‘LLC tax’ debate shadows Hassan’s campaign for governor

Last modified: 11/2/2012 11:26:02 AM
It was early in the morning on June 19, 2009, when negotiators completed work on a new two-year state budget. A few days later, the New Hampshire Legislature approved it, and Gov. John Lynch signed it into law.

Now, that budget – what it contained and how it was assembled – has become a rhetorical weapon for both candidates in the race for governor.

Democrat Maggie Hassan, then the Senate majority leader, touts it as evidence of her experience in making hard decisions to balance the budget amid a national recession. Republican Ovide Lamontagne derides it as an essentially unbalanced budget that relied on accounting tricks, borrowed money and tax increases.

One provision in particular has become a talking point as the Nov. 6 election approaches: the so-called “LLC tax,” described by Democrats at the time as a way to close a loophole in the state tax system but condemned by Republicans and small-business groups as a job-killing quasi-income tax. Introduced late in the process without a public hearing, the tax was initially supported by Lynch. But he later turned on the tax, and it was repealed in 2010 during a special legislative session.

For Lamontagne, the LLC tax represents what he describes as Hassan’s tax-happy approach to state government.

“Never under my watch will you see an LLC tax, which Maggie supported, brought in in the middle of the night when the budget was being negotiated in 2009, which raised taxes on exactly the wrong people at the wrong time, killing jobs,” he said during a debate this month at Temple Adath Yeshurun in Manchester.

Hassan doesn’t describe the LLC tax as a mistake, but holds up the fact that it was quickly repealed as a symbol of her pragmatism.

“There’s a lot of rhetoric about that and other steps we took, and the attacks on process are not true,” she said last week in an interview with the Monitor’s editorial board. “But what I think is more important is to look at what kind of leader both Ovide and I are. That was repealed over time, as we learned that it didn’t work in implementation the way it was supposed to. But meanwhile, Ovide is still out talking about ideas that are outdated and that have hurt New Hampshire.”

Tale of the tax

In February 2009, officials at the Department of Revenue Administration contacted Rep. Susan Almy, a Lebanon Democrat and then the chairwoman of the House Ways and Means Committee, about a tax loophole they wanted to close.

New Hampshire doesn’t have an income tax, but it does have a 5 percent tax on interest and dividend income above a certain amount. Under state law, shareholders of corporations pay a 5 percent tax in dividends. But if a company was set up as a limited liability company, or LLC, the members didn’t pay that tax.

“It was closing a loophole that has a huge constitutional issue that has us liable to lawsuits,” Almy said last week.

But at the time, Almy recalled, she told the DRA to wait until 2010 to deal with the issue, since it would have required permission from the Rules Committee to introduce a late bill.

“I said I couldn’t do it,” she said, “and then we got to the budget.”

The House and Senate had trouble agreeing on the best way to balance the budget for fiscal years 2010 and 2011. The Senate wanted revenue from expanded gambling, but the House favored new taxes on capital gains and estates.

House and Senate leaders huddled with Lynch and state officials to find a solution. And among the ideas suggested by Revenue Commissioner Kevin Clougherty was the proposal to extend the interest-and-dividends tax to money paid to LLC owners above a “reasonable compensation” for their work. That would raise $15 million for the state, according to projections at the time.

What became known as the LLC tax didn’t go through a public hearing and was included in the compromise budget near the end of the process. But that’s not an unusual practice during budget season, said Marjorie Smith, a Durham Democrat and then the chairwoman of the House Finance Committee. (She’s running for the House again this fall.) “I served on the Finance Committee in the House for 12 of the 14 years that I was in the Legislature.

. . . There was no difference in how the budgets were handled, procedurally, . . . under Democratic or Republican leadership,” she said.

As for the LLC tax, Smith said it surfaced late in the game and “we were under the impression that it had been vetted more than had been the case, probably because there had not been enough time to vet it.”

Clougherty’s office didn’t return a message last week requesting an interview to discuss the LLC tax process.

The budget, including the LLC tax, passed and became law. And then the trouble began, in part because of the complexity of deciding what constituted “reasonable compensation” for LLC owners.

More than 200 people turned out at a DRA hearing that December to protest the tax. Republican officials and business groups called for its repeal. Former Republican senator Bob Clegg, now a lobbyist, helped lead the anti-LLC tax effort, calling it an attack on smaller businesses.

“It was an attempt by the Department of Revenue (Administration) to create a method of taxing those who were least able to fight it,” he said last week.

Andy Sanborn, owner of The Draft in Concord and later a state senator, was one of those who called the tax an attack on entrepreneurship.

“In these new rules, you didn’t consider all the sacrifices we as small-business owners endured to get where we are today. . . . Frankly, it appears that you’re intending to punish the American dream,” Sanborn declared during the December hearing.

The Business and Industry Association had given its blessing to the budget in June, with President Jim Roche saying in a news release that the group’s concerns about the LLC tax “were answered.” But within a few months, the BIA had become a loud voice condemning the LLC tax.

Roche said last week that the BIA never supported the tax even if it recommended approving the budget that contained it.

“To suggest that our recommendation to legislators to support the budget at the time is a recommendation to support the LLC tax is simply false. . . . One can go through a budget like that and choose all kinds of things that you could support or not,” Roche said. “Our recommendation was on the budget in its totality.”

The BIA has continued to keep its distance from the LLC tax; when Hassan said during a BIA-sponsored debate in September that the BIA had helped design the tax, the group immediately issued a press release denying it.

By March 2010, Lynch was calling for the tax’s repeal. At a special session that June, the Legislature passed a bill to fill a $295 million hole in the state budget. It included a repeal of the LLC tax.

“When implementation didn’t match our plans . . . we repealed the LLC tax,” Hassan said.

Attack on Hassan

For Lamontagne, Hassan’s support for the LLC tax wasn’t just a mistake. It’s something that reinforces his campaign’s favorite attack on Hassan, that she favors higher taxes and fees (the campaign sends out a daily “Maggie’s Tax of the Day” email), and undermines her claim of fiscal experience.

“The LLC small business income tax is an issue in this race because it is a prime example of why the people of New Hampshire cannot trust Sen. Hassan with the state budget. . . . Sen. Hassan is an unabashed tax, borrow, spend and regulate liberal who after increasing 99 taxes and fees and growing government 24 percent, left the people of New Hampshire with an $800 million budget deficit,” spokesman Tom Cronin said in a statement. “The LLC small business income tax is one of the clearest examples of her fiscal mismanagement and we believe the voters of New Hampshire should be well aware of it before casting their ballots.”

Hassan, like Lamontagne, has pledged to veto an income or sales tax as governor. And her campaign has disputed the claim that the state budget passed in 2009 left a $800 million deficit, pointing to a ruling by the nonpartisan PolitiFact website that ruled a similar statement as false. When final numbers are used in place of interim projections, PolitiFact concluded, the state budget passed in 2009 in fact left a $17.7 million surplus.

“It was a compromise budget,” Hassan said. “We made some really difficult choices in it. We cut spending in the general-fund account. We closed outdated programs, we closed buildings and at the end of the day we balanced the budget and left a surplus. . . . The decisions weren’t easy, but the served the state well.”

That, her campaign says, stands in contrast with the deep cuts made in the most recent state budget by Republicans who took control of the Legislature in the 2010 election.

Critics, including many Republicans, dispute the notion that the budget was balanced, pointing to the Legislature’s use of borrowed money and one-time funds like federal stimulus money. In addition, they say, the budget moved expenses like the state Liquor Commission out of the general fund to create the appearance of reduced spending.

“Regardless of whether you supported those unusual budgetary measures, it is unquestionably true that we used unprecedented borrowing and bailouts to delay some decisions and create an $800 million problem that had to be fixed (and was fixed by the current Legislature through spending cuts),” wrote Charlie Arlinghaus, president of the Josiah Bartlett Center for Public Policy, in a recent op-ed in the New Hampshire Union Leader. (The Concord-based center describes itself as a “free-market think tank.”) Either way you look at it, Hassan held a leadership position as Senate majority leader and was one of the negotiators between the House and the Senate during the 2009 budget process.

“Maggie worked very hard as majority leader and she worked very hard as a member of the committee of conference on House Bills 1 and 2, and that would certainly mean that she earned her spurs,” Smith said.

But, Almy said, while Hassan helped craft the budget, it’s not like the much-maligned LLC tax was her idea.

“She did not bring it in,” Almy said. “She and the other senators fought until the last possible minute . . . to use a casino instead. . . . Hassan in the end voted for it, reluctantly, but she certainly didn’t bring it in.”

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