The good, the bad and the ugly
This year’s budget process was sloppy at best. While there may be cause for relief in the short term, citizens should worry about the long-term ramifications as well as the process employed in its creation.
The budget committees, led by Rep. Marjorie Smith and Sen. Lou D’Allesandro, each came up with plans for spending and funding. Their spending proposals, generally similar, called for a two-year $11.5-plus billion spending plan. Where they differed, and where the process became a mess, was in coming up with funding sources.
In the House, without public hearings on the substance of the proposals, the budget included a capital gains tax, adding a new tax on passive income sources to those already in state law and an estate tax, a tax that New Hampshire had done away with in 2001.
The House also put in a number of increased fees, including car and boat registrations, new categories of those covered and the like which survived.
In the Senate, the primary revenue sources inserted in the budget differed, with opposition to the capital gains and estate taxes. Instead, without public hearing, the Senate inserted expanded gambling, largely at the urging of Chairman D’Allesandro.
Another proposal in the Senate’s version of the budget was suspension of the credit for the business enterprise tax against the business profits tax. This was a philosophically inept proposal that would have resulted in double taxation for profitable businesses and ignored the integrated nature of the two taxes and original philosophy behind the adoption of the BET.
Once the committee of conference started meeting, various other new proposals started to be floated, again without specificity, defined language or public hearing. Among these was an entertainment tax, which raised the ire of sports teams, recreational facilities and the like, an increase in the rooms and meals tax to 9 percent, and, gaining the most attention, perhaps, a plan to close the “loophole” allegedly given to limited liability companies in making distributions to their “members,” who are the equivalent of partners or shareholders in other business entities.
A tax on refinancing mortgages also was floated and assumed to mean that the full rate of the real estate transfer tax would be applied when refinancings occurred. In fact, the actual proposal was for a much smaller tax with exceptions and deductions, but without a public hearing or full vetting of the proposal, this was generally misunderstood.
At some point, Governor Lynch entered the fray. Keeping largely in the background publicly, Lynch went to work on all of the proposals, some of which were floated by his office. When the smoke cleared, the compromise plan eliminated gambling, the capital gains and estate taxes and did not contain the refinancing tax or the elimination of the BET credit against the BPT. It did contain the LLC distribution tax, but in a quick reaction to concerns expressed by the business community, largely the Business and Industry Association, Department of Revenue Administration Commissioner Kevin Clougherty clarified the application of the tax as being on distributions to passive members and not to employee members, lessening the concern substantially.
During the debate on the compromise, Rep. Neil Kurk considered parts of the budget “the good, the bad, and the ugly.” Finally resolved to oppose the budget, he did praise the elimination of gambling and other onerous taxes but noted that from the GOP perspective, massive increases in state aid to education had caused the problem and many of the ramifications of the budget cuts would push costs down on cities and towns.
The Democratic majority rejected the notion, and with a thin coalition in each house passed the budget. In the Senate, D’Allesandro and Betsi DeVries of Manchester dissented while Robert Odell joined the majority of 13 senators in passing it. In the House, it squeaked by, 202-183 as Democratic leaders imposed a modicum of discipline.
This process was a mess. The budget was balanced using several hundred million dollars of one-time revenue sources which will not be available again. This includes a $110 million taking of medical malpractice insurance funds already being contested in court by those who paid the premiums. Even if that revenue source survives, two years from now budget writers will face the hole again.
If this process is to be rational in the future, Governor Lynch and legislative leaders should assemble a task force now to examine how revenue ought to work in New Hampshire.
Otherwise, New Hampshire has not seen anything yet when it comes to budget crises.
Brad Cook is a shareholder in the Manchester law firm of Sheehan Phinney Bass + Green and heads its government relations and estate planning groups. He also serves as secretary of the Business and Industry Association of New Hampshire.