Property tax is biggest burden for NH businesses
In fiscal year 2016, their total bill was $1.6 billion
By charting a course to reduce the state’s two major business taxes, the NH Legislature has placed a bet that reduced rates will spur economic activity that will outweigh the impact of foregone revenue, without impairing the fiscal capacity required to maintain government services and fulfill future responsibilities.
In 2015, the Legislature reduced the rates of the business profits tax and business enterprise tax, which had stood at 8.5 percent and 0.75 percent, respectively, since 2001, to 8.2 percent and 0.72 percent. The legislation further provided that the BPT rate would drop to 7.9 percent and the BET to 0.675 in the 2018 fiscal year if revenues to the general and education trust funds reached $4.64 billion in FYs 2016 and 2017 — a threshold expected to be met.
The FY 2018-19 budget adopted this year provides for lowering rates further in FYs 2019 and 2021, when the BPT would drop to 7.7 percent and 7.5 percent while the BET would drop to 0.60 percent and 0.50 percent. Unlike the first round of reductions, the second is not subject to revenues meeting a threshold.
The Department of Revenue Administration, without allowing for price inflation or projecting economic conditions, estimated the second round of rate cuts could reduce revenues by $11 million in FY 2019, $85.9 million in the FYs 2020-2021 biennium and $81.1 million in FY 2022.
Apart from trimming tax rates, the Legislature has also expanded credits and deductions from business taxes.
The cap on the research and development credit against the BPT was doubled to $2 million in FY 2013 and raised to $7 million in FY 2018. The deduction for particular property purchases was increased from $25,000 to $100,000 in FY 2017 and to $500,000 in FY 2018 and is projected to reduce BPT revenue by $9.7 million in FYs 2018-19.
‘The bottom line’
Both rounds of tax cuts were initiated by the Republican majority in the Senate.
“We can no longer avoid the impact of business taxes on our ability to retain and grow jobs,” wrote Senate Majority Leader Jeb Bradley, R-Wolfeboro, who sponsored both rounds of tax cuts.
Likewise, Sen. Andy Sanborn, R-Bedford, told NH1, “We have to recognize that 27 states in America have also cut taxes. Every single one of them have cut taxes further, deeper or bigger, than New Hampshire has. So even though we’re looking at tax policy to make tax reductions, we continue to fall further and further behind even if we do something. We’ve got to be more competitive.”
The first cuts met resistance from then-Gov. Maggie Hassan, who, after vetoing the FY 2015-16 budget, relented when the reductions slated for FY 2018 were tied to revenues meeting a threshold. After pitching lower business taxes during his campaign, Gov. Chris Sununu was quick to embrace the second round of cuts, which he said would accelerate growth of the economy and attract businesses to the state.
But Democratic lawmakers have opposed reducing taxes from the outset. “We’re going to lose 10 percent of our revenue,” said Rep. Susan Almy of Lebanon, a veteran of the House Ways and Means Committee. “That’s the bottom line. The money doesn’t come back to the government.”
Noting that the projected shortfall in FY 2019 would equal the annual appropriation to the university system, she said revenues would not keep pace with the rising costs of other departments and agencies, especially the Department of Corrections, which she called “the poster child of our fiscal challenge.”
Sen. Dan Feltes, D-Concord, questioned whether lower business taxes would draw firms to the state and spark growth of the economy.
He said that loss of revenue would shrink the state’s capacity to invest in education, infrastructure, workforce development, affordable housing — or what he called “other competitive metrics” — all of which contribute to a positive business climate.
In FY 2016, the first year businesses were taxed at lower rates, revenues from the BPT and BET increased by $129.1 million and topped estimates by almost $133 million, an outcome some claimed reflected reduced tax rates and others traced to the gathering strength of the economic recovery.
“We definitely see that when the taxes go lower we at the same time are growing the tax base, we make it more attractive for businesses to move here,” said Kevin Flynn of the Business and Industry Association of New Hampshire.
But Almy was among others who discounted the role of tax cuts in the unforeseen growth in revenue, which she traced to underestimating the strength of the economic recovery.
“Tax cuts send a message that New Hampshire continues to be pro-business, but it’s difficult to say the tax cuts per se have generated the growth,” Russ Thibeault of Applied Economic Research told the Concord Monitor.
Meanwhile, in September, economist Greg Bird of the New Hampshire Center for Public Policy Studies, reported that since climbing in 2016, state revenues “are showing signs of hitting their ‘cruising altitude,’ or put differently, producing virtually no growth.”
In particular, Bird pointed to slowing returns from both business taxes as well as the rooms and meals and real estate transfer taxes, which he described as the state’s four “workhorse revenue streams.”
BET’s larger base
Unaudited revenues from the BPT and BET in FY 2017 fell to $634.3 million — $12 million, or 1.9 percent, shy of receipts for the prior fiscal year while revenues from the two taxes during the first quarter of FY 2018 were slightly less than the same period a year ago.
Revenue from the two business taxes is divided between the General Fund, the primary operating fund and the Education Trust Fund, which funds adequate education grants to school districts, charter schools and kindergarten programs. However, by statute all revenue generated by 0.50 percent of the BET tax rate is transferred to the Education Trust Fund. When the rate of the BET is reduced to 0.50 percent in FY 2021, all revenue from the tax would flow to the Education Trust Fund and its contribution to the General Fund — which in FY 2017 was $83.1 million, or 5.5 percent of the total (unaudited) — would be eliminated. The BET contribution to the General Fund approximates its appropriations for the University System of New Hampshire and the Department of Corrections.
Of the two taxes, the BET, which taxes the compensation, interest and dividends of all firms, whether profitable or not, has the larger base — some $29 billion compared to the $4 billion of the BPT, which taxes only gross business profits.
But the most recent data released by the DRA and published by the New Hampshire Fiscal Policy Institute for FY 2014 indicates that both taxes draw a major share of their revenue from a relatively small number of relatively large firms.
Of some 140,000 businesses registered with the Secretary of State as “active” or in “good standing,” nearly half did not file tax returns. They may have not have met the filing thresholds — gross income of more than $50,000 for the BPT and gross receipts of more than $208,000 for the BET — or have mistakenly or consciously failed to file.
Moreover, among the firms filing returns, those with no tax liability represented the largest proportion — 51,164 of the 68,870, or 74.3 percent, of those filing BPT returns and 33,526 of the 68,875, or 48.7 percent, of those filing BET returns.
A relatively small number of the largest businesses, most of them with national and international operations, pay a disproportionate share of both taxes.
In tax year 2014, 2,781 firms, or 4 percent of filers, all paying more than $10,000 in taxes, accounted for 91 percent of all BPT revenue. At the same time, 793 firms, or 1.2 percent of filers, paying between $50,000 and $1 million in taxes, accounted for 77.4 percent of total revenue. And 45 firms, just 0.07 percent of filers, all paying more than $1 million in taxes, paid 31 percent of total revenue. Although BET payments are more widely distributed among small and larger taxpayers, 525 firms, or 0.8 percent of filers, accounted for 50.1 percent and 11 firms for 11.8 percent of all taxes paid.
In other words, in FY 2014, 70 percent of the businesses estimated to be registered in the state either filed no tax return or filed but owed no tax. Of the businesses that filed returns, 1,248, or 3 percent, paid $359.8 million of the $513.4 million, or 70.1 percent, of all the revenue collected from the BPT and BET.
At the same time, the small number of large firms paying the vast majority of tax receipts will reap the greatest benefit from reduced tax rates. For those serving national and global markets, their presence in New Hampshire represents a relatively small portion of their total operations. There is no assurance that any increases in retained earnings or dividends to shareholders arising from a lower tax burden would be reinvested in the state.
Nor does experience suggest that reduced taxes will generate sufficient taxable economic activity to offset more than a fraction of the revenue foregone by reducing business tax rates.
Studies in Arizona, Oregon and California found that between 15 percent and 25 percent of foregone revenue would be recovered from increased taxable economic activity. And the primary mechanisms for capturing revenue from gains in employment, income and sales are personal income and general sales taxes, neither of which are levied in New Hampshire.
Property tax burden
For some time, debate about business taxation has turned on the relatively high statutory rate of the BPT and disproportionate share of revenue drawn from business taxes, both of which appear to place the state at a competitive disadvantage.
In 2015, before the BPT was reduced from 8.5 percent to 8.2 percent, only a dozen states, including Connecticut, Maine and Vermont, levied corporate income taxes at a higher or equal rate.
Despite the rate reduction, in 2017 the Tax Foundation ranked New Hampshire 46th among the 50 states in terms of its corporate income tax, the lowest ranking in New England, where rates range between 7 percent in Rhode Island and 9 percent in Connecticut. But New Hampshire, without either a personal income or general sales tax, placed seventh on the foundation’s State Business Tax Climate Index for the fourth straight year while no other state in the region has ranked higher than 23rd during this period.
Taken together, in FY 2016 the BPT and BET generated $646.3 million in revenue, representing more than a quarter of the general and education trust funds. Among the other taxes, only the rooms and meals tax adds more than 10 percent to the revenue stream. The two business taxes raised $433 per capita, the second-highest business tax burden per capita among the 50 states.
According to the Council on State Taxation (COST), in FY 2016 all taxes paid by New Hampshire businesses — including property, excise, insurance, unemployment insurance taxes as well as licenses and fees — raised $3.1 billion and represented 59.4 percent of state revenue, a share exceeded by only four states.
Businesses also accounted for 38.8 percent of municipal and county revenue, less than the national average of 51.5 percent. In New Hampshire, businesses account for 47.3 percent of state and local taxes, above the national average of 43.9 percent but less than 23 states.
Other measures suggest that the tax burden borne by businesses in New Hampshire is neither especially high nor especially low. In FY 2016, COST calculated that all taxes — state and local — paid by businesses represented 4.6 percent of the gross state product, close to the 4.5 percent average for all states. At the same time, business taxes amounted to 4.1 percent of aggregate personal income, also near average.
These comparisons are qualified by the preponderance of property taxes in New Hampshire’s revenue stream.
COST reported that in FY 2016 property taxes amounted to nearly $3.5 billion in New Hampshire. Local property taxes raised $3.1 billion and the Statewide Education Property Tax raised $363 million. Altogether, property taxes represented 64.3 percent of all state and local tax receipts. This was easily the largest share of any state, more than twice the 31.2 percent average share of all states and six times the 10.6 percent share of the BPT and BET.
New Hampshire businesses paid $1.6 billion in property tax, which amounted to 52.5 percent of their total state and local tax burden and more than twice the 22.4 percent share of the BPT and BET.
Rate cut ‘trigger’?
According to Feltes, while the Legislature was reducing business taxes, it continued to put upward pressure on property taxes by withholding state funding from municipalities and transferring fiscal obligations to them. In FY 2017, the $120 million of state aid to municipalities represented 75 percent of the more than $160 million distributed in 2009 according to data compiled by the NH Municipal Association. He said that measures to reduce the level or slow the increase in property taxes would benefit businesses as well as individuals and families with low and moderate incomes.
In 2014, after meeting for four years, the Business Tax Study Commission, reported that while reducing the rate of the BPT would be “desirable” to stay competitive with neighboring states, in light of “current fiscal constraints … short-term rate reduction is impractical.” The commission also concluded that “the current 8.5 percent rate does not materially affect New Hampshire’s competitiveness in terms of attracting and retaining businesses.”
Instead, the commission found that “businesses do not consider the current BPT rate as a primary factor in making decisions to expand or locate within the state,” but rather lend more weight to energy costs, labor supply, infrastructure and property prices “including property taxes.”
The commission also dismissed the notion that the impact of reduced taxes would be offset by economic growth and increased revenues, finding “no basis for concluding that any effect of attracting new businesses or business expansion as a result of rate reduction would generate additional tax revenue sufficient to compensate for the revenue loss that would result from the rate reduction.”
Feltes doubted the scheduled reductions in the rates of the BPT and BET could be forestalled, but said that he and others may propose introducing a “trigger” by making the cuts contingent on revenues meeting specific thresholds.