Should New Hampshire business tax triggers be repealed?
BIA President Jim Roche and Executive Councilor Andru Volinsky debate the merits of shortfall-activated hikes in BPT, BET rates
After the 2008 financial crisis shrank state revenues, the budget shortfall was offset in part by withholding funds and transferring hundreds of millions of dollars in costs to municipalities, which defrayed them by increasing property taxes. Although the economy recovered, these measures have become permanent features of the fiscal landscape, where property taxes represent nearly two-thirds of all state and local tax receipts.
The economic dislocation stemming from efforts to quell Covid-19 threatens to have an even more severe impact on state and municipal revenues.
The budget for fiscal years 2020-21 calls for increasing the rates of both business taxes — the business profits tax from 7.7% to 7.9% and the business enterprise tax from 0.60% to 0.675% — if revenues fall more than 6% short of projections. Together, the two business taxes represent the largest source of general fund and education trust fund revenue.
On April 23, after being urged to do so by the Business and Industry Association of New Hampshire, Gov. Chris Sununu said he will ask the Legislature to repeal the trigger and forestall the increase. “It’s the wrong approach and the wrong thing to do,” he said.
In his letter to the Legislative Advisory Board of he Governor’s Office for Emergency Relief and Recovery (GOFERR), BIA President Jim Roche said it would be “extremely insensitive to the struggles of employers of all sizes and will adversely impact their ability to rehire employees at the very time rehiring is desperately needed.”
Meanwhile, Executive Councilor Andru Volinsky, one of two candidates vying for the Democratic gubernatorial nomination, said that the trigger for increasing the tax rates was expressly intended to address a challenge like that posed by Covid-19.
Many large businesses have continued to operate, he said, some of them, like Amazon and FedEx, very profitably and would not be significantly affected by a marginal tax increase. Above all, he said, steps to deplete state revenues would lead to shifting a greater share of the tax burden to property taxpayers.
Q. Will forgoing revenue from business taxes increase the likelihood that the state will again balance its budget by reducing aid and shifting obligations to cities and towns?
Roche: That is one option, although it may be less likely with the current composition of the Legislature. Other options include a state hiring freeze, delaying capital investments and delaying new programs or program expansions.
Just as businesses of all sizes are being forced to make difficult decisions, so too will all levels of government. The fallback option should not be raising business taxes. Businesses are the very group that policymakers hope will dig our economy out of its hole. Burdening them with higher expenses will not help them recover, including bringing their employees back to work. It will hurt businesses and their employees across the board.
Volinsky: Yes. This has been a well-documented pattern with state governors and lawmakers in prior years that the state has reneged on funding promises and failed to fund what should be state services.
The shifting of pension costs, decreases in revenue-sharing and defunding of school building aid are all examples of funding promised to local communities and later withdrawn in order to meet state budget concerns without any apparent regard for local property taxpayers. The Manchester and Nashua Safe Stations substance abuse referral programs should have been state funded from the start. That’s an example of an unfunded service.
Q. The biennial budget provides for distributing almost $62.5 million to the most hard-pressed school districts and another $20 million in unrestricted funds to municipalities in the 2021 fiscal year. With the school funding issue again before the Supreme Court, should the state being doing what it can to fulfill these commitments?
Roche: Legislators will need to prioritize “wants” versus “needs.” BIA has long advocated for a constitutional amendment to give the Legislature the ability to send state education dollars where they are most needed. Distributing state education money on a per-pupil basis without regard to local fiscal capacity is not an efficient or wise use of scarce resources. A constitutional amendment will go a long way toward fairly addressing this challenge.
Volinsky: Of course the state should make these promised payments. They are not enough to comply with the Claremont school-funding principles, but they illustrate what is at risk if the governor cuts revenues by $20 million or $30 million on top of the expected decreases resulting from the pandemic. New Hampshire is going to experience a significant loss of revenue because of the overall economic crisis, and it makes no sense to further deplete business tax revenue.
The trigger was put in place to mitigate the impact of precisely what has occurred. It was prudent then and imperative now. Moreover, since the economic slump will squeeze profits and shrink payrolls, the tax liabilities of businesses will be reduced in any event.
Q. In 2018, businesses paid $1.7 billion in property taxes, more than twice the $800 million these same businesses paid in business profits tax and business enterprise tax. What is the risk that not increasing business tax rates would be more than offset by rising property taxes levied on businesses?
Roche: The question assumes that raising state business taxes would translate into cities and towns not raising local property taxes. One does not automatically follow the other. Property tax rates reflect local spending decisions. As noted earlier, all levels of government will need to make difficult decisions about spending and priorities. The fallback option should not be raising property taxes.
Burdening businesses with higher property taxes will not help. Further, property values from which municipal governments generate most of their revenue have not been impacted by Covid-19, at least not yet. Even when they are impacted, it will not be to the same degree as state tax revenues.
Volinsky: The governor’s proposal ignores the fact that businesses with a brick-and-mortar presence in the state pay property taxes and pay them at the same inequitable rates, just like homeowners across the state. This means that many businesses will have their state tax cuts more than offset by local property tax increases.
Q. The BPT is levied on a firm’s reported profits while the BET is levied primarily on a firm’s payroll, regardless of whether it turns a profit. Since they have different tax bases, should the two be treated differently in the current circumstances, particularly since restoring employment will be an immediate priority?
Roche: I think the question being asked is, “Would it be good policy to raise the BPT tax and keep the BET tax at the same rate so as not to discourage hiring?” The two taxes are closely interwoven (e.g. BPT payers get a dollar-for-dollar credit for any BET tax owed). The more you shift the burden from those paying only the BET to those paying the BPT (a relatively small number of companies), the more you risk returning to an unconstitutionally inequitable system of taxation, and that is what led to the development and implementation of the BET in the first place.
Volinsky: The governor’s tax cuts will benefit only a small portion of New Hampshire’s businesses. In a strong economy 75% of the 170,000 registered businesses either did not file a tax return or make a tax payment. Of those few businesses that filed returns and paid taxes, less than 2% accounted for the vast majority of business tax receipts. One has to ask who is the governor trying to benefit with these tax cuts, assuming he understands how they work.
Q. Changes to the federal tax code undertaken in 2017 reduced the top tax rate on corporate profits from 35% to 21%. Since the tax liability of many of New Hampshire’s largest commercial taxpayers has been significantly reduced already, should the state lighten it further by shifting a larger share of the tax burden to other taxpayers?
Roche: The purpose for reducing the federal corporate tax burden was to allow companies to invest more in growing their individual businesses. Reducing business tax rates does not automatically translate to “shifting a larger share of the tax burden to other taxpayers.” Overall spending has a greater impact on overall tax burdens. In addition, when New Hampshire lowered business tax rates between 2016 and 2019, it resulted in dramatically increased revenue collections from business, not less.
Volinsky: No. Local property taxpayers deserve a break. And the governor could achieve that by keeping state promises to fund schools, share revenue and pay pensions.