A Taxing Issue: Some Background on N.H.'s Business Taxes
The debate over New Hampshire’s business taxes has largely played out along partisan lines this year, with Republicans supporting staggered cuts to the state's corporate tax rates, and Democrats opposed. But political rhetoric aside, let's look at the underlying numbers to better grasp the core policy issues.
First, just what are the taxes at play here? New Hampshire levies two taxes specifically on businesses. The Business Profits Tax (BPT), the larger of the two, is an 8.5 percent tax assessed on income earned from business activity. Every business in the state with receipts of at least $50,000 is subject to this tax, which has been around since 1970.
There’s also the Business Enterprise Tax (BET), currently at .75 percent. This is assessed on all compensation, interest and dividends paid out by a business, as long as it has annual revenues of $150,000. It's essentially a tax on a business' wages, though companies can use their BET liability as a credit against its BPT bill.
It’s true New Hampshire has among the highest business tax rates in the country. And, according to at least one study, the state has the third-worst corporate tax profile. That same survey, however, rated New Hampshire relatively well for its overall tax profile, after accounting for things like personal income taxes, sales taxes and property taxes.
National rankings aside, New Hampshire’s two main business taxes make up the single biggest share of the state’s revenue pie.
That means any change in business tax rates will have a significant impact on the state’s total revenue picture. How to predict that impact has been at the heart of this year’s budget debate.
Advocates for lowering New Hampshire’s business taxes say the cuts will boost overall economic activity, encouraging Granite State firms to expand and luring out-of-state businesses to move here. They also often point to other states with lower business tax rates as models for New Hampshire.
But comparing state business taxes without taking into account each state’s overall tax structure leaves out other important factors. Let’s look, for instance, at the revenue streams of other states that policymakers and business leaders point to as competitors with New Hampshire.
Several things jump out here: One, New Hampshire relies on property taxes to a much greater extent than many other states to fund state and local governments - but that's an argument for another day. It's also clear that business taxes (labeled here as “corporate income tax”) make up a significantly higher share of tax revenues in New Hampshire than many “competitor” states – 10 percent in New Hampshire versus, say, just 5.5 percent in neighboring Massachusetts. Many of these other states also rely on one of two big tax sources (mostly individual income and sales taxes) for the bulk of their revenue stream.
We can also look more broadly at revenue sources across the country, to put New Hampshire's tax structure in perspective.
We see in these charts that, compared to the rest of the U.S., New Hampshire relies much less on taxes to pay for state government (38 percent of total state revenues in New Hampshire, compared to 50 percent nationally). According to a recent analysis by the Pew Charitable Trusts, New Hampshire’s state revenue pie depends much more on “service charges,” such as tuition at state colleges and user fees, as well as outside sources like state lottery revenues and transfers from local governments.
Whether cutting New Hampshire’s business tax rates will spur new economic activity remains subject to debate. But, if nothing else, it’s clear that any discussion about the future of the state’s revenue structure should probably include more than just business taxes.