Stabilizing business tax rates at last (for two years, anyway)
Throughout 2019’s prolonged budget debate, two competing claims dominated the dispute over business tax rates. This week’s budget deal confirms conclusively which side was correct.
For months, Democratic leaders in the Legislature claimed that their budget — the one Gov. Chris Sununu vetoed — “stabilized” business tax rates. The budget did not raise taxes, they said repeatedly, but maintained existing tax rates and only eliminated tax cuts that were scheduled to take place in the future.
Republican Gov. Chris Sununu countered by accusing legislators of raising both the 2019 business tax rates and the 2021 rates.
The budget compromise Gov. Sununu signed this week reveals the truth. Unlike the vetoed state budget, this one actually keeps business tax rates the same for 2019 and 2020. It confirms that legislative leaders were incorrect when they claimed that their previous budget did not raise taxes.
On Jan. 1, 2019, the Business Profits Tax rate dropped from 7.9 percent to 7.7 percent and the Business Enterprise Tax rate dropped from 0.675 percent to 0.6 percent.
The budget that Gov. Sununu vetoed raised those rates back to their 2018 levels of 7.9 percent and 0.75 percent. It did so immediately, not in the future. It further eliminated the reductions (to 7.5 percent and 0.5 percent) scheduled to take place in 2021.
The governor insisted that the 2019 tax rates remain intact. Legislators insisted that rates return to their 2018 levels. There seemed to be no middle ground. Until this week.
How did this budget bring the two sides to agreement?
It did so by keeping this year’s tax rates intact and using revenue targets to trigger future changes.
The compromise budget keeps this year’s rates at 7.7 percent and 0.6 percent. Legislative leaders do not call this a tax cut. That is an admission that their previous budget did, in fact, raise business tax rates in 2019, not just in the future.
Under the compromise, if total general and education fund revenue for the current state fiscal year neither rises nor falls by 6 percent or more, those tax rates remain in place through the next fiscal year.
That is, the rates remain stable if revenue remains stable. At last, the budget “stabilizes” business tax revenue.
However, if total revenue rises by 6 percent or more, business tax rates will fall to the rates they were already scheduled to hit in 2021: 7.5 percent and 0.5 percent.
If total revenue falls by 6 percent or more, business tax rates will automatically snap back to their 2018 levels of 7.9 percent and 0.675 percent. This is another admission that the vetoed budget raised, rather than stabilized, business tax rates.
In essence, each side is betting that the economy will turn in their political favor in the next year.
In this deal, Democrats seem to be taking the bigger risk. To get what they have spent the better part of this year advocating, they need the economy to tank.
They have insisted that “out-of-state corporations” are unfairly undertaxed and that the state desperately needs more revenue. To achieve both, they have advocated higher business tax rates. Yet they get those higher rates only if state revenue comes in more than $155.8 million below expectations.
(Revenues have fallen slightly so far this fiscal year, but not at a rate that would trigger the tax increase.)
Gov. Sununu, on the other hand, gets two additional years of stable, relatively low tax rates (2019 and 2020). In the third year, he gets either a continuation of those rates or an additional tax cut unless state revenues quickly crater.
