Considering the context of business tax cuts
We need an economic development strategy that meets today’s needs
The budget is currently in play in the state Senate. Some legislators say lowering the state’s business profits tax and business enterprise tax should be part of the process. They claim that it will result in increased jobs and revenues for the state.
New Hampshire indeed faces significant demographic and economic development headwinds, and on the surface lowering the tax rate seems warranted. But the problem is not the idea itself, but context and strategy.
Those seeking to reduce the state’s marginal rate on the BPT are correct in the sense that New Hampshire ranks a sub-par 38th for its business tax rate. However, we also rank eighth in the nation for business tax climate, meaning one has to broaden the context to get a more full measure of the state’s relative business tax standing.
A legislative commission, which studied business taxes for four years, concluded that businesses prefer consistency and continuity and not year-to-year changes in the state’s tax code.
The commission also concluded a rate reduction, while desirable, needs to be considered in the context of existing fiscal reality of the New Hampshire state budget and our recovering economy. It also concluded the tax rate is not the prevalent factor in business location or expansion in our state. Factors such as energy costs and an educated workforce drive business expansion.
The BPT and BET, which account for some 25 percent of general fund revenues, bring in less revenue today than seven years ago: some $555 million in 2014 vs. $585 million in 2007.
This session, the Legislature considered several ideas to use business tax credits to spur economic development. On the surface, some were good ideas, but instead of enacting one-off measures or simply reducing the existing tax rate, we need to more fully consider the state’s business tax code.
This does not mean we should increase the tax burden. Quite the contrary. We need to do all we can to encourage entrepreneurism — those are the dollars that create the kinds of jobs New Hampshire needs. We must ensure the state continues to be a friendly place to do business. And that includes a tax policy that encourages job creation.
Cutting the BPT across the board — meaning, without context — will only exacerbate the revenue challenges
the state faces. The hit alone for the business tax reduction could be $75 million or more over the biennium, once fully implemented.
Businesses are not going to rush to the state if we reduce the state’s existing business profits tax on the margin. The folly of that idea was demonstrated in 2012 in Kansas, where such a plan in and of itself led to a fiscal crisis and a lowering of that state’s bond rating.
Exacerbating fiscal challenges and creating instability does not create a business-friendly climate. The real issues include how to fund and structure New Hampshire’s educational strengths, how to maintain and improve the transportation network, and how to develop energy sources compatible with needs – all of which attract businesses and entrepreneurs.
We need a business tax that meets the needs of today.
Let’s lower the rate. Let’s have meaningful, targeted tax credits. And let’s start by making sure business entities don’t fall between the cracks or the burden falls disproportionately on certain businesses.
New Hampshire needs to be the innovation state — that should be our strategy. Not a one-off Hail Mary pass that may result in budgetary crisis and possibly a falling state credit rating.
Mark Connolly, principal of New Castle Investment Advisors, Portsmouth, is the state’s former director of securities regulation.