New Hampshire’s “Crumbs” – Federal Tax Reform Produces “Abnormal Rise” in Business Tax Revenue

Dollar-Differences-and-Changes-in-Revenue-April-2018-768x388This week the New Hampshire Fiscal Policy Institute (NHFPI) issued some analysis on the “abnormal rise” in New Hampshire Business tax revenue. Their conclusion? It is likely due to Federal Tax Reform.

As of the end of April, the BPT and BET together are about $90.8 million (16.9 percent) above plan for the year, and $107.0 million (20.6 percent) above April 2017. Although these two business taxes have been the primary source of the surplus during the year, the post-TCJA rise has dwarfed other revenue sources, even those that are major contributors.

NHFPI (rightly) cautions legislators not to presume too much about the flow of cash, which you wouldn’t normally expect given that we have Republican majorities in every branch and a Republican Governor. But there it is.

Businesses are changing their behaviors in response to corporate tax reform at the federal level in ways that generate more revenue within the existing state business tax structure, but some changes are likely to be temporary and have limited long-term effect. Legislators should be cautious regarding the use of these revenues, given the lack of assurance that higher-level revenues will continue and other uncertainties surrounding the State’s longer-term revenue.

I asked Greg Moore at AFP-NH for his thoughts, and he had plenty.

NHFPI and AFP both agree that the Legislature is making a huge mistake by going on this massive spending spree. However, where we disagree is in the durability of increases in state revenues as a result of tax reform.

By reducing and eliminating a number of deductions and exemptions, the federal government has broadened the federal corporate tax base. Since the federal tax base is the basis for our state corporate taxes, it broadens New Hampshire business tax base as well.

Greg points out that broadening the tax base while lowering the tax rate is the fundamental goal of tax reform but,

by not commensurately lowering business tax rates, (New Hampshire) is effectively raising taxes on its business since they are paying taxes on a broader base. Therefore, a good solution to ensure that New Hampshire doesn’t actually raise taxes on business would be to accelerate the business tax relief that was passed in the 2017 budget.

The Tax Foundation confirms this thinking.

  • Because the base-broadening provisions of the new federal tax law often flow through to states, while the corresponding rate reductions do not, most states will experience a revenue increase. The vast majority of filers will receive a tax cut at the federal level, but they could easily see a state tax increase unless states act to prevent one.

New Hampshire has an opportunity to use their tens of millions in tax reform “crumbs” to improve the business climate. But that means fiscal prudence that puts the interests of taxpayers ahead of acting like this is found-money, free and ripe for a spending spree. Spending that inevitably needs to be funded in future budgets where, if additional tax reform is ignored, there will be inadequate revenue to fund it; unless the legislature raises taxes.

Something Democrats are happy to do “when they win” – which they will if Republicans keep acting like Democrats.