Testimony on Repeal of LLC Tax

Submitted to the Senate Ways and Means Committee on 9 Feb, 2010

SB 473 – Repeal of the “LLC Tax”

I am writing this testimony in support of Senate Bill 473-FN. This bill repeals the so-called “LLC tax” that was passed last June and clarifies that certain businesses are exempt from the Interest and Dividends tax, and always have been, since their shares are non-transferrable. My reaction when I first found out about the “LLC tax” was that I could not think of a better way to kill the prospect of new jobs in NH at a time when this state and in fact the country is faced with record unemployment. The perfect parable to describe this new tax is that of the goose that laid the golden egg.

Small businesses are certainly the “golden goose” of New Hampshire (or any state for that matter). President Obama realizes this, and was recently quoted: “Over the past fifteen years, small businesses created roughly 65% of all new jobs in America,” and has been suggesting tax credits for firms that hire. Small business will lead the economic recovery and the states that are most friendly to small businesses will lead the recovery. In the past for New England, this has always been NH with its competitive tax advantage. The new LLC tax makes N.H. the worst state in New England for small business, guaranteeing continued high unemployment for the foreseeable future. Currently small businesses pay the Business Enterprise Tax or the Business Profits Tax depending on whether they are taking out compensation or a distribution. In either case, they are laying golden eggs every year for the state of New Hampshire.

The LLC tax considers a distribution to be a dividend, and charges an additional 5% on top of the business profits tax of 8.5%, bringing the grand total to 13.5%, on top of the already onerous Federal taxes. Why would a business come to N.H. when they can go to Massachusetts or Maine and pay lower taxes? To add insult to injury, based on directives from the Legislature and Governor, the Department of Revenue Administration (DRA) has been very aggressive on deciding what constitutes “reasonable compensation”, and the burden of proof is on the business owner (guilty until proven innocent). So the DRA has the authority to disallow compensation deductions so that business owners are forced to consider what would normally be income to instead be a “dividend” and taxed at 13.5%. Sounds like an income tax for small business owners to me. The new law also created an incredibly burdensome accounting nightmare for small businesses.

So the “LLC tax” passed last June is a tax that will cut open the goose looking for the golden eggs inside. But, like the parable, we will find out instead that we just have a dead goose, and no more golden eggs, as small businesses flee to Maine or Massachusetts. This is why it is absolutely vital that we pass SB 473 so that we can regain the competitive N.H. advantage and attract new businesses, retain the ones we have, and grow our way out of this economic collapse.

Jim Forsythe, PhD
Forsythe Consulting, LLC