By the authority vested in me, pursuant to part II, Article 44 of the New Hampshire Constitution, on June 20, 2012, I vetoed SB 326, an act relative to state reimbursement of towns and relative to taxation of trusts under the interest and dividends tax.
When SB 326 was first introduced in the Senate in January 2012, it did not pertain to trusts. At that time, and when it was passed by the Senate, the bill dealt with the reimbursement of New Hampshire municipalities for the loss of interstate flood control funds. In late April, a non-germane amendment was brought forward in the House that made several changes to our trust laws.
The final version of the bill maintained provisions repealing the reductions in reimbursements paid to towns and cities that have lost taxable valuation of lands subject to flood control, and allows monies that are owing to New Hampshire communities for flood control losses to be distributed to communities in accordance with current state laws. I have no objection to these provisions.
I am vetoing this legislation because I remain concerned about the potential fiscal impact and unintended consequences of the provisions amending our trust laws. The proposed tax policy changes lack clarity, have not been fully examined and may be unfair to some taxpayers. The final version of these changes was brought forward at the committee of conference on the bill in late May.
I have been an advocate of reforming New Hampshire trust laws in order to make our state first in the nation for trust services. That is why I strongly supported and signed into law in 2006 the Trust Modernization and Competitiveness Act, and why I will continue to support efforts to make New Hampshire a leader in trust services in the country. I want New Hampshire trust law to be transparent, straightforward and represent good policy.
The changes to our trust laws in the bill as passed by both bodies raise several issues. First, the bill changes how so-called "non-grantor" trusts are taxed under the state's Interest and Dividends tax. Non-grantor trusts generally are those trusts in which the person or entity establishing the trust has given up the right to the principle in the trust. Under SB 326, the I&D tax will be required to be paid only in a year in which a distribution from a non-grantor trust is made, and will now be paid not by the trust but by the New Hampshire beneficiary in accordance with federal tax rules. This change in law could significantly reduce the amount of I&D tax paid to the state.
Second, under SB 326, an owner will be able to transfer shares of an S corporation into certain non-grantor trusts and avoid entirely the payment of I&D tax on a dividend. But there is presently insufficient information concerning its potential impact for me to support this change.
The same is true with a third provision of SB 326. The bill would remove from I&D tax a distribution from any trust with transferable shares to a New Hampshire beneficiary. As a result, a real estate investment trust with transferable shares, for example, could make a distribution to a New Hampshire beneficiary who would no longer be required to pay I&D tax on that distribution. Here again, too little information has been developed on the potential fiscal impact to the state from this change in law.
Further changes to our trust laws may be advisable, including some of the ideas developed in SB 326. But I believe it is more prudent to study further the potential impact of these changes before enacting them into law. Once additional information is developed to demonstrate that these changes are fair, well thought out tax policy and would be revenue neutral, then legislation can be introduced next year.
For these reasons, I am vetoing SB 326.