Tax has come home to roost in Concord. After being slipped into the budget at the 23rd hour and 59th minute in the dead of night without a public hearing --- the legislators who voted for it are now flummoxed that ordinary working people are irate.

For some reason in New Hampshire, perhaps due to the character and strength of our White Mountains, we just don’t expect the abuse of the political process that would allow an income tax on small business owners to become law without a public hearing and vigorous debate and then to be applied retroactively!

What is the LLC Tax? Simply put it extends the 5% Interest and Dividends Tax (I&D) to the stream of income a business owner pays him or herself above a level of “reasonable compensation” that is determined by government officials in Concord. Setting aside for a moment that it is an upside down world when Concord officials have the power to determine what a business owner can pay themselves --- this tax is fundamentally new and specifically targets business owner income.

For example—a business owner conducting business as an LLC or partnership pays him or herself a salary of $100,000. The DRA then determines the level of “reasonable compensation” that the business owner should pay him or herself is only $50,000. The $50,000 that is allowed as compensation would not be taxed under either the Business Profits Tax (BPT) or the I&D Tax. But the second $50,000 is now taxed twice – once at the 8.5% BPT rate ($4,250) and again as an after-tax “dividend” under the 5% I&D Tax ($2,287). Total Tax Hit = $6537 per this example.

Historically, since its inception over 85 years ago, the Interest and Dividends Tax has applied only to passive forms of income – true dividends and interest. Now this fundamental tax change applies to business owner income and to add insult to injury, personnel from the DRA have stated that the tax would apply to capital gains.

How in the world did New Hampshire get here? It starts with no public hearing when legislators wrote this law in June! Generations of New Hampshire citizens of all political stripes have steadfastly opposed an income tax and this tax would probably not have seen the light of day except for the hidden stealth and secrecy of its inception.

The Department of Revenue (DRA) just completed four forums on implementing the rules for new LLC tax.  At these forums, the DRA made it perfectly clear to the nearly 1000 people who attended, that they were not there to discuss the merits of implementing the tax, but on how best to collect it. New Hampshire citizens turned out in droves because they are angry their voices were not heard when the legislation was voted on, and that their voices will be largely ignored now that it is law. Many are small business owners struggling to keep their doors open in this terribly difficult economy. One after another, they made a compelling case about how fearful they are that this tax will undermine their business’s ability to stay afloat.

Naturally this tax has its defenders – primarily the Democrats who voted for and signed it into law --- and their spin is in over-drive. They claim the tax merely closes a loophole, which does not pass the straight face test. Whether inadvertent or by design, the LLC tax does not apply to sole-proprietors. So if the design of the tax was to close loop-holes and provide equity why weren’t sole-proprietors also taxed?

Tax equity among business owners was debated when the Legislature created the Business Enterprise Tax in 1993. As every business owner knows, the BET is a .75% tax on the salary of every employee including the owner --- but paid exclusively by the owner not the employee. Businesses are subject to both the BET and BPT, but can credit their BET exposure against BPT obligations to prevent double taxation. When the BET was adopted it broadly spread the burden of business taxation so a few companies were not stuck with the entire tax bill. But in reality the BET is a .75% income tax on business owners. Supporters of the LLC tax took another giant leap forward --- and supporters should be honest enough to call it what it is – a narrow but hefty income tax on business owners.

As the questions mount, the problems are just beginning. If the tax is applied retroactively it is a certain lawsuit given our constitution’s prohibition on retroactive taxation. People are expected to pay the tax for all of 2009, but the compliance rules aren’t finished and are unlikely to be adopted before the end of February. The tax is due 6 short weeks later. I twice suggested to DRA they waive all penalties and fines for the first year. I have received no answer to what should be common sense. In addition, book-keeping costs are likely to be extreme – a potential cure worse than the disease.

Along with others, I have filed legislation to repeal this tax. Taxing business owners at a time when 50,000 people are out of work and businesses are struggling sends a terrible message. If you are considering opening a business in New Hampshire—Don’t! If you are in business here already – Leave!

When the business tax climate in Massachusetts beats that of New Hampshire----we have a problem even Democratic spin won’t solve. Repeal of this tax and spending discipline maintains our tax advantage and gets New Hampshire back to work.

If we don't repeal this tax we might as well change our border welcome signs to:

  Welcome to NEW TAX-SHIRE!

A Little Good News, Some Mixed News But Even More Bad News in Concord

by Jeb Bradley

The recent release of New Hampshire’s revenue receipts simultaneously offers glimmers of hope while raising even more concerns about the State Budget enacted in June.

First the good news: The “Rainy Day Fund” which is the State’s hedge against economic downturns ended the fiscal year with $56 million more of a cushion than anticipated. Governor Lynch froze new hiring, deferred equipment purchases, and curtailed out of state travel to produce these savings. 

Despite the fact that Governor Lynch and Democratic Legislators approved an overall spending increase in 2007 of 11.17% and in 2009 of 10.48%, the Governor’s executive orders curbed the worst excesses of the Legislature’s spending blitz that has increased expenditures from $9.36 billion to $11.5 billion during that time.

This $56 million in the Rainy Day Fund will be a critical one-time buffer if the State loses its NH Supreme Court appeal of the JUA (Joint Underwriting Association) lawsuit. This lawsuit comes from a budget provision attempting to simply “take” $110 million from a fund designed to keep a lid on physician’s medical liability insurance costs. The State’s attempted money grab has already been ruled in violation of both the State and Federal Constitutions by the Superior Court.

The mixed news is that business tax revenues were only 4% lower than expectations. While it is preposterous to call any shortfall good news, in comparison to last year’s business tax receipts that were off by 25%, being 4% below expectations is a slim glimmer of hope. However, it's also a warning that if the trend continues the State will face a nasty budget deficit.

Despite the good and the mixed news, NH is far from out of the budget woe woods as the bad news dwarfs the good. Other revenue sources are badly underperforming, despite many taxes being increased in the budget. Receipts from the rooms and meals tax, communication tax, and real estate tax are all down by about 9%. The interest and dividend tax is down a whopping 25%. Even tobacco taxes are down slightly.  In the three months since the budget was enacted revenues are down a total of $26 million or 6.4%. Should this trend continue the deficit will only grow.

Now that the state employees union has rejected the proposed contract that would have implemented 19 furlough days, Governor Lynch must begin a series of layoffs to save a mandated $25 million. Whether he will run into roadblocks if the union files a grievance for each position eliminated or political roadblocks from his allies in the Legislature – these savings may be questionable. 

So with all these budget monkey wrenches, it is certainly understandable that its authors are quick to claim that the national economy is to blame and that revenues are likely to rebound when the economy turns around. But that is a cavalier attitude based on wishful thinking rather than rational evidence.

NH’s unemployment rate just jumped to 7.2% which means nearly 25,000 people have lost jobs this year. As bleak as that is, the national numbers are worse --- much worse. Since the federal stimulus legislation was enacted in February, 2.7 million Americans have lost their jobs and the national unemployment rate is at a 26 year high of 9.8%. The human toll of these numbers is staggering for individuals, families and businesses struggling to stay afloat.

Some pundits have tried to argue that things are getting better as only 263,000 Americans lost their jobs in September vs. 741,000 in January. While true, any signs that employers may be thinking of adding jobs in the future is at odds with the evidence. Job losses continue, while overtime and the average length of the work week both fell. Employers don’t need to hire anytime soon and consumer spending which drives our economy continues its retreat.

So NH Legislators who voted for huge spending increases --- not to mention the property tax hikes from cost shifting and 61 additional tax and fee hikes in the last two budgets --- are desperately praying for a rebound in the economy to produce the revenue they need to balance their budget. Voters should not hold their breath waiting for miracles.

Instead what Democratic Legislative Leaders are planning is a TAX SUMMIT to discuss new and innovative ways to separate taxpayers from their hard earned dollars. Will these leaders recommend an income tax, a sales tax, a tax on mortgage refinancing, an entertainment tax, or new levies on New Hampshire businesses? Every one of these taxes or others could be on the table at a time that 53,330 New Hampshire people are out of work.

After hiking spending 23% in the last two budgets, raising property taxes and 61 other tax and fee hikes one would think that Democratic Legislative Leaders appetite for new and varied taxes would be satiated. Most NH voters are shaking their heads wondering if a SUMMIT to REDUCE SPENDING is too much to ask for. Isn't it time for the Democrats to turn off the tax hike spigot and focus on fiscal discipline?

As tough as things are for families and businesses across NH, they will get much worse if taxes continue to climb to meet revenue shortfalls. Then we will have to re-title this blog to "The Good, the Bad and the Ugly"! 

The ink is barely dry on the New Hampshire budget signed into law by Governor Lynch on June 30. Only 2 months have elapsed in the 24 month spending blueprint, but problems Republicans warned about are intensifying like a hurricane ready to make landfall. More ominously, a Plan B strategy dealing with budget problems is not even discussed in the polite company of Democratic legislative leaders.  In fact the chair of the House Finance Committee said publically a Budget Plan B is not even necessary. 

Here is why Budget Plan B is more urgent every day. Tax revenues are well below expectations.  When the budget was negotiated among House and Senate Democratic leaders, a funding gap between desired spending and available revenue was papered over when budget negotiators inflated revenue expectations by $75 million in the dark of night. Observers warned this $75 million was optimistic. Two months into the budget, those warnings are reality. Action needs to be taken now but Democratic leaders seem smug with happy talk that the budget will magically balance.

Here are the facts: July’s revenue was $4.7 million below expectations.  August was even worse with total revenues $17.6 million below expectations. Rooms and meals was $3.7 million under estimates – even after the tax was increased from 8% to 9%. Tobacco taxes were $2 million less than predicted – even after a huge 45 cent increase on a pack of cigarettes.  Business revenues were off by nearly $3 million.

To be fair, the July and August $22.3 million revenue hole needs to be taken in the context of not being historically large revenue months. However, September’s revenue figures will be a bell-weather as many businesses and individuals make estimated quarterly payments.  If September underperforms and continues the July / August trend, New Hampshire is staring down the gun barrel of a very large revenue deficit.  And no one should forget that the $22.3 million hole comes despite 38 new or increased taxes or fees in this budget.

Revenue deficits are only one part of the problem. The state is in a losing streak in court cases. Superior Court Justice Diane Nicolosi ruled in favor of the New Hampshire Health Care Association and blocked the State from keeping $9 million that nursing homes claim they are entitled to.  Belknap County Superior Court Justice Kathleen McGuire ruled that a budget provision, which transferred $110 million from a fund controlled by the Joint Underwriting Association to the State’s General Fund to balance the budget, is unconstitutional.

Justice McGuire’s well researched, clearly written and completely unambiguous ruling, held that the politicians who supported this proposed $110 million transfer, are in violation of both the ‘takings’ and ‘contracts’ clauses of the New Hampshire Constitution and the Fifth and Fourteenth Amendments to the United States Constitution.

While the State has appealed Justice McGuire’s decision, nobody in Concord ---- except the Democratic cheerleaders who proposed this $110 million sleight of hand transfer ---- believe the state will win the appeal.

A third lawsuit is about to be filed by the New Hampshire Municipal Association over the budget downshifting of state expenses to towns and cities. The Municipal Association has estimated the downshift will increase local property taxes by $90 million which is why nearly 150 towns and over 50 school districts will join this lawsuit.

In the face of mounting budget problems, Democratic legislative leaders have spent the summer barn storming across New Hampshire on their “truth and responsibility” tour. These leaders are claiming that state spending has been reduced by 1%. If the assertion was true – the Democratic architects of the budget would deserve credit.

But --- it is always easier to fall for the narcotic of believing your own spin rather than focusing on facts.  Again, here are the facts. Total state spending increased by nearly $1.1 billion or 10.48% according to the non-partisan Legislative Budget Assistant (LBA). Putting that spending hike in context, it is critical to recall that total state spending increased by 11.17% in the previous budget according to the LBA.

The responsibility part of the tour by Democratic legislators must be intended to remind voters they have an obligation to dig deeper into already thin wallets to pay for this explosive growth in state spending at a time people fear they will join the 50,000 unemployed New Hampshire citizens.  Thus Democratic leaders plead that the 38 new or increased fees or taxes are somehow responsible.

There is scant recognition in Concord how bleak our budget picture is. Nor will it improve until the national economy starts to grow out of ruinous deficits, bad debt, bailouts, government takeover of companies, and the bloated stimulus that has actually increased the unemployment rate to 9.7%.  Most experts believe the jobless rate will climb to over 10% before things begin to turn next summer.  These stark conditions should compel Democratic leaders in Concord to develop Plan B immediately.
That is precisely why Republicans called upon Governor Lynch to release the results of his call nearly a year ago for agency heads to produce budget plans that spend 3% less than their department did in previous budgets. That is the responsible way to confront a growing budget deficit—with spending cuts.

Our parents always taught us to say what we mean and mean what we say. Unfortunately, the more Democratic leaders tout “truth and responsibility” in regards to their budget, the more they mean taxes.  The House Speaker recently said she was open to an income tax. Perhaps that’s honest.  But it should be a stark warning to everyone who wants our state to remain a low tax haven – that income tax proponents are lurking. And the only way to fight an income tax is with fiscal discipline and spending cuts.
 
 

New Hampshire residents weary of dreary summer rain received a frightening jolt of lightening when a Judge blocked Governor John Lynch’s attempt to transfer $110 million dollars of private funds to State coffers.  Belknap County Superior Court Justice Kathleen McGuire ruled that an extremely controversial provision in the recently enacted New Hampshire Budget, which transferred $110 million from a fund controlled by the Joint Underwriting Association (JUA) to the State’s General Fund to balance the budget, is unconstitutional.  Justice McGuire’s well researched, clearly written and completely unambiguous ruling, held that Governor Lynch and members of the Legislature who supported this proposed $110 million transfer, are in violation of both the ‘takings’ and ‘contracts’ clauses of the New Hampshire Constitution and the Fifth and Fourteenth Amendments to the United States Constitution. Governor Lynch has already indicated the State will appeal the decision but it is hard to imagine, given McGuire’s opinion, that the Supreme Court will overrule her.

The JUA was formed in 1975 to provide medical liability insurance to physicians and currently provides over 20% of the medical liability coverage in New Hampshire. The Judge ruled the JUA is independent from the State. More importantly, physicians, not the State, contribute to its funding and when the JUA faced a deficit in 1985 a surcharge on doctor’s policies was assessed to cover the gap--not State funding. Twice in the past, the JUA distributed surplus funds to policy holders--not the State. Given these facts, it’s political hubris and arrogance seldom seen in our State, for the Democratic supporters of this budget to simply expropriate $110 million. These unseemly political shenanigans, now defy both our state and federal constitutions.

The sanctity of contracts is one of the underpinnings of our society, as is the prohibition of the government taking a person’s property without just compensation.  Good for Justice McGuire for upholding constitutional principles and shame on politicians who believe the State can simply break contracts and take property it doesn’t own, to enable the gravy train of a 10.5% state spending increase.

What does this $110 million hole mean for the New Hampshire Budget? First, the budget hole is not just $110 million. Recently Superior Court Justice Diane Nicolosi ruled in favor of the New Hampshire Health Care Association and blocked the State from garnering $9 million that nursing homes claim they are entitled to.  Furthermore, the New Hampshire Municipal Association is set to file suit against the State for changes to pension contributions made in the recent budget. The State has historically contributed 35% of the cost of pensions for police, firefighters, teachers, and other employees. Under the recent budget the State’s contribution will drop to 25%, costing property taxpayers an estimated $27 million. Thus far, 143 towns and 53 school districts have agreed to join the Municipal Association lawsuit displaying the depth of anger at the Democratic leadership’s hike of property taxes.

In total, the State could be looking at a nearly $150 million litigation shortfall.  As if misery did not already have enough company, when the budget was passed in June, its authors inflated revenue projections by $75 million to give the appearance it was in balance, at least on paper.  The question now is if this budget, passed only a month ago, is even worth the paper it is written upon?

New Hampshire residents may quickly lose sight of the interminable Washington debate on new bureaucracies, taxes, and regulations involving global warming and government run health care and soon be consumed with the budget wildfire in Concord that not even all this rain will stamp out.

So where does the State go from here?  The option I support would be to cut spending to balance the budget with available revenue.  Spending reductions of about 3.5% would be necessary to make up the $110 million gap. During budget debates, Republicans in the House and Senate proposed larger spending reductions and unfortunately each and every one were rejected on largely party line votes.  If Democrats won't cut spending, then what other options will they pursue?

Are new taxes on the horizon?  Unfortunately, that is more likely. The budget Governor Lynch signed increased tobacco taxes, taxes on rooms and meals, and numerous fees all while adding new taxes on gambling winnings, camping and owners of limited liability companies ---  the latter two new taxes without even the courtesy  of a public hearing.  The House earlier voted to increase gas taxes and implement new taxes on capital gains and estates. The Senate earlier voted to increases taxes on New Hampshire businesses small and large. At a time that the New Hampshire unemployment rate stands at 6.8% and families are struggling to pay their bills, there is no shortage of Democrats in the Legislature ready, willing, and almost gleefully able to raise taxes.

What about gambling? There is little question the prospects for gaming just improved. The Senate already voted for gambling (though I voted in opposition).  Would the House reconsider? Even if the House does reconsider, and gambling fills this $110 million crisis of today, larger budget problems loom in the near future.

The budget that just passed included $500 million of one-time funding sources—much of it federal stimulus money. Given that the federal budget deficit this year will approach an unheard of $2 trillion and federal budget deficits are estimated to top $1 trillion per year for the next 10 years (before health care reform), no state should expect more federal largess any time soon.

So, today’s crisis involving an unconstitutional attempt to simply grab $110 million will quickly become an even larger problem that gambling revenue will not fill.  Bottom Line: our State is hurtling headlong towards an income or sales tax, possibly both, unless we meet the challenge of reducing state spending.   

Supporters of the recently enacted State of New Hampshire budget were quick to claim that it was responsible and that they made tough decisions during difficult economic times. Talk about myth and spin - this budget fits the bill - literally!

Myth #1:  State spending will decrease in the next two years.  Sounds great doesn't it? Unfortunately, this is flat out wrong. Here are the facts: According to the Legislative Budget Assistant--the non-partisan office that is charged with preparing budget figures--total authorized spending in the current budget, which will close June 30, is $10.408 billion. The budget that was just approved and will begin July 1 authorizes spending of $11.499 billion, an increase of $1.091 billion or 10.48% by every known method of mathematics! How can these budget supporters possibly justify this huge increase when people are struggling to pay their bills and now will struggle to pay the higher taxes and fees contained in the budget? This 10.48% increase also comes at a time when other states around the nation on average are actually reducing spending!

Myth #2: The new tax on campsites closes a loophole. If budget writers really thought this tax on camping was closing a loophole it is hard to imagine why they would have introduced it in the wee hours of the night without a public hearing. The fact is that it is a brand new 9% tax on camping. It is positively amazing how supporters of this budget claim to be the politicians that support the little guy.  This budget not only taxes camping, it hikes taxes or fees on meals, tobacco, boat & car registration, salt water fishing licenses and most importantly, property taxes. Nothing can hide the fact that New Hampshire citizens of modest means will be digging deeper into their already empty wallets.

Myth#3: The tax on limited liability companies (LLCs) also closes a loophole.  Again, if this was a loophole – why no public hearing? This tax will impact approximately 10,000 small business owners organized as LLCs who will now be subject to the 5% Interest and Dividends Tax.  Without any rules yet promulgated, who knows if this will be a tax on interest or dividends---or a tax on the compensation a business owner pays him or herself. If this taxes a business owner’s compensation in the same way the Business Profits tax is applied -- against so-called excessive compensation -- then New Hampshire will be sending a terrible message to those very people we want to invest in the state and create jobs. Perhaps the supporters of this budget are spinning this as a business owner loophole because in reality they want an income tax!

Myth #4: If the budget were not enacted the cost to the State under a continuing resolution to keep government running would be $11 million per month. This takes the cake for spinning a myth. There is no reason whatsoever that spending for a short period could not have been authorized at 98% of existing levels to ensure deficits were not created. This is precisely what could have been done for the entire budget in order to avoid all the tax and fee hikes that will hurt working families and small businesses.

Myth #5: This budget is balanced. Whether the budget is actually balanced will not be known for some time. However, this budget relies on $75 million of magically inflated revenue estimates and a $110 million raid on a fund paid into by doctors to reduce medical liability costs. This raid is already the subject of litigation and the STATE JUST LOST THE FIRST ROUND IN COURT! Given these problems, it is hard to imagine the budget being balanced when it closes in two years.

Unfortunately, the really difficult choices were left for the next budget when the $500 million dollars of one-time revenue sources runs dry. The stage will be set in the next budget for the penultimate debate of whether this state adopts an income or sales tax or both. Even if the state were to allow expanded gaming, it will not be enough to fill this spending sink hole!

My grateful thanks to everyone who has written me with comments on these email updates. I appreciate all the information and ideas that you have provided. With the close of the legislative session in Concord, I won’t email updates until the fall. Please however monitor my web-site www.jebforstatesenate.com for occasional discussion about issues ranging from global warming legislation to healthcare.  Hope to see you climbing in the White Mountains this summer!  

Supporters of the recently enacted State of New Hampshire budget were quick to claim that it was responsible and that they made tough decisions during difficult economic times. Talk about myth and spin - this budget fits the bill - literally!

Myth #1:  State spending will decrease in the next two years.  Sounds great doesn't it? Unfortunately, this is flat out wrong. Here are the facts: According to the Legislative Budget Assistant--the non-partisan office that is charged with preparing budget figures--total authorized spending in the current budget, which will close June 30, is $10.408 billion. The budget that was just approved and will begin July 1 authorizes spending of $11.499 billion, an increase of $1.091 billion or 10.48% by every known method of mathematics! How can these budget supporters possibly justify this huge increase when people are struggling to pay their bills and now will struggle to pay the higher taxes and fees contained in the budget? This 10.48% increase also comes at a time when other states around the nation on average are actually reducing spending!

Myth #2: The new tax on campsites closes a loophole. If budget writers really thought this tax on camping was closing a loophole it is hard to imagine why they would have introduced it in the wee hours of the night without a public hearing. The fact is that it is a brand new 9% tax on camping. It is positively amazing how supporters of this budget claim to be the politicians that support the little guy.  This budget not only taxes camping, it hikes taxes or fees on meals, tobacco, boat & car registration, salt water fishing licenses and most importantly, property taxes. Nothing can hide the fact that New Hampshire citizens of modest means will be digging deeper into their already empty wallets.

Myth#3: The tax on limited liability companies (LLCs) also closes a loophole.  Again, if this was a loophole – why no public hearing? This tax will impact approximately 10,000 small business owners organized as LLCs who will now be subject to the 5% Interest and Dividends Tax.  Without any rules yet promulgated, who knows if this will be a tax on interest or dividends---or a tax on the compensation a business owner pays him or herself. If this taxes a business owner’s compensation in the same way the Business Profits tax is applied -- against so-called excessive compensation -- then New Hampshire will be sending a terrible message to those very people we want to invest in the state and create jobs. Perhaps the supporters of this budget are spinning this as a business owner loophole because in reality they want an income tax!

Myth #4: If the budget were not enacted the cost to the State under a continuing resolution to keep government running would be $11 million per month. This takes the cake for spinning a myth. There is no reason whatsoever that spending for a short period could not have been authorized at 98% of existing levels to ensure deficits were not created. This is precisely what could have been done for the entire budget in order to avoid all the tax and fee hikes that will hurt working families and small businesses.

Myth #5: This budget is balanced. Whether the budget is actually balanced will not be known for some time. However, this budget relies on $75 million of magically inflated revenue estimates and a $110 million raid on a fund paid into by doctors to reduce medical liability costs. This raid is already the subject of litigation and the STATE JUST LOST THE FIRST ROUND IN COURT! Given these problems, it is hard to imagine the budget being balanced when it closes in two years.

Unfortunately, the really difficult choices were left for the next budget when the $500 million dollars of one-time revenue sources runs dry. The stage will be set in the next budget for the penultimate debate of whether this state adopts an income or sales tax or both. Even if the state were to allow expanded gaming, it will not be enough to fill this spending sink hole!

My grateful thanks to everyone who has written me with comments on these email updates. I appreciate all the information and ideas that you have provided. With the close of the legislative session in Concord, I won’t email updates until the fall. Please however monitor my web-site www.jebforstatesenate.com for occasional discussion about issues ranging from global warming legislation to healthcare.  Hope to see you climbing in the White Mountains this summer!