To The Daily Sun,
Mark Fernald's op-ed in the Sept. 25 issue of The Sun concerning the New Hampshire Interest and Dividends Tax (IDT) indicates that he doesn't understand forms of business organizations, economics and recent history. His article is a complaint of unfairness as hint for the broad-based income tax platform that he ran on for governor in 2002, and was defeated.
Mr. Fernald seems to forget the uproar created in 2009-2010 by the Democratic-controlled Legislature and the State Department of Revenue Administration (DRA) when they tried to "close the loophole" by taxing distributions from limited liability companies (LLCs) and other business organizations. Attempting to apply the IDT on top of the Business Profits and Business Enterprise Taxes (BPT, BET) would have increased the tax burden on small businesses to around 13.5 percent and made New Hampshire even more uncompetitive for small business than it currently is — and during a difficult economic period which still lingers today. Fortunately the hue and cry from New Hampshire citizens forced the Legislature and DRA to back away from their position, but Mr. Fernald seems to persist. He just doesn't understand business and economics.
My background is in corporate law, where I served as counsel to large and small businesses in Connecticut and Illinois for over 30 years. I have also instructed classes at the undergraduate and graduate levels in the College of Business Administration at Plymouth State University for over 10 years, which classes included instruction on forms of business organizations, including LLCs.
In my personal experience, LLCs are a primary and favored form of business organization among small businesses and the backbone of New Hampshire's economy. The reasons are simple. LLCs are easy and inexpensive to form; management can be through a single member/owner; claims and liabilities are limited to assets of the LLC, not personal assets; and most importantly LLCs avoid double taxation, i.e. taxes are paid at one level, usually the member/owner level (in most states).
For federal and most state purposes there is a "pass through" of taxation at the entity level, which is measured by earned income at the member/owner level. New Hampshire is different. Because we do not levy an income tax on earned income received by individuals from LLCs and other sources, taxes are collected at the entity level through the BPT and BET, regardless of whether the entity is a partnership, corporation, LLC or proprietorship.
Thereafter, distributions to individual members/owners have traditionally not been taxed.
Mr. Fernald forgets that the IDT has traditionally been a tax on interest and dividends received by individuals from organizations like GE, P&G and J&J. It is a tax on unearned income. It is simply a mischaracterization to attempt to apply it on top of already existing taxes on earned corporate income like the BPT and BET. To call LLCs a "huge loophole" and comparable to "corporate inversions" is to seriously misunderstand economics and business formations. Furthermore, all of Mr. Fernald's points seem to ignore economic incentives and personal motivation. They reinforce the old adage typical of many on the left that when you tax or regulate something, you get less of it. Is that what we want for our state's economy in these difficult times? Hardly.
Richard R. Gerken
- Category: Letters
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