Since 2015, New Hampshire Republican lawmakers have steadily lowered the state’s business profits tax, taking it down from 8.5 percent to 7.5 percent in intervals of two-tenths of a percent. The reduction has been touted as a means to make the Granite State more inviting to businesses, inspire expansion and hiring, and grow the economy.
And the state has captured much more business tax revenue in recent years, increasing 118 percent since the tax cuts began.
But a new report from the New Hampshire Fiscal Policy Institute, a think tank advocating for economic policies for low-income residents, argues that the tax cuts are not the cause of that growth, and not making the cuts could have given New Hampshire hundreds of millions of dollars more in revenue.
Here are three takeaways from the report, and the reaction from supporters of the cuts.
No significant link between New Hampshire’s business tax reductions and the state’s recent revenue increases.
Tax policies can affect the decisions made by businesses, the NHFPI report notes. But the report contends that smaller changes to a state business tax – like New Hampshire’s – are unlikely to have major short-term effects.
An analysis by NHFPI of the state’s Gross State Product between 1970 and 1998 found no statistically significant relationship between New Hampshire’s business tax rates and the state’s Gross State Product. In the period between 1998 and 2022, about 15.4 percent of the Gross State Product growth was found to be correlated with the tax cuts, the organization found.
But when compared to regional economic growth across New England, New Hampshire’s economic growth appears less unique, and less tied to its business profits tax rate, the report states.
“Controlling for economic growth in New England shows there is no statistically significant relationship between the BPT rate and overall economic growth in New Hampshire relative to New England,” the report found.
One factor: State business taxes are only one component of a company’s state tax bill. About half of all the state and local taxes paid by New Hampshire businesses go to property taxes; the state business tax makes up about 26 percent, the NHFPI says, citing fiscal year 2021 figures from the Council on State Taxation.
Meanwhile, when the state does reduce business taxes by two-tenths of a percentage point, the savings for most businesses are relatively low, the report found.
Businesses paying between $1,000 and $10,000 in business profits taxes every year – the bracket of the tax with the highest number of filings in New Hampshire – saw an average of only a $50 reduction in taxes for every tenth of a percentage point that lawmakers reduced that tax, the report found, citing 2020 data from the Department of Revenue Administration.
And the report argues that because 57.6 percent of the state’s business taxes in 2020 came from “water’s edge,” multinational companies paying more than $1 million in taxes to New Hampshire per year, any savings those companies receive from the state tax cuts that are returned to shareholders through dividends will leave the New Hampshire economy. NHFPI points to a report from the Tax Policy Center finding that 40 percent of corporate stock shareholders live outside the United States.
The extent to which tax cuts spur growth is difficult to measure. Academic literature at the national level has provided conflicting conclusions.
A 2014 Harvard University and Texas A&M study that looked at 28 years of changes to business taxes in all 50 states found “little to no positive impact” on gross domestic product, job creation, and other factors. A 2013 study published in Business Economics found that corporate tax reductions tend to spur initial job growth, but that the benefits drop off after a year.
New Hampshire’s General Fund revenues swelled largely due to national events.
New Hampshire’s state coffers have definitely increased in recent years. But the NHFPI report says that’s likely due to other factors.
First, the economic recovery in the decade following the Great Recession gradually increased corporate profits and state tax revenues, the report notes.
Second, the 2017 Tax Cuts and Jobs Act, which created incentives for large corporations to move profits that were sitting in overseas banks back into the United States, became a windfall for most states, including New Hampshire. Because many companies were repatriating their money in the U.S., the business taxes captured much more revenue. For most companies, the extra cost in state taxes was justified by the savings in federal taxes; but for the states, the extra money made a major difference.
Third, in the years following the COVID-19 pandemic, and a wave of federal aid to both businesses and consumers, corporate profits soared.
The revenue growth seen in New Hampshire has also happened in other states that did not lower business taxes, the report notes: Corporate tax revenues rose 32 percent in Maine, 45 percent in Massachusetts, and 18 percent in Vermont between state fiscal year 2020 and 2021, the report noted. New Hampshire’s intake rose 41 percent in the same period.
Those latter two one-time events have allowed New Hampshire’s General Fund to grow significantly in the past six years, and helped provide the funding for the $15 billion, two-year budget approved by lawmakers in June, the report concludes.
Keeping the tax rate at higher levels could have brought New Hampshire more revenue.
Because most of New Hampshire’s recent revenue growth has been driven by the profits of national and international companies, NHFPI estimated that the state could have gained even more in revenue had the tax rates not been lowered. In total, the state missed out on between $496 million to $729 million in revenue between 2016 and 2022, the report estimates.
To reach that projection, NHFPI staff designed a spectrum defined by a high-value estimate and a low-value estimate. The high-value, $729 million estimate of how much revenue was not captured is based on the assumption that the tax cuts created no economic growth that would generate revenue and offset themselves.
The low-value estimate was based on the assumption that the tax cuts did generate growth. To do that, the NHFPI projected what would happen if the business tax cuts spurred enough economic growth to pay for 32 percent of the revenue growth. That percentage was chosen because it is almost double what rosy models in other states have suggested could be generated in economic growth, allowing it to serve as a “best-case scenario” upper bracket.
The NHFPI argues that the extra revenue could have been invested into state programs to help low-income New Hampshire residents, stimulating the local economy without giving corporate tax breaks.
“Key research also suggests dollars retained in the New Hampshire economy, particularly those targeted at services for individuals and families with low and moderate incomes, provide more effective economic stimulus than corporate tax reductions,” NHFPI stated in a press release accompanying the report.
Fiscal conservatives push back, say tax cuts still worth doing
Reacting to the report’s release, New Hampshire fiscal conservatives have stood by the tax cuts. And they have rejected the idea that the state’s potential lost revenue is a problem.
Drew Cline, president of the Josiah Bartlett Center for Public Policy, a free-market think tank that supports the tax cuts, said the business tax cuts were never intended to create a windfall of revenue for the state in the short term. Instead, Cline argues that lowering the rate was necessary to improve the business climate in the long term, even if it didn’t have the effects that some have claimed.
“They weren’t supposed to pay for themselves,” Cline said in an interview. “No serious policy analyst believes that a business tax rate decrease of this nature is going to immediately pay for itself.”
Instead, Cline said: “The purpose of cutting those tax rates was to provide some level of stimulus for the economy so that it would grow and hopefully make everybody more prosperous and have all of the benefits from a growing economy, which include increased government revenue.”
Cline said that even if the short-term, national factors that swelled New Hampshire’s revenues fade away, the result will still be positive from a fiscally conservative standpoint.
“I thought the spending was too high on this last budget,” Cline said. “But it’s kind of hard to make the case that government should have kept tax rates even higher so that the budget could have spent three quarters of a billion more.”
Republican lawmakers were even more emphatic.
“I don’t think this comes as a surprise to anyone that when you lower state taxes, taxpayers keep more of their own money,” said Sen. Tim Lang, a Sanbornton Republican. “If the criticism is that New Hampshire taxpayers kept between $500 million to $750 million in their pockets since 2015, I think that’s great.”
This story is courtesy of NH Bulletin under creative commons license. No changes have been made to the article.
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