New Hampshire’s six-year run of business tax cuts should have made the state’s corporate income tax rate the second-lowest in New England. But a funny thing happened along the way. New Hampshire was joined by an unexpected rival.
When the succession of cuts began in 2015, New Hampshire’s Business Profits Tax (BPT) rate was 8.5%, making it the third-highest corporate income tax in New England. Only Maine’s 8.93% rate and Connecticut’s 9% rate were higher. After the passage of the current state budget, New Hampshire’s BPT rate is down to 7.6%, a 10.5% cut in six years. (Legislators cut the Business Enterprise Tax by 27%.)
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That makes New Hampshire’s rate lower than the top rate in Vermont (8.5%), Maine (8.93%) and Massachusetts (8%).
But Connecticut, beset with fleeing businesses and a dwindling population, took measures to stop its own bleeding. It reduced its corporate income tax rate from 9% to 7.5%.
Rhode Island’s rate has remained at 7% the entire time.
(Maine and Vermont have graduated corporate tax rates. Maine’s lowest corporate tax rate is 3.5%. Vermont’s is 6%.)
Because Connecticut lowered its corporate income tax rate by 1.5 percentage points, New Hampshire’s rate wound up moving down only one place, rather than two, among the New England states.
This helps to illustrate an important point. States don’t act in a vacuum.
Businesses aren’t trapped inside any jurisdiction’s borders. It’s a free country, and they can move if they find another location more hospitable. Which they sometimes do. Just ask California.
If each state could erect its own iron curtain, just imagine how high corporate and personal tax rates would be.
But because it’s a free country, states sometimes find it in their best interest to lower rates to make themselves more attractive.
That’s why Connecticut and New Hampshire weren’t the only places to lower corporate tax rates in the last six years. A few examples:
New York lowered its rate from 7.1% to 6.5%.
Washington, D.C., dropped its rate from 9.4% to 8.25%.
Florida cut its rate from 5.5% to 4.4%.
Iowa slashed its rate from 12% to 9.8%.
North Carolina cut its rate in half, from 5% to 2.5%.
Some lawmakers prefer to ignore other states and pretend that corporate tax rates are simply a lever for raising revenue from existing businesses. Raise the lever, raise the revenue. Lower the lever, lower the revenue.
But people inside and outside a state’s borders react when those levers are raised or lowered. That’s a big reason why state tax rates change.
This year, five states states have reduced business tax rates. Ten states have reduced individual income tax rates. The total number of states to reduce either business or individual income taxes is 11, not 15, though, as some states reduced both.
Some notable examples:
Indiana decreased its corporate income tax rate from 5.25% to 4.9%
Idaho reduced its corporate income tax rate from 6.925% to 6.5%, retroactive to Jan. 1.
These follow numerous changes made last year, from Arkansas eliminating its top income tax bracket to Tennessee eliminating its tax on interest and dividends to New York eliminating and Illinois reducing its capital stock tax.
It’s true that some states raise rates. New Jersey added a new top corporate tax rate, going from 9% in 2015 to 11.5%. Of course, New Jersey also has earned the title of “Most Moved From State” for three years running (and it’s particularly good at losing higher-income people). In a free country, mistakes will be made.
And in a free country, states compete for people, entrepreneurs and businesses.
Freedom made New Hampshire an economic marvel. Recognizing that people are free to live wherever they want, state policymakers for decades have focused on making the Granite State as attractive as possible.
It has worked beautifully. New Hampshire’s economic growth has surpassed every other New England state’s, and the national average, since the late 1970s.
With a booming economy came a growing population, which has enhanced the state’s quality of life and kept New Hampshire from becoming Vermont — a dying state that pays people to move there.
When people are free, there’s a limit to how bossy a state can be. And there are rewards for offering people more personal, political and economic autonomy.
New Hampshire has figured this out. Other states are catching on, just as technology has made Americans more mobile than ever before.
The competition is not over. It’s just beginning.
Drew Cline is the President of the Josiah Bartlett Center for Public Policy
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