Tax cuts threaten N.H.’s future economic success
To ensure the state remains attractive, we must invest in quality schools, affordable higher education, safe roads and bridges and healthy, vibrant communities
While New Hampshire’s policymakers may hold a diversity of views on any given topic, it is safe to say that there is at least one commonality among them: a desire to keep the Granite State one of the best places in the country to raise a family, to earn a living or to build a business.
To accomplish that common goal and to ensure the state remains attractive to residents, workers and entrepreneurs, New Hampshire must invest in quality schools, in affordable higher education, in safe roads and bridges, and in healthy, vibrant communities.
Yet proposals to reduce business taxes, now before the New Hampshire House and Senate, would drain millions of dollars out of the state budget each year, not only making such investments impossible, but likely leading to significant cuts in the public structures and services vital to sustained and widely-shared economic prosperity.
For instance, House Bill 386 would drop the business profits tax rate to 7.0 percent, reducing revenue by $120 million each budget cycle, starting with the upcoming the 2016-17 biennium.
Senate Bills 1 and 2 would respectively lower the BPT rate and the business enterprise tax rate; revenues would ultimately fall by nearly $70 million on a biennial basis if both were to become law.
To put the magnitude of such revenue losses into perspective, the Community College System of New Hampshire, indispensable to building our future workforce, received $82.5 million from the General Fund for 2014-15.
Importantly, New Hampshire’s bipartisan Business Tax Study Commission, which completed its work in fall 2014 after four years of deliberation, recognized the very real tradeoffs that a major business tax cut would entail.
Among its recommendations, the commission noted: “Any reduction in the BPT rate would result in a loss of revenue to the state which would make such a reduction impractical for the foreseeable future.”
Moreover, the commission’s report calls into question the very justification proponents of business tax cuts put forward in the support of their plans – namely, that reducing the taxes businesses pay will improve New Hampshire’s overall economic performance.
The report states: “In view of the positive and highly competitive overall business tax climate with which New Hampshire is credited, our view is that the current 8.5 percent rate [for the BPT] does not materially affect New Hampshire’s competitiveness in terms of attracting and retaining businesses.”
The commission’s report goes on to add that: “Testimony received both from the New Hampshire Department of Economic Development and other business groups indicated that the hierarchy of priorities for businesses focused more on energy, educated workforce, transportation and the overall cost of doing business. The predictability of the tax rate and a stable tax policy was more of a focus than was New Hampshire’s current BPT and BET rates.”
These conclusions are in keeping with extensive economic research on the relationship between business taxation and economic growth. Such research suggests that business taxes have, at most, a relatively modest impact on companies’ location, investment or expansion decisions, an impact that is likely outweighed by other factors and influences.
In fact, Timothy Bartik, senior economist at the Upjohn Institute, concludes: “If state and local tax cuts are financed by cutting public services, the result may be lower business activity.”
The Granite State enjoys many advantages, from a highly skilled workforce to a beautiful and varied natural environment. Maintaining and strengthening those advantages in the years ahead will require significant public investment. Business tax cuts like those envisioned by the Legislature would endanger the public services on which both residents and businesses rely and prevent investments critical to a brighter economic future for all.
Jeff McLynch is executive director of the New Hampshire Fiscal Policy Institute.