Biz Tax Revenue Growth Not Driven by Rate Reductions

Since 2015, state revenues have increased substantially. These higher revenues have provided opportunities for investments in health, education and transportation while generating surpluses, giving policymakers more fiscal space to enact tax rate reductions.

State lawmakers have successively reduced the Business Profits Tax (BPT) and the Business Enterprise Tax (BET) rates. Profits are taxed after certain adjustments through the BPT, while the BET is based largely on the compensation businesses pay to employees.

Between state fiscal years 2015 and 2022, combined BPT and BET revenues rose 118%. Concurrently, BPT and BET rates were reduced incrementally. For the tax year 2015, BPT and BET rates were 8.5% and 0.75%, respectively. For tax year 2023, the rates have fallen to 7.5% and 0.55%. The BPT is the state government’s largest tax revenue source.

An examination of the potential causes of business tax revenue growth does not indicate tax rate reductions spurred such growth. The NH Fiscal Policy Institute’s research published in August 2023 shows estimated revenue losses from tax rate reductions totaled between $496 million and $729 million across tax years 2016-2022. While overall revenues grew during this time, the state lost revenue to these rate reductions that it would have otherwise collected if the rates had not changed.

Six Indications That Rate Drops Did Not Boost Revenue
First, while BPT revenues increased during this time, BET revenues stagnated. Available state data show that relative to tax year 2015, before the rate reductions and without adjusting for inflation, BET receipts were lower in tax year 2019, similar in 2020, and only 5.2% higher in 2021 while wages paid, the largest part of the tax base, grew substantially.

Second, from the creation of the BPT in 1970 through 2022, there is no statistically significant relationship between the tax rate and job growth, or between the tax rate and gross state product growth in NH relative to New England overall. Personal income per capita, after adjusting for consumer price inflation in New England, grew similarly across Maine, Massachusetts and NH between 2015 and 2022.

Third, combined state-level corporate tax revenues in other New England states, as well as nationally, rose 110% and 84%, respectively, between fiscal years 2015 and 2021, while NH business tax revenues increased 79% in the same period. The Granite State’s recent revenue increase is far from unique, which makes it unlikely to have been caused by state policy changes.

Fourth, multi-national entities pay the majority of BPT revenue, making their corporate profits a key part of the tax base. National corporate profits have surged since 2015, and particularly since the pandemic’s beginning, due to influences beyond NH policy.

Fifth, while the number of business tax filers increased between 2015 and 2021, revenues rose much faster, suggesting growth was not primarily driven by an influx of businesses.

Sixth, recent, peer-reviewed research does not indicate reducing state corporate tax rates is likely to increase revenue or to have a dramatic effect on economic activity overall.

While business tax rate reductions could potentially help the economy, the math of the tax rate reductions themselves suggests limited impacts. For all but the most profitable entities, the BPT rate reductions are likely insufficient to enable hiring more employees. The 9,196 businesses that paid between $1,000 and $10,000 in BPT (representing 42% of all BPT-paying businesses) would have had an average tax reduction of $518 if the tax rate had been one percentage point lower.

State Revenue Risk
A key consideration for policymakers going forward is the state’s increasing reliance on BPT revenues to fund services.

The combined BPT and BET revenues comprised about 36% of all state tax revenue in the most recent year, the largest tax revenue source by far. BPT revenues accounted for more than three quarters of total business tax revenue in tax year 2021. Rate reductions have pushed down BET revenues, making the state increasingly reliant on corporate profits for tax revenue, rather than the wages and other compensation taxed by the BET. As state corporate taxes have historically been volatile, and profits can swing faster than the economy overall, future revenues may become more difficult to predict. 

Phil Sletten is the research director at the NH Fiscal Policy Institute, an independent, nonprofit, nonpartisan public policy research organization based in Concord. Learn more at www.nhfpi.org.