When a good legislator sponsors bad legislation
Bid to tax non-profits is a misguided attempt to address state’s revenue problem
Rep. David Hess, R-Hooksett, is one of my favorite New Hampshire legislators. He is sensible, smart, a retired attorney and dedicated to his town and his state. Like other favorite legislators, among them Sen. Lou D’Allesandro, D-Manchester, he has worked diligently over an extended period of time.
As in the case of most legislators, every once in a while even my favorites submit bad legislation. In Senator D’Allesandro’s case, I have always been distressed at his support of casino gambling. In Representative Hess’s case, it is his reintroduction this year of House Bill 569.
HB569, a reincarnation of a bill that Representative Hess introduced in 2014 would apply the business enterprise tax – a unique and somewhat suspect levy in its own right – to 501(c)(3) entities, better known as “tax-exempt” charities.
The new bill would apply the BET at a reduced rate from the present levy, to 501(c)(3) organizations with the first $10 million of economic activity deleted from the equation. Ostensibly, this threshold level is to exempt smaller not-for-profits.
In testimony before the House Ways and Means Committee, Representative Hess emphasized that there are large 501(c)(3) organizations in New Hampshire, notably large hospitals and colleges, that pay their chief executives high salaries. While undoubtedly this is true, the bill is defective both theoretically and practically, for several reasons:
• First, by definition, “tax-exempt” entities are exempt from taxation because a judgment has been made by society that their contributions are such that taxing them would be counterproductive. Both at the federal level and state level, we have recognized that such entities provide public assistance and services that are valuable to society and otherwise might have to be paid by the government or not exist at all.
The fact that they are large, complex organizations in many cases that require the services of sophisticated chief executive officers and other chief administrators who get paid for their level of expertise, misses the point.
• Second, there are many large not-for-profits that generate more than $10 million in economic activity that are struggling or weak and are losing money. Particularly in the case of community hospitals, many of which are losing money in New Hampshire because of the rate of reimbursement the government gives them, and in the case of private, not-for-profit colleges that are in an extremely challenging demographic environment, adding taxation to them would further weaken them.
In the case of colleges, they already pay local governmental property taxes on their dormitories and cafeterias, a unique situation making those in the state less competitive than any other state around it and making the not-for-profits less competitive with public institutions that do not have to pay the same levy.
• Third, in the case of service-providing not-for-profits with program revenue for the services they provide, the bill would tax them and take away what little surplus, if any, they have. Surpluses by not-for-profits are used to subsidize services or provide free services, and most of the money for the services comes from governmental reimbursement at some level in the first place, which has been supplemented by the surplus money.
Taking the surplus money away in the form of this tax would deprive the not-for-profits of the revenue needed to provide those services, putting the burden back on the state to provide the services or, worse, depriving needy citizens of the services.
This effort certainly is not mean-spirited, since Representative Hess is not a mean-spirited person. However, it is misguided. New Hampshire has a revenue problem and, to use a hackneyed expression, “moving the deck chairs around on the deck of the Titanic” in terms of revenue is no way to solve it.
The Legislature has many areas in which it has insufficient revenue to supply the needs of the citizens of New Hampshire. Taxing vulnerable not-for-profits or even strong not-for-profits is not the way to solve those problems.
It is not hard to imagine the solution to the “problem” of how to get revenue from highly compensated not-for-profit executives any more than it is from highly compensated other members of society. However, trying to add a layer of taxation to the not-for-profit community that provides so much good service is not the answer.
Indeed, if this tax passes, does Representative Hess or any other person really believe that the salaries of not-for-profit executives at the largest institutions will go down? Certainly not, as those people are in a competitive world. Regardless of the merits of an argument about what the limits should be on not-for-profit executive compensation, House Bill 569 is a bad way to deal with it.
Brad Cook, a shareholder in the Manchester law firm of Sheehan Phinney Bass + Green, heads its government relations and estate planning groups.