My March 6, 2010 Letter to the Editor about the LLC Tax

(along with some other comments)



additional commentary by Timothy Horrigan; July 29 & August 5, 2010


This is a letter to the editor, defending a rather unpopular tax, which appeared in the March 6, 2010 Dover, NH Foster's Daily Democrat. An LLC is, as you probably know, "a limited liability company." This is just like a corporation, except it's not a corporation: it has simpler but less flexible rules. In New Hampshire LLC's can't have transferable shares and they can only have a limited number of "members" (equivalent to shareholders, although corporations and even other LLC's can be members.) One of my constituents is very eager to remove the restriction on the number of members because he owns many LLCs, possibly dozens of them, but I digress...



Original URL (subject to link rot over time):


Support for LLC tax

To the editor: I would like to put in a good word for the much maligned "LLC Tax" which was passed last year by the General Court during the budget process.

This tax was supposedly sneaked into the "budget trailer bill" HB2 in the dead of night. But that is a myth. I knew it was there; hopefully all the other legislators who voted for the budget knew it was there. The process may have been politically flawed, since there were no public hearings, but the House and Senate both followed their rules, and the governor signed HB2 into law.

The LLC Tax is as valid as any other law, as is the rest of HB 2 (a flawed budget bill which was the best bill the General Court could pass under the financial and political constraints facing our state.)

The term "LLC Tax" is itself a myth. HB2 simply closed a loophole in the Interest & Dividends Tax whereby Limited Liability Companies were excluded from a tax which corporations already paid. LLC's tend to be smaller than corporations, but there are some very large entities which are LLC's. Fidelity Investments, the financial giant which is a major employer in New Hampshire, is organized as several interlocking LLCs, for example. The LLC loophole in the Interest & Dividends tax cost the state government about $15 million a year.

The Interest & Dividends tax is 5 percent, which is not a trivial percentage, but which is far less than the 13.5 percent figure cited by LLC Tax opponents.

The 13.5 percent number was arrived at by adding the Interest & Dividends tax to the 8.5 percent Business Profits tax, which LLC's have been paying all along. The so-called LLC Tax applies only to cash payments to LLC owners which cannot be justified as compensation for services rendered. The LLC Tax has been derided as a "job-destroying" tax but it actually incentivizes job creation: it is not applied to revenues paid out as wages and salaries, and it is not applied to revenues reinvested in the LLC. The new tax specifically excludes revenues which are used to directly create new jobs, as well as those which are used to increase the compensation for existing jobs.

Rep. Timothy Horrigan
Durham




The LLC is often regarded as a synomym for "small business" although some LLCs are huge. Wal-Mart Transportation, Wal-Mart's inhouse trucking firm is an LLC, for example, as is its e-commerce subsidiary Walmart.com. So is Walmart.com's rival Amazon, for another example. So is Fidelity Investments, which is (if I am not mistaken) the second-largest private employer in New Hampshire (after Wal-Mart.)


The tax was put into the 2009-2010 budget during the conference committee process. It is often described as having been done secretly in the dead of night, but it was put in during the afternoon and everyone knew about it. There was no hearing, but the issue had been the subject of hearings previously. The House and Senate Ways & Means and Finance committees were being a little cynical: they hear the same crap at every hearing about how unfair taxes are and how every proposed tax increase will destroy the economy. (In New Hampshire, we also have many small taxes. We have no broad based tax, but we have dozens, maybe hundreds, of narrow based taxes, mostly on business. No matter how narrow the base of the tax is, and no matter how seemingly trivial— or even downright useless— the industry being taxed is, there will be lobbyists ready to warn the committee that this industry is the lynchpin of the state's economy. I have even seen lobbyists come in and tell us that our economy would fall apart if we raised the cigarette tax to the same rates found in neighboring states; apparently the basis of our whole economy, especially in communities near a state line but also in the central part of the state, was sales of cigarettes at convenience stores to bargain-seeking out-of-state smokers. Apparently smokers will drive long distances in their quest to get lung cancer and emphysema as cheaply as possible.)


In any case, the LLC tax was basically a logical idea: it treated interest and dividends from LLCs the same as those from all other corporate entities. New Hampshire has excessively high business taxes, but this tax was only 5% and it would (supposedly) raise $15 million at a time when the state needed every million it could get to balance the budget. That's not a small percentage and it's not that small an amount of money, but it's not enough to destroy the small business sector. 5% isn't going to turn anyone's winning business plan into a loser. $15 million wasn't going to suck the small business sector dry (especially since state government is one of the small business sector's biggest customers, and since some of the millions would be used to lower other taxes.)


The LLC tax was tagged with the epithet "job-killing LLC tax." Ironically, money spent on payroll was exempt. Money reinvested in the business was exempt as well (unless you have multiple LLCs like my neighbor. He would have to pay the tax on funds transferred from one LLC to another.)


The LLC tax uproar coincided with a recession, and more specifically it corresponded with a dispute over "reasonable compensation": income over a certain amount can be considered interest & dividends if it cannot be justified as "reasonable" compensation. The opponents of the LLC tax radically misinterperted a proposal to raise a floor value to $50,000 as a proposal to set a ceiling value of $50,000.


The LLC tax eventually got killed in June 2010. It only raised an estimated $2 million before it died. Even though it is dead, and even though it only took a fraction of what it was expected to take, the Republicans are still angry about it.




On a related note, I have made more than one provocative comment on the Manchester Union Leader's web site, attached to stories about the LLC Tax. I often wonder if some of the respondents really own LLC's profitable enough to be effected by the tax. One of the popular tropes in the Union Leader comment sections involves a (supposedly) LLC owner who was about to hire a worker until the tax prevented them from doing so. This trope seems unlikely to me: it cost a minimum of $25,000 to hire even a worker. $25,000 divided by 5% is $500,000. Most LLC's don't make anywhere near that much profit. If they do hire a worker, the cost of hiring a worker is a business expense and should be exempt from the LLC Tax. And of course, no business owner hires workers unless the value of the worker's services exceeds the cost. The 5% bite out of the LLC's interest and dividends is not insignificant, but (as I said before) that doesn't turn a winning business plan into a loser.

Here are a couple of my comments, with responses from other readers (some of whom seem to be confabulators):


"Businesspeople by the busload blast LLC tax"; January 8, 2010

(one of the businesspeople was Senatorial candidate Kelly Ayotte's husband, who owns a landscaping business in Nashua.)



Joseph Daley looks on as his wife, Kelly Ayotte, officially files her papers to run for the U.S. Senate.

Joseph Daley, a small business owner from Nashua, griped about traveling 90 minutes each way to speak for 3 minutes. I can't blame him for being irked. He can submit written testimony as well, although it is unclear who if anyone will read it.

Hmmm, Kelly Ayotte's husband is a small businessman and they live in Nashua and HIS name is... JOSEPH DALEY.

I am surprised the reporter didn't pick up on the name and I am amazed the editors of the UL didn't. Maybe it's a different person by the same name, but it's probably the same Joe Daley.
- Timothy Horrigan, Durham, NH

My comment triggered this angry retort:



@- Timothy Horrigan, Durham, NH: Tim, sorry but whoever Daley is related to has no bearing on his testimony. He is a business owner who may be affected by this and as such has the right to protest it.

You people are so desperate to make anything look like something, that you would mention this. It's quite laughable.

There's plenty of scandal however, with the fact your inept little governor LYNCH has caused this state so much financial distress the likes of which we have never seen before.
- Sue, Manchester



"Lynch lashes out: But what of the facts, governor?"; April 18, 2010 (editorial)


I am a state rep, so I guess I am one of the bums. I reluctantly voted for the LLC tax, which in fact made little difference one way or the other. Small changes in tax rates do not change things all that much. Increasing the interest & dividends tax from 0% to 5% was an unpopular move and the way it was enacted was problematic. It didn't actually "kill" any jobs, because a 5% tax rise doesn't turn a profitable business plan into an unprofitable one, any more than a 5% drop in revenue would. Ditto for the increase in the rooms and meals tax: maybe not a great idea, but it caused no measurable change in how many rooms and meals consumers bought. IT didn't even cause a measurable drop in campground revenues (although this effect would have been hard to measure because it was applied to a very small sector of the market.)

I enthusiastically supported gay marriage. It is VERY popular with gay people and those who have friends or family members who are gay. It also fixed a troubling inconsistency in the law. And BTW, the last two gay marriage votes in the NH House endorsed marriage equality by a nearly veto-proof margin: CACR 28 failed 201-135 and HB 1590 by 210-109. A third bill related to the fight against gay marriage, the referendum amendment CACR 20, was so unpopular it didn't even get voted on: it was killed via the "consent calendar".
- Timothy Horrigan, Durham, NH

Vince Milano from Epping owns a successful business, but I doubt any of these other people are running LLC's which were successful enough to incur the tax.



Timothy Horrigan, at least you have the courage to admit and stand behind your positions...no matter how misguided they may be. Your support of the LLC tax is nothing less than the unjustified imposition of a biased, unconstitutional, retroactive INCOME tax on the very segment of the business sector responsible for not only the creation of most of the jobs in this troubled economy, but for the very existence of an economy. Many of these LLCs operate on such a thin profit margin that any increase in expenses means that the LLC owner(s) may not draw any compensation that period. Your contention that "Small changes in tax rates do not change things all that much." appears to be held by one who has never put his blood, toil, sweat and heart on the line to grow a business from nothing. (Trust fund baby??)
And your statement, "I enthusiastically supported gay marriage. It is VERY popular with gay people and those who have friends or family members who are gay" is patently ludicrous. Do you really think it would be unpopular with this demographic. The reason the votes you listed resulted as they did is because you and your ilk didn't bother to ask your constituents how they felt about the issue. The arrogance displayed in Concord these days is reprehensible. But thankfully, it can be corrected in November.
- Whitey, Strafford

Rep. Horrigan of Durham (who never finds it necessary to give his party affiliation, but you can guess it) says, "Small changes in tax rates do not change things all that much." The last time I heard this contempt, it was a politician in Atlas Shrugged smugly telling a businessman, "You'll find a way."

A given tax increase--even the infinity-percent increase of applying a tax to something it has never been applied to--might not be seen in statistics, if you close your eyes. But a consistent and repeated tendency to favor "small" tax increases over any spending discipline, if it doesn't break a business plan, drives employers to try to achieve it SOMEWHERE ELSE--leaving us with fewer jobs and Horrigan with new "victims" of the unexpected recession testifying before his committee--for whom the only solution is more activist government. Rep. Horrigan, it really is time for you to go.
- Spike, Brentwood NH

Timothy Horrigan you are exactly the problem. How can you say a 5% tax increase won't kill a business that's on the edge because of this recession? It's this arrogant statement by a legislator that is completely out of touch with everyday people and everyday life. You are focused on your own issues like gay marriage not issues that are important to everyday people. I'm sure gay marriage had a lot of support amongst gays, like a no drunk driving laws would have among alcoholics. Democrats are so out of touch with the mainstream they push issues on the fringe without addressing the tough issues. Lynch did lie that's the truth.
- BF, Epsom

Mr. Horrigan you are correct on one major point in your posting- You are one of the BUMS. It is quite clear from your posting that you think that it is quite OK for the State Government to take more from business owners and producers. After all what's a mere 5 % ? You could not be more wrong. Every dime you take out of the private sector by tax is a money that cannot be saved or spent by those that earned it , thus building our economy. Why can't you just step back and realize that Government is not the answer to every problem and more often than not IS the problem. The more people like you in this government the worse off we will be until we hit the bottom. And on the Gay Marriage issue I stand against it and it is very UNPOPULAR with everyone I know. And where is the equality? Why can't someone have 2 spouses? Marry a relative/ After all we want them to be happy and it is done in other places in the world. How depraved are we to get, Mr. Horrigan? Call me what you will, I don't care anymore. But I have become politically active as have my family and friends and it is not your ilk we support,
Remember Progress is not always good , right or moral.
- Vince Milano, Epping NH

(I actually met Mr. Milano in July, because I am part of an ad-hoc caucus which is trying to help him— and other citizens— file petitions for redresses of grievances. He was a person of considerable intelligence, and I guess I will admit that he makes some valid points. I will continue to assume that the other people I am quoting are morons, however.)

It's OK, folks: I can take the abuse.

To the person who cited Ayn Rand: her books are FICTION! "Atlas Shrugged" or "The Fountainhead" are great novels, but using them as textbooks on economic or political science is like using "The Davinci Code" as a history textbook. The events in Rand's books DID NOT HAPPEN! She MADE THEM UP! And, by the way, she was bisexual and not at all monogamous.

My point wasn't that it is desirable to raise taxes. It's not. But tax increases don't always have disastrous effects-- and sometimes it is necessary.
- Timothy Horrigan, Durham, NH

Mr. Horrigan, you stated, "It's OK, folks: I can take the abuse." Of course you can; you're a politician (as opposed to statesman) who has a thick skin. But along with that thick skin comes a deaf ear, blind eye, and the delusion that you know better than the public what is best for the public. You may even suffer from the self-perception that what you are doing is altruistic in nature, when in fact, it is arrogant, narcissistic and completely subjective as defined by your politics. I hope that someday - before it is too late for you and us - that you will recognize the errors of your ways and correct them...or at least, sytand aside and allow someone with a sense of the electorate's will to step in and reverse the New Hampshire economy's downward spiral. Wake up, Mr. Horrigan, and smell the coffee.
- Whitey, Strafford

Rep Horrigan in Durham,
I would not consider it a badge of honor, that someone has to go into the realm of fiction to find a character more arrogant and dismissive than you.

Many LLC and rooms and meals related business do operate on profit margins narrower than 5%, especially now during a recession. I find you denial of this fact troubling. I find your willingness to raise taxes during a recession, when families and business are at their most vulnerable, even more troubling.

The ideal function of government is to offset the variations of the business cycle, saving during good years and spending down the rainy day fund during lean years. Instead your tax and spend proposals exacerbate the boom bust cycle which hurts our States average economic growth rate.

I don't know what measure you are using to asset that applying the rooms and meals tax to campgrounds "didn't even cause a measurable drop in campground revenues" runs contrary to all the reporting I heard on the subject.

Your defense of these tax increases seems to be that they did not pass the point of diminishing returns; that the governments take should be the most it can possibly get, or at least not cause a disaster in the economy. What about fairness, what about leaving the money in the hard working hands that earned it? What about maximizing jobs, wages, and business profits as a way of increasing peoples individual wealth, and eventually government revenues as well?

You say the tax increases you did last year were necessary, Republicans said the spending cuts the Governor is finally proposing this year, were necessary last year. Looks like the Republicans are getting the last word. Why didn't you listen to them last year? Why the propensity to raise taxes first/cut spending last?
- Jim, Manchester, Ward 9