New Hampshire’s tax system has received a good deal of attention recently, as two candidates for Governor have presented proposals that would dramatically alter how the state taxes businesses operating within its boundaries.
One proposed plan would eliminate both the Business Profits Tax (BPT) and the Medicaid Enhancement Tax (MET), reduce the rate of the Interest and Dividends Tax from 5.0 percent to 2.3 percent, and attempt to compensate for the hundreds of millions of dollars in lost revenue by extending the Business Enterprise Tax (BET) to nonprofit institutions and increasing its rate from 0.75 percent to 2.0 percent. A second proposal would lower the BPT rate from 8.5 percent to 7.4 percent.
As the public, the press, and policymakers evaluate these and other plans and the impact that they would have on the state’s budget and economy, here are a few facts worth keeping in mind:
State business taxes have relatively little effect on business decision-making.
Proponents of reducing business taxes typically maintain that doing so will make New Hampshire a more attractive place in which to locate new businesses or expand existing operations. Yet, a substantial body of economic research suggests that business taxes have a relatively modest impact on these kinds of decisions, an impact that is likely outweighed by other factors and influences. As one summary of that research puts it:
…differences in tax burdens across states are so modest that they are unlikely to outweigh the differences across states in the other costs of conducting business. These other “costs of conducting business” are the most important factors affecting business investment decisions and include the cost and quality of labor, the proximity to markets for output (particularly for service industries), the access to raw materials and supplies that firms need, [and] access to quality transportation networks and infrastructure…
Business taxes in New Hampshire are already lower than in most states.
In July 2013, the Council on State Taxation (COST), a Washington, DC-based association that represents the interests of over 600 multistate and multinational corporations, issued the 11th edition of its annual report on state and local business taxes. In its report, COST tallies all of the taxes paid by businesses in a given state, not just corporate income taxes, but property, sales, and personal income taxes as well, recognizing that states raise revenue in a variety of ways that affect businesses. It then compares those sums to the total economic activity in each state, as represented by private sector gross state product, to calculate a total effective business tax rate. For New Hampshire, that figure was 4.2 percent in FY 2012, markedly lower than the national average of 4.8 percent and less than 38 other states.
Many New Hampshire businesses pay neither the BPT nor the BET.
Of the roughly 59,000 businesses that filed BPT returns in 2011, the vast majority – over 44,500 – had no tax liability; similarly, approximately 24,900 of the 59,000 BET returns that year had no liability either. In fact, according to the Department of Revenue Administration, more than 19,000 businesses – or close to a third of all businesses filing a tax return — owed zero BPT and BET in 2011.
Business tax cuts do not pay for themselves.
While proponents of business tax reductions often assert that such changes will spur economic growth to such a large degree that revenue gains will ultimately compensate for any revenue losses, the most authoritative state-level research on this subject suggests that the reality is far different. Economic analyses conducted in Arizona, Oregon, and California find that changes in corporate income taxes may yield some additional economic activity, but usually only enough to replace 15 percent to 25 percent of the initial revenue loss associated with such changes. What’s more, two of the key mechanisms by which a state may recoup a portion of a given tax cut are not present in New Hampshire, as the state lacks both a broad-based sales and income tax. Thus, any growth in incomes earned by local residents or in the consumption of retail goods or services would not be reflected in higher revenue for New Hampshire in the way that they might in other states.
Business tax cuts, if not offset by increases in other taxes, will lead to reductions in the public services on which both residents and businesses rely.
Most observers of the New Hampshire budget would probably agree that the state seems unlikely to experience a budget surplus in the near future. Consequently, to keep the state budget balanced, any reduction in taxes must be matched by an increase in revenue elsewhere or by a reduction in spending. Dropping the BPT rate from 8.5 percent to 7.4 percent, once fully implemented, would reduce tax revenue by as much as $90 million per biennium, based on an analysis by the Department of Revenue Administration of similar legislation introduced earlier this year. To put that sum into perspective, $90 million exceeds the level of General Fund support for a number of key government functions in the current FY 2014-2015 budget. For example, General Fund appropriations in the budget adopted last June amount to:
- $18.2 million for the Department of Justice;
- $27.7 million for the Department of Resources and Economic Development;
- $33.6 million for the Department of Revenue Administration;
- $39.1 million for the Department of Environmental Services, and;
- $82.5 million for the Community College System of New Hampshire.
Helping businesses grow is vital for the future of New Hampshire’s economy, but it’s important to remember that both businesses and residents need safe roads and bridges, high-quality schools, and healthy communities to call home. Cutting business taxes simply impairs New Hampshire’s ability to deliver those vital services.