December 11, 2013
As originally published in the New Hampshire Union Leader
Rep. David Hess wants to tax me but at least he’s going about it the right way. Too often tax reform is a sneaky way of raising taxes. New Hampshire’s history of recent tax reforms shows it doesn’t have to be. Tax reform, simplification, and loophole elimination often fail at the state and federal level because the politicians use reform as a guise to increase revenues. Rep. Hess isn’t and should be applauded for that whether you like his proposal or not.
The state’s Business Enterprise Tax is assessed on every business enterprise in the state of New Hampshire, profit or non-profit. It is a tax assessed on almost everyone but at a very low rate – just three-quarters of a percentage point. There is only one exception. Those non-profits with a federal 501c3 tax status are exempt from our tax. That includes many small charities like food banks but also educational foundations, think tanks like mine, many large hospitals, and some colleges.
Some tax advocates would close the exemption to get more money for the state. Hess would not. Instead, he would eliminate the exemption but use whatever additional revenue it raised to reduce the total rate making his proposal revenue neutral. This is important.
Taxpayers are rightly skeptical of any proposal that claims to be seeking fairness but has the happy-for-the-tax-collector accident of taking more of our money overall. Too many tax hikes pretend one motivation when the true driver is more money for legislators to spend.
The two most successful tax reforms in the state’s history didn’t do that. They tried to give taxpayers assurance that they weren’t grabbing money.
The creation of the Business Profits Tax in 1970 included the elimination of 13 separate taxes on capital. Gov. Walter Peterson wanted to grow the economy by eliminating antiquated capital taxes that discouraged start up companies from locating here. One new tax was created but 13 others eliminated.
The Business Enterprise Tax itself was created in 1993 as a reform of the BPT. Both state and federal tax changes had so riddled the tax with loopholes that one-half on 1% of taxpayers paid 70% of the BPT.
Then-Gov. Steve Merrill supported reform but insisted that any change must be revenue neutral. By repealing other taxes and cutting the BPT by 12%, the Business Enterprise Tax Reform was actually a small net tax cut.
The debate was around getting tax policy right. Taxpayers could have confidence in the sponsors’ motives because the change was not getting them more money to spend.
Rep. Hess’s proposed change is similar. Any additional revenue would be offset by a rate cut for everyone. That is precisely the right change that assures us that Rep. Hess is focused on tax policy not a money grab.
The other consideration that must be applied is current tax policy. No tax is imposed in a vacuum. Various classes of taxpayers have additional burdens that have to be taken into account.
For example, it probably doesn’t make sense to exempt taxpayers like my small organization simply because we happen to be a 501c3 instead of a 501c4. There is no counterbalancing tax I happen to pay. If some non-profits pay – and most do – then perhaps all should.
However, within the currently exempt group do some taxpayers have other taxes? Hospitals, for example, are taxed significantly under a hospital only tax called the MET. We didn’t used to care because it was a fake tax which was transferred back under a different name. But in 2011, it became a real tax and a fairly large one.
If it is legitimate to have a very narrowly restricted tax like the MET which only 26 businesses pay, should one of the taxes be credited against the other? As an example, we currently do that with insurance taxes. Insurance companies pay a premium tax. To avoid double taxation — or something that functions as double taxation even if there is a technical difference – those taxes are credited against their business taxes.
I’m not necessarily endorsing the extension of the BET to all of those currently exempt – though I find no good reason my organization should be exempt. Even if the exemption is repealed many new taxpayers may need to be extended other credits because of the other aspects of our current system. It may turn out to be a simpler enforcement mechanism to just keep the exemption.
Regardless, Rep. Hess has made an important statement about tax policy that the right and the left should agree with. Tax policy changes can and must be debated in a revenue neutral context. It’s the only way we’ll ever trust you.