BET tips exemption undermines state revenues

The proposal would erode the tax base and compound New Hampshire’s fiscal problems

In recent weeks, the proposal that would reduce the business enterprise tax paid by companies whose employees receive part of their pay in the form of tips has been making its way through the New Hampshire Senate.

It is a proposal that would erode the BET base by exempting the tips workers receive and, thus, would begin to compromise the stability it affords New Hampshire.

The proposal would drain away tax revenue at a time when New Hampshire is struggling to restore parts of its budget critical to its economic future and the well-being of some of its most vulnerable citizens.

Reliable information on the amount of that revenue loss is not yet available, but data from the New Hampshire Department of Revenue Administration indicate that compensation comprises the largest share of the BET base. In fact, in tax year 2010, it made up roughly 84 percent of the activity subject to taxation under the BET. What’s more, DRA recently testified that tips constitute one-third of the total payroll of some employers.

As a matter of sound fiscal policy, the Senate should refrain from action in the absence of critical information about the proposal’s impact on state revenue. Unfortunately, one needs look no further than one year ago to understand that the Senate may still press ahead.

Last spring, the Legislature enacted changes to the communications services tax to exempt 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, CST revenue is roughly 24 percent below expectations. Should that trend hold, the revenue loss could amount to approximately $19 million per year. Worse still, when the changes in the CST are added to the impact of other tax cuts enacted over the last few years, the result is a roughly $50 million hole in the 2014-15 budget.

Granting tax breaks to the employers of tipped workers will only compound the difficulties New Hampshire already faces in crafting a budget that promotes economic growth and that maintains the quality of life we all enjoy.

In addition, allowing some businesses to avoid paying the BET on employee earnings is unfair to the businesses that paid under the law for years. Likewise, it treats businesses with tipped employees much more favorably than businesses that are required to pay their employees at least the minimum wage.

In effect, it introduces the possibility that two businesses — one that is allowed to pay workers the subminimum wage of $3.27 per hour and another required to pay the $7.25 minimum wage — will face substantially different tax bills despite being largely identical.

If New Hampshire is to provide the public services that underpin a vibrant and growing economy, it must have a sustainable tax system. Providing an exemption for tips under the BET simply eats away at one of the most stable parts of that system. Now is not the time for that kind of change.

Jeff McLynch is executive director of the New Hampshire Fiscal Policy Institute.