Testimony of Jeff McLynch, Executive Director of the New Hampshire Fiscal Policy Institute, before the Senate Ways and Means Committee regarding the Business Enterprise Tax (BET), May 14, 2013
Chairman Odell, Members of the Committee, thank you for the opportunity to appear before you today. My name is Jeff McLynch and I am the Executive Director of the New Hampshire Fiscal Policy Institute (NHFPI), an independent, non-profit organization dedicated to exploring, developing, and promoting public policies that foster economic opportunity and prosperity for all New Hampshire residents, with an emphasis on low- and moderate-income families and individuals.
I am here today to voice opposition to Amendment 2013-1668s, which seeks to reduce the taxes owed by businesses that employ wait staff and other workers that receive some of their pay in the form of tips. As proposed, the amendment would make the struggle to finance public services vital to New Hampshire’s economic health and to the well-being of its most vulnerable citizens that much more difficult. Furthermore, the amendment may establish a double standard in the treatment of tips under law. Finally, the amendment would undermine the basic purpose of the BET, eating away at its base and beginning to compromise the stability it brings to New Hampshire’s tax system. Consequently, I urge the Committee to reject the amendment.
In my remaining time, I’d like to expand briefly upon each of these concerns in turn.
First, as the Committee is aware, a definitive assessment of the impact that the proposed amendment would have on upon state revenue is not yet available from the Department of Revenue Administration (DRA). In the absence of such information, I would urge the Committee to refrain from approving this particular amendment, since, while the magnitude of the impact is uncertain, it is abundantly clear that it would entail tradeoffs in the formulation of New Hampshire’s FY 2014-2015 budget and impair its ability to invest in the public services that build a strong economy.
New Hampshire’s recent experience with the Communications Services Tax (CST) is instructive on this point. Roughly one year ago, again, at the urging of affected industries, the Legislature enacted changes to the CST that exempted charges for internet access from the tax. At the time the changes were approved, little information was available about the effect they would have on state revenues; yet, through April of the current fiscal year, CST revenue is roughly 24 percent below expectations. Should that trend hold, the revenue loss could amount to approximately $19 million per year. Such a loss not only has contributed to the budget deficit that the state faces in the current fiscal year, but will make it all the more difficult for New Hampshire to promote economic growth and to maintain the quality of life its residents enjoy through its budget.
Indeed, the internet access exemption under the CST is just one of several tax cuts the Legislature enacted over the course of 2011 and 2012. Data presented by the Department of Revenue Administration to the Senate Finance Committee on May 6 indicate that, taken together, three business-related tax cuts – an increase in the limit on the Net Operating Loss (NOL) carry forward, an extension of the period over which the BET credit against the BPT may be used, and an increase in the thresholds at which businesses begin to owe the BET – will reduce General and Education Fund revenue by as much as $15 million between FY 2014 and FY 2015. Adding the CST to this set brings the total revenue loss for the coming biennium to as much as $50 million; any revenue loss resulting from the proposed amendment would simply exacerbate the problems previous tax cuts have already created for policymakers striving to balance the state’s budget.
Second, under current law, New Hampshire employers are permitted to pay employees a sub-minimum wage of $3.27 per hour if those employees receive more than $30 per month in tips. In other words, employers are allowed to treat tips as compensation for the purposes of meeting the federal wage standard of $7.25 per hour. If the BET were modified as the amendment suggests, employers would be permitted to treat tips in two different ways, both to their benefit.
Third and finally, as it was originally enacted, the BET was intended to enhance the equity and stability of New Hampshire’s tax system and to reflect the move “away from capital intensive investment to an economy based on service related investment.”[i] As two of the architects of the tax, Stan Arnold and William Ardinger, have observed, “the BET [is] a fair tax because it applies to all forms of business organizations … it is [also] a comprehensive tax because it applies to all types of economic activity.”[ii]
The amendment before the Committee today runs counter to these fundamental goals. The BET is not designed as direct tax on the compensation, interest, or dividends any one person receives; rather, it is intended to serve as tax on overall economic activity. Tip compensation, as it represents payment for services rendered, is simply part of that larger economic whole.
Moreover, to the extent the proposed amendment simply seeks to remove tips from the base of the BET, it opens the door to other businesses seeking to exempt themselves – or other forms of compensation, such as bonuses or commissions, common to their industry – from the BET. Should this occur, it would erode the base of the BET still further and, by extension, render it less stable over time.
In conclusion, I urge the committee to reject the proposed amendment to the BET. It would compound the revenue losses New Hampshire is expected to experience in the short-run and would add greater uncertainty to a tax designed to be comprehensive and stable over the long-run.
I thank you again for the opportunity to testify today and would be happy to answer any questions you may have.
[i] Section 1, Chapter 350 of the Laws of 1993
[ii] Arnold, Stan and Ardinger, William F.J., “Top Ten Reasons Why New Hampshire’s BET May Provide An Answer to State Tax Reform,” State Tax Notes, November 29, 2004, p. 585.