Wednesday, February 3, 2010



Part II

By Jeb Bradley
“I wish I had an answer to that because I'm tired of answering that question.” Yogi Berra

Governor Lynch firmly proclaimed in his State of the State Address this past week that Jobs, Jobs, and Jobs are the issues facing New Hampshire. Meanwhile, business leaders are scratching their heads asking how in the world can they create jobs amidst the demoralizing impact of large business tax hikes from Concord and the uncertainty of what comes next from a Legislature seemingly oblivious to the impact of the 38 taxes and fees they just raised in 2009?

The Governor avoided the sore subject of all these new taxes, especially the LLC Tax, a 5% levy on a significant portion of a business owner’s income. Business owners are angry and frustrated. In fact a new group, The Small Business and Small Industry Association was founded to help fight this new tax.

This business owner income tax comes against the backdrop of New Hampshire’s alarming unemployment rate jump to 7% with 51,625 people out of work. That bad news coupled with Senator Scott Brown’s stunning victory in Massachusetts left Concord Democrats in full denial on taxes. Even their spin made no sense.
One Democratic State Senator told the Portsmouth Chamber of Commerce, “only very very successful LLC owners who were not re-investing funds into businesses would have to be concerned.” The Governor’s office maintained the so-called LLC tax merely closes a loophole. The Chairman of the Democratic Party even said on the BlueHampshire Blog that business owners are being “scared” and that businesses “don’t have to pay any additional taxes.”

Really? So where is the $30 million that Democratic budget writers estimated the LLC Tax would produce actually coming from? That’s the proverbial $30 million question tax supporters can’t or won’t answer!

How does the LLC Tax work? It extends the 5% Interest and Dividends (I&D) tax to a business owner’s salary -- above a level of reasonable compensation defined by the Department of Revenue (DRA). How many LLCs and partnerships will be affected? No one knows but estimates start at 10,000. It could be thousands more.

What supporters of the LLC Tax ignore --- no other state or the federal government taxes small businesses in this manner. Why? Most people recognize that small businesses such as partnerships and LLCs are responsible for creating a large portion of the new jobs in America. The LLC tax will make New Hampshire self-destructively unique, undermining the very job creation energy needed to get 51,625 New Hampshire citizens back to work. Former DRA Commissioner Phil Blatsos called this tax an “insidious job killer” that could cost 600 jobs per year. Probably just for starters!

Many legislators in Concord believe businesses don’t contribute their fare share of taxes even though they produce some $500 to $600 million in annual revenue. So, how do business owners pay taxes in New Hampshire?

Small businesses typically pay the Business Enterprise Tax (BET) – a payroll tax of .75% on the salary of every employee including the owner. Because the largest expense for most small business is salary, they would typically not pay the 8.5% Business Profits Tax (BPT) unless they retained profits. But the impact of the BET is felt directly by small business owners because it’s straight from their bottom line.

On the other hand larger companies that are incorporated would typically pay the (BPT) on net profits. While these larger companies are subject to the BET, they are allowed to fully credit their BET exposure against the BPT. When a corporation pays a dividend to a passive investor, the investor not the corporation would pay the 5% I&D tax. A passive investor, however, is completely different from a business owner.

Corporate executives are not subject an income tax in the manner that LLC owners or partnerships now are, thanks to the LLC tax hitting a significant portion of an owner's salary. People who claim the LLC tax simply closes a loophole believe the owner’s salary is actually a dividend. Try telling that to a business owner working 18 hour days to keep the doors open, keep people employed and meet payroll every week. The other 6 hours the business owner is probably awake ….worrying about what cockeyed tax idea will come next from Concord! A full-fledged income tax?

It only gets worse for the business owner. For several years the DRA has conducted hard-hitting audits to determine if business owners pay themselves more than what government officials deem reasonable compensation. Per these aggressive DRA audits, any business owner salary above that bureaucratic definition of reasonable compensation is termed “profit” subject to the 8.5% BPT. Now thanks to the LLC Tax, that same salary will be subject to the 5% I&D Tax. So the effective tax rate for the small business owner is an ungodly 13.5% -- enough to keep business owners sleepless in New Hampshire!

Adding insult to injury, the Democratic Chairwoman of the House Ways and Means Committee has proposed legislation defining reasonable compensation so the 13.5% income tax on business owners kicks in on salary above $50,000 per business entity --an absolute killer if there is more than one owner. And DRA sets all the rules. No wonder business owners are crying foul and everyone concerned about JOBS is aghast at the plummeting business climate in New Hampshire.

What can people do? I have sponsored legislation to repeal the LLC Tax and remove DRA’s authority to determine what business owners can reasonably pay themselves without triggering a hefty tax bill. Those hearings will be held at the State House on February 9th at 10am. It is essential for people to travel to Concord and make their voices heard.

Alternatively Silence Means --- WELCOME TO NEW TAX-SHIRE!


No comments:

Post a Comment