House votes to cut R&D tax cap to hike interest and dividends tax deductions

Senate votes to eliminate I&D tax altogether

The NH House has voted to roll back the research and development tax credit for businesses in order to increase interest and dividend tax deductions for individuals.

The House voted 182-143 on Thursday to OK House Bill 1554 at the same time that the Senate voted 12-9 to pass Senate Bill 404, which would phase out the I&D tax altogether – a move that would eventually cost the state treasury $100 million, according to the Senate bill’s fiscal note.

The dueling I&D tax cuts show that both chambers want individuals to share in the recent wave of tax cuts that has for the most part been going to businesses, but they are doing so in vastly different ways.

The House version is intended to be revenue-natural. It increased I&D tax deductions from $2,400 to $3,500, with an added deduction for the elderly and disabled going from $1,200 to $1,750.

But to pay for those changes – estimated to be about $5 million in 2015 figures by the Department of Revenue Administration – the bill would cut decrease the total R&D cap from $7 million to $2 million, reversing a change that went into effect just last year.

Lawmakers had increased the $2 million cap to $7 million because of an increase in demand for the R&D credit. In 2016, when the cap was still $2 million, 193 businesses requested $7.4 million, meaning they only received 27 percent of the amount they were entitled to.

The Business and Industry Association of New Hampshire strongly opposed rolling back the cap, saying that it sends the wrong message to businesses. The federal government and most surrounding states don’t even have a cap, it noted.

Rep. Susan Almy, D-Lebanon also criticized what she called “this abrupt pulling of resources from programs that still need them in order to tuck money into shiny new ideas,” and she urged lawmakers to “maintain our promise for economic growth in this state.”

But Rep. Norman Major, R-Plaistow, chair of the House Ways and Means Committee, which backed the bill, noted that lawmakers – aside from cutting the rates of the business profits tax and the business enterprise tax – have passed a number of other business tax breaks, including increasing the Section 179 expense deduction and the net operating loss carryforward deduction. “This bill provides relief to taxpayers as well of business,” said Major.

If the bill is approved by the Senate and signed into law, the R&D cap rollback would go into effect in July while the I&D cuts would begin at the start of 2019.

Millions in revenue

The Senate voted to get rid of the 5 percent I&D tax altogether, letting it drop by 1 percent a year starting fiscal year 2020 (so it would not affect the current biennium), and repealing it altogether by July 2024, the start of the 2025 fiscal year.

SB404 would not try to replace the lost revenue. That would result in $100 million loss a year when fully repealed. Over the five-year phase-out, the loss would total $292 million.

Sen. Andy Sanborn, R-Bedford, prime sponsor of the bill, said that the DRA’s fiscal note was wrong, but his main argument, was that the I&D tax was a tax on income.

“When you receive money from your retirement account, that is a tax on income,” he said. He added that “my constituents are moving to Florida because they don’t have a tax on income. They are exempt from that.“

He added, “I’m here to cut people’s taxes. We’ve done a lot to help the business community, but we’ve done very little to cut taxes for everyday hard-working people or those in retirement.”

But Sen. Dan Feltes, D-Concord, cited one study that said that 80 percent of the benefits of eliminating an I&D would go to the wealthiest 20 percent of Granite Staters.

If the state really wanted to help retirees, he said, it would increase the I&D exemptions, “but that is not this bill.”

But Sen. Jay Kahn, D-Keene, wryly added that “people move from New Hampshire to Florida for other reasons than a tax,” Besides, he said, New Hampshire is seventh per capita when it comes to millionaires. “I think we’ve done pretty well by millionaires,” he said.

The bill will next be sent to the Senate Finance Committee for review.