A year ago, it seemed possible that New Hampshire was headed for a triggered tax increase. Instead, lawmakers could cut corporate tax rates and begin phasing out state taxes on interest and dividend income, which would remove the asterisk and make New Hampshire the ninth state to completely waive personal income tax.
If some revenues had fallen 6% or more below projections, which seemed plausible at the start of the pandemic, recent triggered reductions in New Hampshire business tax rates would have been undone. Now, some lawmakers are looking to get rid of the tax trigger altogether and cut corporate tax rates over the next two years.
House Bill 10 would reduce business profits tax (BPT) from 7.7% to 7.6% and business tax (BET) from 0.6% to 0.55% for the year current tax. BPT and BET would decline again next year, to 7.5% and 0.5%, respectively. Governor Chris Sununu (R) also promoted a reduction in the BET rate in his February 11 budget speech and also included the phased reduction of state tax on interest and dividend income in his budget.
The BPT can be understood as a typical corporate income tax, but the BET is more like a value added tax (VAT). While it is a tax levied on businesses, the BET is essentially a universal consumption tax. Its basis includes all of a firm’s labor and capital inputs, as it measures wages, dividends paid to investors, and interest paid on loans, to reflect general consumption. Value added taxes such as the BET have the advantage of having an extremely broad base which allows stability and applies to companies of all sizes and categories. Companies can deduct taxes paid on the BET from their BPT liability.
House Bill 10 would continue the state’s rate-cutting efforts, which have been ongoing since 2016, when the BPT was levied at 8.5%. The peak BPT rate of 7.7% is lower than neighboring Vermont (8.5%), Maine (8.93%) and Massachusetts (8%), although it is still relatively high.
Currently, the BPT and BET rates for the 2022 tax year are tied to revenue collected. If the combined amount of unrestricted income from general funds and education trust funds is 6% or more below official income estimates, the BPT increases to 7.9% and the BET to 0.675%. If that same income is 6% or more above the estimates, the BPT and BET decrease to 7.5 and 0.5%, respectively. The same provision was in place for the 2021 tax year, but was not triggered in any way. House Bill 10 would replace those triggers with scheduled rate cuts this year and next.
While tax triggers can be a useful tool to bring about tax reform without ignoring revenue concerns, the New Hampshire trigger is remarkable in several ways. First, it could lead to a decrease or an increase, leaving companies open to tax increases at times when they are already struggling. The trigger is also based on the difference between revenue estimates and recoveries. While these numbers give some indication of where a state is doing, tying rate changes to actual year-over-year revenue growth against an established baseline would provide a better indication. to find out if a state can afford rate reductions. If revenue projections are dramatically off in either direction, a rate increase or decrease could be triggered even though actual revenue changes would not otherwise indicate a revision.
Used correctly, tax triggers can limit the volatility and unpredictability associated with rate cuts. However, New Hampshire would do well to move away from the BPT and BET trigger currently in place because it creates uncertainty for businesses during an economic downturn and does not accurately track state revenue growth.
Business tax revenues are impossible to predict accurately, as profits fluctuate widely from year to year, but the Department of Revenue Administration estimates that, assuming business revenues are within the levels of the In FY20, the rate cuts in HB10 would cost the state $49.7 million per year on a static basis when fully implemented by FY2023.
Additionally, if the Governor’s proposal passes, New Hampshire would become the ninth state with no personal income tax following a phase-out in 2026. Currently, the state only taxes income from interest and dividends – a distinction it has shared with Tennessee until now. year, when Tennessee completed the phase-out of its Hall income tax on interest and dividend income. Now New Hampshire can do the same.
New Hampshire may not be facing a surplus, but its financial situation is much better than initially expected, with revenue down just 2% in 2020. A monthly comparison from the Department of Revenue shows that the perceptions of corporate tax in 2021 is following the projections. and even surpassing 2019 figures in four of the seven months for which data is available.
The state will need to ensure it is prepared to budget for HB10 revenue changes, but overall state finances are in good shape and it is commendable that lawmakers are looking to reduce the burden on businesses that may be in difficulty and to avoid potential risks. tax increases.