Repeal of Interest and Dividends Tax Disproportionately Benefits Wealthy NH Households – New Hampshire Bulletin

First Published in the New Hampshire Bulletin, March 30, 2023

In 2021, the Legislature enacted a phaseout plan for the Interest and Dividends Tax, which is collected from a percentage of income generated by wealth, that would eliminate the tax by 2027. This change will result in less state revenue for public services.

However, in the state budget currently being constructed by the House Finance Committee, this tax would be repealed entirely in 2025. Repealing this revenue source reduces state tax liability much more for New Hampshire’s wealthiest and highest-income households, on average, than for most Granite Staters, who will likely see minimal or no impact on their taxes.

The New Hampshire Department of Revenue Administration data indicates that, for tax year 2020, more than half of the Interest and Dividends Tax revenue was paid by Granite State households with more than $200,000 in interest, dividend, and distribution income, which excludes income from wages, salaries, capital gains, or other income sources.

Households with more than $200,000 in these forms of income pay about $10,000 or more to the state through the Interest and Dividends Tax. To be liable to pay $10,000 in this tax to the state, a taxpayer would have to own an estimated $4,048,000 (assuming a 5 percent annual return) to $13,403,974 (assuming a 1.51 percent annual return, the average S&P 500 stock dividend yield in 2020) in wealth.

In either scenario, a tax filer has to have millions of dollars in assets that generate income.

The approximately 87 percent of Granite Staters who do not live in households paying this tax may have never heard of it, and their households’ incomes are much more likely to be impacted by other taxes.

For example, for a single-family home assessed at $200,000 in Manchester, a homeowner would have paid an estimated $4,900 in property taxes in 2020, regardless of their income or investment assets. A homeowner with millions of dollars in assets that generate enough to pay $10,000 through the Interest and Dividends Tax will have that amount paid reduced to $0 over time, while property taxes would likely be unaffected, or continue the general trajectory from the last decade of property tax growth outpacing inflation in New Hampshire, for a homeowner whether or not they have millions in investments.

The Interest and Dividends Tax was enacted 100 years ago, in 1923, and had a tax rate of 5 percent from 1977 to 2022. The tax rate applies after certain exemptions: For individuals, the first $2,400 of Interest and Dividends Tax income is exempt, with additional exemptions for older filers, people who are blind, and those who have a disability making them unable to work. Joint filers do not need to file for this tax until they collect at least $4,800 in interest, dividend, or distribution income.

Starting in 2023, the tax rate began dropping by 1 percent annually. The delayed phaseout means much of the revenue losses from repealing this tax will not appear until the next state budget, which is currently being discussed in the Legislature.

The negative impact on revenues will increase yearly with each rate reduction until it has been eliminated entirely by 2027, and the full impact would take effect two years earlier under the House Finance Committee’s proposal.

The governor’s revenue projections estimate that the Interest and Dividends Tax will bring in $135 million this fiscal year, which is approximately the average of the last three years. In the aggregate, revenues will fall by about $67.8 million below that annual average in the next two fiscal years due to the planned tax rate reductions.

This projected loss during the next budget biennium is more than the state contributed to the Community College System of New Hampshire this year.Assuming a relatively consistent tax base, the eventual annual loss of $135 million from the tax’s repeal is equivalent to the current revenue used to fund the Department of Corrections or the equivalent of the combined budgets for the Department of Fish and Game, the Department of Labor,and the Department of Employment Security, as well as the state veterans home.

Last fiscal year, which saw a boost from Interest and Dividends Tax revenues likely related to stock market performance, the Interest and Dividends Tax accounted for about 7.9 percent of General Fund revenues, which are the most flexible funds policymakers have available to finance services in the state budget.

Economic modeling from the Institute on Taxation and Economic Policy indicates that more than half of the dollars from Interest and Dividends Tax elimination would benefit the top 1 percent of households by income. National-level analysis from the Congressional Budget Office and Moody’s Analytics suggests that tax reductions for higher-income households, including permanent reductions to dividends and capital gains taxes, are less effective at stimulating economic growth than aid targeted at households with low and moderate incomes. Stimulus provided to individuals and families with low and moderate incomes enters the local economy more quickly than higher-income households, as households with limited resources more readily spend this aid to afford basic necessities.

By eliminating this tax completely in a future budget, policymakers are setting the stage for difficult choices, as the phaseout of the Interest and Dividends Tax will have substantial effects on resources available for services.

With an elevated risk of a recession in the coming years and a potential rise in the need for services, public resources must be carefully raised and deployed to help ensure sufficient funding for programs serving Granite Staters, and to support a more resilient, equitable, and inclusive economy.

     – Phil Sletten, Research Director