Conference committee weighs Section 179 deduction compromise

NH Senate, House seek middle ground on lifting NH’s lowest-in-nation limit

The fiscal impact of increasing New Hampshire’s Section 179 deduction cap, but at lower levels than the federal government allows, could be 60 percent greater than originally thought, but there seems to be a consensus that it should be done.

Attempts at a bigger increase, however, could cause the bill to fail, either at the legislative level or through a governor’s veto, even though the fiscal impact diminishes as the deduction limit rises.

At stake are millions of dollars in capital equipment expense deductions businesses can take off their federal taxes up to $500,000, as opposed to the state, where businesses can only deduct $25,000 in such expenses – the lowest such limits in the nation.

Both the NH House and NH Senate have passed bills (House Bill 668 and Senate Bill 239) to fix the discrepancy, and representatives from both chambers are meeting this week to figure out how much to increase the deduction, how quickly and how it should be connected to updates in the state’s business tax code.

The Senate version would synch the state’s business tax code – which has been out of date since 2000 – to the federal code on a rolling basis, with a few exceptions, the 179 deduction not among them. That would increase the limit to $500,000 starting this tax year, putting New Hampshire in line with the federal government as well as with 37 other states, said Sen. Andy Sanborn, R-Bedford.

“This will make us competitive with the rest of America,” said Sanborn at Monday’s initial conference committee meeting at the State House. “This is the single most pro-business thing we can be doing.”

Fiscal impact

The House version would look at matching the federal code on an annual basis, but would exclude the Section 179 deduction, which would increase to $100,000 in the first year, and then gradually increase to $250,000 starting in 2017.

Since New Hampshire doesn’t have a sales or income tax, it relies on business taxes for 23 percent of its revenue, a much higher percentage than other states, so it has to be more careful, argued Norman Majors, chair of the House Ways and Means Committee. That means the House shouldn’t tie its hands by automatically increasing the cap to federal limits, “because Congress can act very funny.”

He said the Section 179 limit should be increased gradually to judge the fiscal impact.

The latest news on fiscal impact, however, wasn’t that encouraging to those wishing to increase the deduction.

When the state Department of Revenue Administration last looked at 2013 data 18 months ago, based on a $100,000 deduction, the state would have lost about $4.7 million, but that was before all the tax returns for that year were totally processed, said Revenue Commissioner John Beardmore.

However, the most recent figures for that same deduction – also based on 2013 returns – was a $7.6 million loss.

This time Beardmore also looked at what the state would have lost with a $125,000 deduction ($8.8 million) and $150,000 ($9.7 million.) Beardmore didn’t run the numbers for $500,000, but he said he thought it should be higher than the old estimate of $13.9 million, but not significantly higher because the impact diminishes as the deduction cap rises.

Sanborn seized on this latter statement, and emphasized that those who took the deduction on the front end would lose the depreciation on the back end. However, Beardmore said that it wasn’t revenue-neutral because firms go out of business, leave the state or are sold to out-of-state firms.

Gov. Maggie Hassan would sign the House version, said Meredith Telus, the governor’s budget director. But when asked under what conditions she would veto the Senate version, or something in-between, she said that would depend on the effect of other business tax cuts, including one being considered by a committee of conference two hours later.

Planet Fitness bill

That bill, SB 342, is known as the Planet Fitness bill because it was brought to the attention of the Legislature during that company’s initial public offering in 2015.

Under the measure, the state would no longer tax the step-up in basis that must companies experience when they receive a large influx of capital, by going public or another large equity investment.

The governor vetoed a similar bill last year, worried about the effect that unintended consequences might have on the budget.

Under the Senate version, a business could exclude that step-up on the front end, but then would have to deal with it on the back end, should the company ever be sold. IN Under the House version, a business could have the option to exclude it on either end.

In this case, Telus told the committee, Hassan supported the Senate version because its fiscal impact would be smaller. When asked if the governor would veto the House version, Telus said that it was unlikely.

“I don’t think we do not want to do anything this year,” she said.

But she added that if the Legislature were to pass the House version of SB 342, she might take a harder look at vetoing the Section 179 deduction bill.

Both committees adjourned to Wednesday to see if they could reach some kind of compromise acceptable to the governor.