While New Hampshire has a low overall tax burden relative to other States, its business taxes are among the highest. The Tax Foundation, for example, ranks New Hampshire seventh overall in terms of business tax climate, but just 46th when only business taxes are considered. New Hampshire’s seventh-place ranking is the result of the absence of a general individual income tax and a general sales tax.
There are two business taxes in New Hampshire. The business profits tax, as the name suggests, is a tax on profits. Businesses with $50,000 or less in profit are exempt. The business enterprise tax is a tax on the compensation, interest and dividends paid out by a business. Business that pay $100,000 or less in compensation, interest and dividends are exempt.
The business enterprise tax is treated as a credit against the business profits tax. In other words, if a business has a business profit tax of $10,000 and a business enterprise tax of $10,000, it pays $10,000 in taxes.
The reason New Hampshire has two business taxes is that: (1) some businesses -e.g. law firms- show no profit by paying all of their profit as salary and (2) these businesses escape taxation because New Hampshire does not tax earned income. In other words, the business enterprise tax is essentially an income tax that is collected from profitable businesses that report no profit.
New Hampshire’s high business tax rates led the Legislature to include rate reductions in the 2015 budget. The business profits tax was cut from 8.5 percent to 8.2 percent in 2016, and is scheduled to go down to 7.9 percent at the start of 2018, which would make it a tenth of a percent lower than the corporate tax rate in Massachusetts. The business enterprise tax was cut from .75 percent to .72 percent in 2016, and is scheduled to go down to 0.675 percent at the beginning of 2018.
State Senator Jeb Bradley has proposed a bill that reduces the business profits rate to 7.7 percent on July 1, 2019, and then eventually down to 7.5 percent on July 1, 2021.
But rather than just tinkering with the rates, a Republican-controlled Legislature and a Republican Governor presents the opportunity for more comprehensive reform of business taxes.
More specifically, what I have in mind is replacing the business profits tax and the business enterprise tax with a single tax. The revenues of the business, less the cost of the materials needed to make whatever tangible product the business produces –what accountants call the cost-of-goods-sold– would be taxed.
Replacing the business profits tax and the business enterprise tax with a net revenues tax as described above would simplify the tax code for businesses.
It would eliminate the cost and effort of tax avoidance and allow businesses to focus on doing what makes business, not tax-accounting, sense.
It would create a level playing field by eliminating the special deductions and credits that favor some business over others.
I would set the rate of the net revenue tax to make it revenue neutral – that is, it should be the rate that collects the same amount of taxes that is currently collected under the business profits tax and business enterprise tax. But by making the net revenue tax applicable to certain not-for-profits (I would exempt religious schools) the tax base could be expanded and allow the elimination or reduction of taxes such as the Interest and Dividend tax.
If all the Republican Governor and Republican-controlled Legislature do is further tinker with tax rates, they will have squandered an opportunity for fundamental reform.