Distant Dome is co-published by Manchester Ink Link and InDepthNH.org.
By GARRY RAYNO, Distant Dome
Business taxes are the lifeblood of the state budget.
They have been since the late Gov. Walter Peterson worked with lawmakers on a major overhaul that produced the business profits tax.
When major economic downturns devastated state revenues, governors and lawmakers turned to hiking the business profits tax and several others to try to make ends meet. They were Republican governors and legislatures that did that.
But in recent years with Democratic governors, business tax reforms and cuts have been a hallmark of the Republicans.
Today the state’s two business taxes — business profits and business enterprise — are the single largest source of revenue for state government, accounting for about one-quarter of all general and education fund dollars.
The business profits tax targets large, often multi-state and multinational public companies that have a harder time hiding profits than smaller closely held companies.
The officers of public companies have a fiduciary duty to produce the best balance sheets possible, so they want to show a profit, not hide it.
The business enterprise tax is a backdoor value added tax that assesses salaries, dividends and capital as business activity which ensnares all but the smallest businesses.
Avoiding business tax
There are ways to avoid it — create a separate LLC for every project or purchase — and allows some very successful business owners avoid large tax liabilities.
Today, many people do not know how the business enterprise tax came to be.
As with major changes in many state policies, it was spurred by a lawsuit or a threatened one.
The state constitution requires all taxes, assessments and rates to be “proportional and reasonable,” which is the foundation for the state Supreme Court’s Claremont II decision.
In the early 1990s as the state was caught in, but beginning to emerge from a major recession, one state company was growing “tremendously” and paying a significant portion of the business profits tax returns.
At the same time, physicians, lawyers, engineers, architects, etc. and their firms and companies were thriving too, but not paying business taxes and instead were rolling their profits back into salaries which are not taxed in New Hampshire, as we know.
Cabletron’s two top executives — former Gov. Craig Benson and Robert Levine — threatened to put the state’s business tax system on trial. Knowing that might not be good for the state and its revenue stream, then Gov. Steve Merrill put together a group of tax experts, business leaders and owners, and other stake holders to recommend changes.
The group suggested the business enterprise tax which was mostly the work or noted tax attorney Bill Ardinger from the Rath, Young and Pignatelli law firm.
The rate was one-quarter of one percent on salaries, dividends and capital and no one felt too much pain from the levy that eventually passed.
As with all taxes, the rate was raised and raised again to help pay for the state’s share of the Claremont education settlement.
The business enterprise tax is one state levy that tracks economic activity close to real time, while most state taxes lag, which means New Hampshire revenues are slow to diminish when the economy slows and then slow to recover when business activity increases.
During the last recession, state revenues were close to target for several fiscal years while other states were watching the bottom fall out of their revenue stream.
Yet when the rest of the country was beginning to recover around 2010, the state was facing a revenue shortfall of several hundred million dollars.
However, since the 2013 fiscal year, surpluses have been the norm and were substantial the past few years.
While there is a surplus halfway through this fiscal year, it is not as large as it has been and is on some shaky ground. One reason is lawmakers approved cutting business tax rates to bring the state more in line with surrounding states.
Due to the 2015 law budget law, business tax rates went down again Jan 1.
The business profits tax rate dropped from 8.2 percent to 7.9 percent and the business enterprise tax rate dropped from .72 percent to .675.
A similar reduction over a six-month period in fiscal 2017 reduced business tax revenues $12 million from the previous year.
When lawmakers debated the rate reductions, some proponents claimed at worst the reductions would be revenue neutral and more likely produce additional revenue.
Few people bought that argument and the figures for 2017 tell you why.
The rate reductions — included in the 2016-2017 fiscal year budget package — were a key reason former Gov. Maggie Hassan vetoed the budget.
Republicans claimed she vetoed the budget because she intended to run for the US Senate in 2016, which she did and defeated GOP incumbent Kelly Ayotte by a slim margin.
Hassan, however, claimed the rate reductions would blow a $70 million hole in future budgets. The figure was high, but her claim that the tax cuts were a roundabout way to reduce the size of state government does ring true.
Before the business tax cuts were approved the state had several years of revenue surpluses in the high tens of millions of dollars spurred on largely by business taxes.
Business tax revenues have been on an upward trend since bottoming out in 2009 when they were $487.9 million, or $130.2 million less than the prior year.
Business taxes reached their zenith in 2016 at $646.3 million producing a $90.4 million revenue surplus and are projected to be $662.3 million this fiscal year, which is still below 2008 revenues adjusting for inflation.
For the first half of this year, the state has collected $305 million, which is $23.5 million more than projected, but the rate cuts kick in the second half of the fiscal year when more than 60 percent of the total business tax receipts are collected.
The business tax surplus is likely to decrease before the end of the year. The questions are how far down the surplus goes and does it disappear.
In recent years the rooms and meals tax and the real estate transfer tax have also produced surpluses, but this year the surpluses are smaller.
The leveling trend for all revenues is indicative of an economy reaching its growth potential due to an aging workforce, exploding housing costs, and low unemployment rate making it difficult for some companies to find qualified workers, and most economic activity focused in the southeastern section of the state.
Along with the rate cuts, over the past few years lawmakers have done other things to reduce business tax revenue. They approved an offset for a scholarship program, increased the threshold for paying the business enterprise tax, and increased deductions for capital purchases.
Other tweaks were made to the tobacco, interest and dividends, and the communications taxes that reduced state revenues.
Even with those reductions, there has been sufficient money to fund most of the wants and needs.
Rainy day fund
But instead, a majority of lawmakers used most of the surplus to increase its rainy day fund to about $100 million.
Using surpluses for one-time things is not new. Using all the excess revenue for new or expanded services would create an even greater budget problem when revenues take a downturn as they are bound to do every decade or so.
However, the surpluses would have more than paid for the state’s share of Medicaid expansion hospitals and insurance companies now pay but not after this fiscal year.
The surpluses would have helped end the wait list for developmentally disabled individuals moving from school district responsibility to the state’s. While more money has been allocated, lawmakers did not follow Gov. Chris Sununu’s lead and increase pay for hard-to-find providers, which is one of the major reasons for the waiting list.
Last year lawmakers level funded the university system all but ensuring tuition would rise at the University of New Hampshire, Plymouth State University, Keene State College and Granite State College.
Using the same logic some organizations did by calling a proposed toll increase a tax increase — it is a user fee — lawmakers increased the taxes on every university system student and parent.
The often repeated slogan of “no new or increased taxes” does not appear to apply if you attend one of the university system’s institutions.
If the best and brightest high school graduates go outside the Granite State for their higher education, they are more likely not to return. Remember the state has a rapidly aging population and shrinking workforce.
How good is that for the state’s economy over time?
Elections have consequences and so do tax cuts.
Garry Rayno can be reached at firstname.lastname@example.org.
Garry Rayno’s Distant Dome runs exclusively on Manchester Ink Link and InDepthNH.org, where Rayno will explore a broader perspective on State House – and state – happenings. Over his three-decade career Rayno has closely covered the NH State House for the New Hampshire Union Leader and Foster’s Daily Democrat, and his coverage spanned the news spectrum, from local planning, school and select boards, to national issues such as electric industry deregulation and Presidential primaries. He is former editor of The Hillsboro Messenger and Assistant Editor of The Argus-Champion. Rayno graduated from the University of New Hampshire with a BA in English Literature and lives with his wife Carolyn in New London.