Not surprisingly then, state policymakers continue to search for the best route to foster economic growth and get people back to work. A state commission, created in 2010, has weighed, among other options, lowering the business profits tax (BPT) rate and changing the way NH's business tax code interacts with the federal corporate income tax, to ease compliance and administration. Another approach under consideration is reducing the business enterprise tax (BET). Other legislative proposals under review include modifying the research and development tax credit and devoting revenue from the introduction of gambling to lowering the BET.
The Fix that Wouldn't
Unfortunately, all these approaches are unlikely to help NH reach its intended destination. Simply put, proposals to reduce business taxes do not represent the most effective means of achieving greater prosperity in NH, as they ignore several relevant facts about business taxation in the state and, more generally, about the effect that taxes may have on economic activity.
First and foremost, in the aggregate, the taxes paid by businesses operating in NH are already quite low compared to other states. One assessment conducted last year for the Council on State Taxation (COST), a nonprofit trade association consisting of nearly 600 multistate corporations, found that total state and local taxes paid by NH businesses amounted to 4.4 percent of private sector gross state product in FY 2010. That is below the national mark of 5 percent and less than at least 33 other states and the District of Columbia. Similarly, the Tax Foundation's latest State Business Tax Climate Index ranked NH's tax system as the sixth most favorable in the nation.
Of course, while overall taxes paid by NH businesses may be relatively low, one tax-the property tax-is more prominent than others. The same COST assessment determined that more than half of businesses' total tax bill in NH is attributable to local and state levies on business property. Yet, nearly all tax policy changes now under consideration not only fail to address this issue, but also could ultimately push property taxes higher.
A Balancing Act
Given NH's current fiscal condition, any reduction in revenue resulting from business tax cuts will have to be balanced in the budget, most likely through spending cuts. Should those spending cuts trigger additional reductions in aid to municipalities and school districts, property taxes may rise in response. Under these circumstances, businesses may see their total tax bill rise-not fall-despite lower businesses taxes.
Economics suggests business taxes have, at most, a relatively modest effect on business decisions-an effect that is likely outweighed by other costs of doing business.
In 2004, a review of existing studies led economist Robert G. Lynch to conclude in a report, Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, These other costs of conducting business' are the most important factors affecting business investment decisions and include the cost and quality of labor, access to quality transportation networks and infrastructure, quality-of-life factors, and utility costs.
New Hampshire can adopt public policies to help address such costs, including investing in higher education to boost worker productivity or in transportation infrastructure to speed goods to market. It will only be able to make such investments if it has the resources to do so. Instituting additional business tax reductions would deny the state those resources and make it harder to attract and retain businesses in the future.
Jeff McLynch is the executive director of the NH Fiscal Policy Institute, an independent, non-partisan organization dedicated to promoting public policies that foster economic opportunity and prosperity for all NH residents, with an emphasis on low- and moderate-income families and individuals. He can be reached at jmclynch@nhfpi.org.
Current Issue - May 2024