N.H.’s Section 179 deduction limit called ‘woefully behind other states’
$25,000 annual cap on capital equipment expenses is $475,000 lower than federal allowance
New Hampshire is one of the few states in the nation, and the only one in New England, that doesn’t match federal law when it comes to the amount of capital equipment costs a business can deduct from its tax bill.
In fact, it doesn’t even come close.
Currently, businesses can deduct as much as $500,000 of such expenses under the Internal Revenue Code Section 179 right away, rather than waiting three to 30 years, depending on the type of equipment purchased.
New Hampshire only allows a $25,000 immediate deduction against the Business Profits Tax.
Rep. Laurie Sanborn, R-Bedford, wants to change that, with House Bill 668, which would increase the limit to $100,000, retroactive to Jan. 1, 2015. The main problem is it would cost the state some $4.7 million, according to the state Department or Revenue Administration’s fiscal note.
When she was asked at Tuesday’s House Ways and Means Committee about the idea of phasing in the increase more gradually, she replied, “We are so woefully behind other states. Why would you want the perception that New Hampshire is not friendly for business? I’ve been criticized for setting it too low, but it’s very important that we move in the right direction.”
But Rep. Susan Almy, D-Lebanon, said the change would result in less money for things that businesses want, including better infrastructure and a better trained workforce.
“You are trying to cut business taxes,” she told Sanborn.
“No I’m not. I’m trying to encourage economic activity,” Sanborn shot back.
Sanborn and the bill’s other supporters argued that the change wouldn’t actually cut taxes, but delay their payment, since it doesn't add to the deduction, just accelerate it.
And if it did stimulate activity, that initial estimated revenue lost would be offset, both by increasing profits of the seller of that equipment, as well as profits generated by the buyer deploying that equipment.
For every 10 percent decrease in the cost of business capital, there is a 5 percent increase in business activity, testified Jared Walczak, a policy analyst from the Washington-based Tax Foundation.
Walczak suggested that New Hampshire tie its rate to the federal rate like the surrounding states, with a clause to set it at a certain level in case the federal level should drop.
It has been extended every year ever since it was increased from $100,000 to $500,000 as part of President Obama’s economic stimulus program, but often at the last minute. The deduction for 2014, for instance, was passed retroactively on Dec. 13. If it hadn’t been extended, the federal deduction would drop to $25,000.
New Hampshire increased its deduction from $20,000 to $25,000 in 2012.
Rep. Patricia Lovejoy, D-Stratham, questioned whether increasing the state deduction would result in much economic activity, since the federal tax break – based on a 35 percent capital gains tax rate – is so large compared to the state BPT rate of 8.5 percent.
But that could mean a lot for a small business, said Walczak.
But it isn’t so much the size of the tax break, testified David Juvet on behalf of the Business and Industry Association. It’s that New Hampshire needs to be seen as competitive compared to surrounding states.
“It’s one small effort in striving to make New Hampshire a desirable place for small business,” he said.