House Bill 123 creates an income tax disguised as a property tax

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New Hampshire legislators have devised various schemes over the years to protect the logging industry from market forces. The latest scheme comes in House Bill 123, as amended. Promoted as “closing a loophole” in the state’s Timber Tax, HB 123 in fact creates a new tax on revenues generated from sales of carbon credits. The new tax blends features of property taxation and income taxation. Though it gives the appearance of using assessed value as its base, it is a tax on net revenue earned in the prior year, which makes it an income tax. And because it has no offsets, it would be an unconstitutional double tax.

Background

The privately owned Connecticut Lakes Headwaters Forest in Coos County has produced varying amounts of lumber for more than 150 years. The logging business supported by harvests on that land has always ebbed and flowed along with changing demand for the region’s wood. The last three decades, however, have seen declining production. Industry data show that the forest’s timber harvest peaked in 1994 at about 150,000 cords. The next year’s harvest fell to 80,000 cords, and annual production has been below 60,000 (frequently below 40,000) ever since.

In 2003, the property owner agreed to put the 145,872 acres under a conservation easement that encourages continued forest management, including logging. The property has been managed for carbon sequestration since 2013. Carbon sequestration involves maximizing tree growth and selling credits based on the amount of carbon trees absorb annually. Trees are still harvested to maintain forest health and maximize returns on healthy trees. 

Though logging continues in the forest, recent yields have been lower on average in the last decade than in the decade prior. The number of cords harvested in 2022 fell below 20,000 for the first time since the early 1970s. Though the yield in 2023 rebounded to 28,000 cords, loggers fear that the land’s use as a carbon sink threatens the long-term survival of their industry. 

Annual harvests of fewer than 40,000 cords are not new for this property and have occurred for long intervals in the past, specifically from 1930 through the end of World War II, from the late 1950s to the early 1970s, and regularly since the mid-1990s. The harvest was below 40,000 cords for 14 of the 21 years from 2003-2023, or 2/3 of the time. Fearing a reduction in logging industry jobs and local tax revenues that come from the state’s Timber Tax, legislators amended HB 123 to encourage more logging and discourage the use of forestland for carbon sequestration programs. 

The loophole myth

HB 123 uses a stick (taxation) in the hope of increasing timber harvests in the North Country. The bill’s committee report says it applies the existing Timber Tax (yield tax) to a new forestry practice. It asserts that “landowners are not paying the timber yield tax on the sale of standing wood and timber associated with carbon offset credits due to a loophole in the law.”

But there is no loophole. The Timber Tax is a 10% ad valorem tax on the assessed value of timber at the time of harvest. Trees enrolled in a carbon sequestration program do not escape this tax. They will be cut eventually, at which point their owner must pay the Timber Tax. Trees in carbon sequestration programs are cut, as they have been every year since the Connecticut Headwaters Forest was put into a carbon sequestration program in 2013. 

Though the committee report represents the bill as “providing for the assessment of the 10% yield tax on the metric tonnage of carbon sequestered from the timber enrolled in forest carbon programs,” that is not what the bill does. 

It creates a new tax not on carbon tonnage, but on net revenues from carbon credit sales.

Reversing, not extending, the Timber Tax

Before New Hampshire’s Timber Tax was created, trees were assessed and taxed annually along with the land on which they grew. This created an incentive for landowners to cut trees to avoid taxation. Concerned about deforestation, lawmakers created the Timber Tax to reverse this incentive. 

“By taxing timber when cut—and only when cut—lawmakers sought to disincentivize the cutting of trees and clearing of land simply to avoid higher property taxes,” the Department of Revenue Administration explains in its Timber Tax Guide.

HB 123 by design would reverse the Timber Tax incentive for trees enrolled in a carbon sequestration program. By creating a new tax on the value of carbon credits sold, it replaces the incentive not to cut trees with an incentive to cut them. 

Were the tax in HB 123 an extension of the Timber Tax, it could run into conflict with Part II, Article 5 of the state constitution, which allows special timber taxes for one purpose:

“For the purpose of encouraging conservation of the forest resources of the state, the general court may provide for special assessments, rates and taxes on growing wood and timber.”

The point of HB 123 is to discourage conservation of forest resources through taxation. Because the bill does not tax timber, it likely avoids conflict with this constitutional provision. If it were, as its supporters claim, an extension of the Timber Tax, however, a constitutional challenge could arise.

HB 123 taxes net revenues (income), not property

Instead of extending the Timber Tax, HB 123 creates an entirely new tax. The bill’s language explains it this way:

“The owner of a property that has been enrolled or registered for the purpose of sequestering carbon dioxide and/or generating carbon offset credits shall annually pay a yield tax of 10 percent of the estimated net value of the carbon offset credits issued and sold in the previous calendar year.”

The bill draws from property taxation a requirement that the value of carbon credits be assessed by local tax officials. It then draws from income taxation the requirement that taxes are paid on the net value of credits “sold in the previous calendar year.”

So is it a property tax or an income tax?

The Timber Tax is triggered when timber is cut, regardless of whether it is sold. It is an ad valorem property tax on assessed value. The tax created by HB 123 is not like this. It is triggered by sales and applied to the net value of property sold. 

The committee report states that “the timber yield tax shall be assessed on the sale of standing wood and timber enrolled in a forest carbon program for the purpose of providing carbon offset credits to a buyer.”

That is confusing because the timber itself isn’t sold, only the carbon credits are sold. But it states clearly that the “tax shall be assessed on the sale….” 

The next sentence provides additional clarity. 

“Importantly, this bill as amended provides for the assessment of the timber yield tax related to this new type of timber sale,” it states.

The committee report emphasizes that the sale of carbon credits is a taxable event that triggers a 10% tax on the net value of credits sold in the prior year. This is clearly a new tax. Its purpose, substance and form are not at all like the Timber Tax.

The game is given up by checking the Official New Hampshire Assessing Reference Manual published by the Department of Revenue Administration. The manual’s definitions of ad valorem tax and income are as follows: 

  • Ad Valorem Tax: A tax levied in proportion to the value of the thing(s) being taxed. Exclusive of exemptions, use-value assessment provisions, and the like, the property tax is an ad valorem tax.
  • Income: The payments to its owner that a property is able to produce in a given time span, usually a year, and usually net of certain expenses of the property.

Despite the fig leaf of an assessment, HB 123 taxes payments that a property produces annually. Requiring a local assessment doesn’t transform the tax into a property tax. It is a tax on income.

The bill requires the carbon credits “issued and sold” in the previous year to be assessed, and a 10% tax to be levied on their net value. This assessment creates the appearance of a property tax. Section IV of the bill attempts to explain the valuation process. It’s confusing, but it does state that the value is determined by the “average price-per-metric ton paid” minus the developer’s and land owner’s costs. How else would assessors determine the value of property sold in the prior year if not by using actual prices paid? Any valuation that differs from actual revenues would be easily challenged in court. 

If you’re taxing net revenue generated from the prior year’s sales, what else are you taxing besides income?

Additional problems

Because the bill does not create an offset against the Business Profits Tax (BPT) or Business Enterprise Tax (BET), it creates a double tax on business income if the carbon credits are sold by a business. That violates the state constitution’s provision that taxes be proportional. 

HB 123 also does not allow a credit against the Timber Tax, which eventually will be paid on trees taxed through this new levy. Instead of paying one tax when a tree is cut, owners of trees that generate carbon credits will pay annually on income from the tree, then again on the tree’s assessed value when cut. 

If the tax were just the timber tax applied to trees not yet cut, then the same trees shouldn’t be hit with the Timber Tax again when cut. The bill has no provision to avoid piling a cumulative property tax on top of annual property taxes because it isn’t an extension of the Timber Tax, but a new tax on revenues generated from carbon credit sales.  

Conclusion

Many advocates of HB 123 as amended seem to genuinely believe that it is a simple extension of the Timber Tax. In their defense, the bill’s language is confusing and initially creates the appearance of conforming with the statutory process of determining a yield tax. That’s likely why it received an endorsement from the New Hampshire Union Leader, which has an editorial policy of opposing income taxes. Be that as it may, the bill as written creates a new tax on income generated by carbon credit sales. Elected officials who have pledged to oppose new taxes, especially an income tax, would violate those pledges by voting for this bill.  

Download this policy brief here: JBC Brief HB 123 Tax

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Cigarette smuggling boosted New Hampshire revenues by nearly $1 billion over 15 years

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New Hampshire is the No. 3 state in the country for outbound cigarette smuggling, resulting in a revenue windfall, concludes the latest annual report on interstate cigarette smuggling from the Tax Foundation and Mackinac Center for Public Policy.

From 2007-2022, New Hampshire earned $955 million in state revenue from cigarette buyers who then smuggled their purchases to higher-tax states, according to the report.

(At $1.78 per pack New Hampshire has the lowest tobacco tax rate north of Virginia.)

The study’s data, from 2022, “demonstrate that when states increase their cigarette taxes, smuggling rates increase, both in the form of increased purchases in neighboring states and through illicit international channels,” the report concludes.

“Higher tax rates incentivize smuggling. As tax rates increase, consumers and suppliers search for ways around these costs. In cigarette markets, consumers tend to shop across borders where the tax rates are lower and dealers develop black and gray markets to sell illegally to consumers, paying little or no tax at all. Growing cigarette tax levels and differentials have made cigarette smuggling both a national problem and a lucrative criminal enterprise,” the report states.

“A primary driver of the amount of cigarette smuggling is the relative magnitude of that state’s excise tax compared to the rate imposed by surrounding states or foreign countries. A sizable literature of peer-reviewed academic studies supports these observations.[11] A 2017 study published in Public Finance Review provides the academic theory and estimates for how tax rates affect smuggling, highlighting that easily transportable goods (e.g., cigarettes) will be attractive cross-border shopping items.[12] A 2018 study published in the same journal supported those findings by examining littered packs of cigarettes across 132 communities in 38 states, finding that 21 percent of packs did not have proper local stamps.[13]”

In addition to high taxes, the study found that bans on flavored cigarettes in Massachusetts and California have sent smuggling to new heights.

Massachusetts’ ban on flavored tobacco and vaping products moved it up to the No. 3 destination in the country for smuggled cigarettes and helped make New Hampshire the No. 3 state for outbound smuggling.

 

“The first state to implement a statewide menthol flavor ban was Massachusetts. Its menthol flavor ban took effect in June 2020. In the 12 months following implementation, sales in the Bay State declined by almost 24 percent compared to the 12 months preceding the ban. Through the end of 2021, sales were down more than 25 percent compared to sales from 2019. This decline translates to $135 million less in cigarette tax revenue for Massachusetts (not including lost revenue from sales tax and smokeless tobacco sales).

“Importantly, these sales did not disappear; most of the transactions merely moved to neighboring states or to illicit markets. Throughout most of the US and all the New England states, cigarette sales have constantly declined since the 1960s. It was telling when sales of cigarettes in New Hampshire increased by 22 percent and sales in Rhode Island increased by 18 percent in the 12 months following the Massachusetts menthol ban. Sales in New Hampshire and Rhode Island remain roughly 10 percent higher in 2021 than in 2019 thanks to cross-border Massachusetts shoppers and smugglers.

“Smuggling skyrocketed in Massachusetts. In 2019, prior to the flavor ban, Massachusetts had a net inbound smuggling rate of 19.9 percent, the 12th-highest in the country. The nearly 38 million packs smuggled into the state cost the state more than $133 million per year in forgone revenue.

“A full year after the ban in 2021, smuggling in Massachusetts is up to 37.6 percent, the fourth-highest rate in the country. The 64 million packs smuggled into the state now cost the state $224 million in forgone revenue each year.”

The State of New Hampshire earned $26 million in revenue from cigarette smugglers in 2022, and a total of $955 million from 2007-2022, the report concluded.

Massachusetts’ revenue losses are nearly nine times larger than New Hampshire’s revenue gains.

“In 2019, prior to the flavor ban, Massachusetts had a net inbound smuggling rate of 19.9 percent, the 12th-highest in the country,” the report found. “The nearly 38 million packs smuggled into the state cost the state more than $133 million per year in forgone revenue.

“A full year after the ban in 2021, smuggling in Massachusetts is up to 37.6 percent, the fourth-highest rate in the country. The 64 million packs smuggled into the state now cost the state $224 million in forgone revenue each year.”

The ban has also saddled Massachusetts with enforcement costs.

“Massachusetts has established a dedicated Multi-Agency Illegal Tobacco Task Force, which seized a record-high 18,483 packs of cigarettes in 2022,” the report notes. “This, too, falls dramatically short of the more than 67 million packs smuggled into the state—amounting to 0.027 percent of illegal cigarettes. The scope of the task force also extends to other types of tobacco and vapor devices on a budget of more than $1 million in 2022.”

In addition to creating a market for the smuggling of legal cigarettes domestically, high taxes and flavor bans have created a booming market for illegal, unregulated imports, the report noted, something that has been documented in other studies as well.

In the past, some New Hampshire office-holders have cited cigarette and alcohol smuggling as a reason to raise excise taxes to match those of neighboring states. But this gets the causation backwards.

New Hampshire has always maintained low rates relative to its neighbors. The other Northeastern states created the regional black market by dramatically raising their rates, and in the case of Massachusetts banning menthols.

New Hampshire has been the beneficiary of interstate smuggling, but it was not the cause.

 

 

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New Hampshire passes Texas on tax competitiveness

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New Hampshire this year slipped ahead of Texas to claim the No. 6 spot on a national index of state tax competitiveness published by the Tax Foundation.

Formerly the Business Tax Climate Index, the newly redesigned 2025 State Tax Competitiveness Index combines the Tax Foundation’s indexes for corporate, individual income, sales, property and unemployment insurance taxes. 

New Hampshire ranked No. 1 on sales taxes, 12 on individual income taxes, 27 on unemployment insurance taxes, 32 on corporate taxes and 39 on property taxes. 

That was good enough to place New Hampshire sixth overall, behind perennial top-five states Wyoming, South Dakota, Alaska, Florida and Montana. 

Texas, previously in the sixth spot, fell to seventh, with New Hampshire edging up one spot by a fraction of a point.

(The foundation applied its new methodology to previous studies going back to 2020 so states could compare their progress.)

Texas ranked No. 1 on individual income taxes, but was in the bottom half on all other taxes. New Hampshire’s only personal income tax—the Interest & Dividends Tax—is scheduled to expire at the end of this year. 

Wyoming and South Dakota, the top two states for years, tied as usual for No. 1 on both corporate and individual income taxes.

Florida (with which New Hampshire competes for residents, workers and retirees) also tied for No. 1 in individual income taxes. It ranked No. 10 in unemployment insurance taxes, 14 in sales taxes, 16 in corporate taxes, and 21 in property taxes.  

The Tax Foundation praised New Hampshire lawmakers for voting in 2023 to let businesses fully deduct interest expenses in the year incurred, rather than over time.

“This change, following on the heels of rate reductions to New Hampshire’s two business taxes, helped New Hampshire’s corporate component ranking improve by eight places, from 40th to 32nd,” the report noted. 

New Hampshire was dinged for high property and corporate taxes.

The report noted that the Interest & Dividends Tax rate change from 4% to 3% did not alter this year’s ranking because the state was already so competitive. But eliminating the tax is seen as a positive step.

“New Hampshire will officially join the ranks of the individual income tax-free states once its low-rate interest and dividends (I&D) tax is eliminated in January 2025, further solidifying its competitive standing overall,” according to the report.

To improve New Hampshire’s tax competitiveness, the Tax Foundation recommends “eliminating the I&D tax…adopting permanent full expensing” and improving the state’s treatment of net operating loss carry forward,” all things legislators have tried to address in recent years.

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Debunking five myths about N.H.’s business tax cuts

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Nine years after the state began reducing business tax rates, five narratives are driving the policy discussion of those cuts. All five are false.  

In a new briefing paper, we debunk the five most common myths about the business tax cuts that ran from 2015-2022.

Background: From 2015-2022, legislators cut the Business Profits Tax from 8.5% to 7.5% and the Business Enterprise Tax from 0.75% to 0.55%. Opponents predicted that the cuts would starve the state of revenue, resulting in defunded programs, lower public school spending, and reduced aid to local governments. 

Those predictions continue to be asserted as fact. Official state data prove them false. 

Note: State spending numbers extend through FY 2025, but audited revenues are complete only through FY 2023. For that reason, we use revenue data only through FY 2023. 

Myth No. 1: Business tax cuts resulted in lower business tax revenues. 

Fact: Revenues from business taxes have more than doubled since the tax cuts began, rising by 124% from state Fiscal Years 2015-2023.

Source: State Comprehensive Annual Financial Reports, 2015-2023.

Myth No. 2: Business tax cuts reduced the share of state revenues paid by businesses. (“Businesses aren’t paying their fair share.”)

Fact: The share of state tax revenues generated by business taxes rose by 56% from 2015-2023. The share of total state revenues, including federal funding, paid by businesses rose by 40%.

Source: State Comprehensive Annual Financial Reports, 2015-2023.

Myth No. 3: Business tax cuts resulted in lower state aid for local governments and public schools.

Fact: State aid to local governments increased by $214 million from Fiscal Years 2015-2025, or 19%.

Source: Office of Legislative Budget Assistant report, “State Aid to Cities, Towns and School Districts Fiscal Year Ending June 30, 2024,” Oct. 1, 2024.

Myth No. 4: Business Tax Cuts reduced aid to public schools, resulting in property tax increases.

Fact: State aid to public schools increased by 15% from 2015-2024. (Both adequate education grants and total aid to public schools increased by 15%.) At the same time, public school enrollment fell by 16,373 students, or 9%, resulting in average per-pupil state aid rising by 26%, from $5,115 in 2015 to $6,469 in 2024.

Source: Office of Legislative Budget Assistant report, “State Aid to Cities, Towns and School Districts Fiscal Year Ending June 30, 2024,” Oct. 1, 2024, Department of Education Average Daily Membership reports, 2014-2024. *State adequate education aid is based on the prior year’s enrollment.

Myth No. 5: Revenue declines caused by business tax cuts are the reason for projected revenue shortfalls in Fiscal Year 2025.

Fact: Business tax revenues and total state revenues are dramatically higher, not lower, since 2015. However, from 2015-2025 legislators increased spending to match revenues. Had spending simply grown at the rate of inflation, slower revenue growth would not be an issue in 2025. 

Note: “Total State Revenue” in the chart below refers to revenue from state sources, excluding federal funds. 

Download this briefing paper here: Business Tax Cut Myths 2024.

 

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Business tax cuts did not reduce state aid to local governments

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Since New Hampshire began cutting business tax rates in 2015, state aid to municipalities and public school districts has fallen, according to a prominent political narrative. 

That narrative is false.

Aid to local governments and local school districts rose by by $214 million (19%) from Fiscal Year 2015 to Fiscal Year 2025, an October report from the Office of Legislative Budget Assistant shows.

A related false narrative asserts that if state aid to localities is up, that’s only because of federal COVID relief spending. 

This also is false. 

The $214 million increase in state aid consists entirely of state tax revenue. Federal COVID relief money and all other federal spending are separate. 

What about school districts? 

The state has increased adequate education grants and total state aid to public school districts since 2015. 

State adequate education aid rose by $139 million (15%).

Total state aid to public school districts rose by $148 million (15%). 

While state aid to public schools increased by 15%, public school enrollment fell by 16,373 students, or 9%. 

So although the total dollar increase might look relatively small, it is spread among fewer students, creating a larger per-pupil expenditure.

Looking only at state adequate education grants, the state government sent local public schools an average of $5,115 per pupil in 2015. That rose to an average of $6,469 per pupil in FY 2025 (the current school year), an increase of 26%.

Inflation over the last decade grew faster than the increase in state aid to local governments and school districts, eating away at the value of those increases. 

But the claim from tax cut opponents is not that the hundreds of millions of dollars in additional aid was consumed by bad federal policies that sent inflation soaring. The claim is that the state cut local aid in absolute terms because state revenues fell following the tax cuts. This is entirely untrue.

Not only did legislators increase local aid, those increases were funded by soaring business tax revenues, which have more than doubled since 2015. 

Local governments and public school districts received $214 million in additional state aid over the last decade, including a 26% increase in the per-pupil value of adequate education grants. If they raised property taxes during this time, the blame cannot be placed on state aid.

These increases do not include any of the $112 million in Local Fiscal Recovery Fund moneys distributed to towns, $994.5 million in American Rescue Plan and Coronavirus State Fiscal Recovery Funds allocated by the state, $486 million in ESSER funding for public schools, or other COVID relief funds sent directly from the federal government to cities. 

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After tax cuts, businesses pay a larger share of state revenue

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Businesses not paying their fair share. Shrinking state revenues. A tax burden shifted from businesses to property tax payers. 

Those were the predictions critics have made since 2015, when New Hampshire legislators began a series of business tax cuts. 

Not only did those predictions fail to materialize, but the exact opposite happened.

Since the rate cuts began, businesses tax revenues for the state General and Education Trust Funds have more than doubled, from $561.7 million to $1.2 billion.

And the share of state government revenues paid by businesses has risen, while the share paid by property taxpayers has fallen by more than half.

 

Business shoulder larger share of state revenues

New Hampshire has two primary business taxes, the Business Profits Tax (BPT) and the Business Enterprise Tax (BET). Starting in 2015, legislators began to cut these tax rates. 

From 2016-2022, legislators cut the BPT rate from 8.5% to 7.5%, and the BET rate from 0.75% to 0.55%. 

In Fiscal Year 2015, the last year before these rate cuts took effect, business taxes accounted for 11% of total general government revenues, the state’s Comprehensive Annual Financial Report shows. (These exclude business activities such as liquor sales, lottery sales, toll revenue and unemployment insurance taxes.)

In Fiscal Year 2023 (the last year for which we have final, audited data), business taxes accounted for 15.4% of total general government revenue, a 40% increase, the state’s Comprehensive Annual Financial Report shows.

At the same time, the share of total general government revenues paid through general property taxes fell by more than 50%. General property taxes comprised 8% of general government revenues in FY 2015 and just 3.6% in FY 2023. 

Those figures include federal funding. Restricting the analysis to state General and Education Trust Fund revenue alone, the increase is even more pronounced.

In 2015, business tax revenues accounted for 25% of General and Education Trust Fund revenue.

In 2023, they accounted for 39%, a 56% increase over 2015.

In fact, business tax revenues alone in 2023 ($1.26 billion) were larger than the entire Education Trust Fund in 2015 ($895 million) and nearly as large as the entire 2015 General Fund budget ($1.3 billion).

Opponents of the business tax cuts continue to claim that they resulted in businesses not paying “their fair share.”

In fact, businesses’ share of General and Education Trust Fund revenues rose by 56%, and their share of total general government revenues rose by 40%. Any way you do the numbers, businesses now pay a much larger share of state revenues than before the tax cuts began.

Smaller tax changes

Some smaller tax changes were made during these years, but they are too small to account for this shift in state budget burden from property taxpayers to businesses. 

For example, legislators eliminated the Electricity Consumption Tax in 2017, effective in 2019, and trimmed the Rooms & Meals Tax by half a percentage point in 2019. Legislators also began to phase out the Interest & Dividends tax by reducing the rate from 5% to 4% in 2023, then to 3% in 2024, and to zero in 2025. 

The Electricity Consumption Tax collected roughly $6 million a year before it was eliminated. And Rooms & Meals Tax revenue did not decline, but increased from $341.6 million in FY 2018 to $464.3 million in FY 2024, according to the Department of Revenue Administration 2024 Annual Report. Though Rooms & Meals Tax revenue rose by more than $100 million, its share of state revenues fell from 5% to 3.7% from 2015 to 2024. 

Interest & Dividend Tax revenue fell slightly, from $156.4 million in FY 2022 to $150.6 million in FY 2023, before spiking to $184 million in FY 2024.

These comparatively small changes cannot explain the shift in tax burden toward businesses.

Increasing business activity

The increasing share of state revenues paid by businesses is primarily the result of a booming economy and rising business profits.

The number of businesses in good standing registered with the state increased from 160,000 in 2015 to 188,000 in 2022, the last year for which the Department of Revenue Administration has posted complete data (a 17.5% increase).

The number of businesses filing a return rose by 3,174, or 4.4%, while the number making a business tax payment rose by 5,401, or 12.4%.

These figures indicate that New Hampshire’s growing economy generated increased business formation and business activity. In other words, more businesses made more money, which generated more state revenue.

In short, businesses now pay a significantly larger share of state revenues, while a lower share comes from property tax payers–exactly the result progressives said they wanted to achieve by raising business taxes.

 

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In N.H., you can’t tax “the rich” or “big businesses” without taxing the little guy too

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It’s election season, and once again progressives are advocating higher taxes by claiming that legislators over the last decade have cut taxes for “big businesses,” “large, out-of-state corporations” and “millionaires and billionaires.” 

These claims are intentionally misleading. They rely on voter ignorance about New Hampshire’s tax system to create the impression that lawmakers in recent years cut taxes only for big businesses and the wealthy. That didn’t happen. In fact, in New Hampshire, that’s unconstitutional.

Unlike the federal government, New Hampshire does not have a progressive personal or corporate income tax system. New Hampshire’s income tax (on interest and dividends) and its corporate taxes are all flat taxes. That is, everyone who pays these taxes pays the same rate.

The New Hampshire Constitution in Section 2 Article 5 mandates “proportional” taxation. Basically, that means that everyone has to pay the same rate. 

Our business taxes and state income tax reflect this constitutional constraint.

Since 2015, legislators have reduced business tax rates. In January the Interest & Dividends Tax ends. All of these cuts were to the flat rates, meaning that they applied to every payer of those taxes, regardless of wealth, equally.

The Business Profits Tax (BPT) rate was reduced from 8.5% in 2015 to 7.5% today. Every business “carrying on business activity in the state” that has at least $103,000 in gross business revenue must pay 7.5% of its profits in taxes to the state. 

Department of Business Administration data show that in 2022, 73.2% of BPT filers paid no tax. Ninety-four percent of BPT filers in 2022 paid less than $100,000 in business profits taxes. To pay $100,000 in BPT would take about $1.33 million in annual profit.

Financial website bankrate.com notes that U.S. small businesses vary in size and revenue, having “a large range depending on the industry, with small businesses generating on average between $1 million (or less) and $41.5 million in annual revenue.”

Though most small businesses have no employees, financial website Motley Fool reports that the ‘average employer small business makes over $6 million a year.”

That might be surprising, but the U.S. Small Business Administration defines a “small business” as one with up to 500 employees.

You might hear that most business tax revenue in New Hampshire is paid by large corporations. But that doesn’t mean they pay a higher rate. They pay the same rate as all other businesses. They account for a large percentage of tax revenue because they’re just so large.

Of the $810.5 million in BPT revenue in 2022, $621.4 million came from companies that paid more than $100,000 in business profits taxes. All of that money was generated by only 1,152 companies. The remaining BPT revenue was paid by 19,146 businesses. And whether they paid $1 or $1 million, they all paid the same 7.5% rate. 

Because more revenue came from larger corporations, progressives claim that the BPT is “paid mostly by large, out-of-state corporations.” In truth, 93% of BPT payers are smaller businesses that pay less than $50,000 in business profits taxes, which means they had profits of less than about $670,000. And 92.9% of BPT tax filers were domestic New Hampshire businesses. Only 7.1 percent were companies based out of state in 2022. 

Those out-of-state companies paid $58.4% of all the business profits taxes collected that year. (How many times do you shop at Target or Walmart?) But they represented a small fraction of all BPT payers. 

The Business Enterprise Tax is a tax on “all compensation paid or accrued, interest paid or accrued, and dividends paid by the business enterprise” after certain deductions are met. It was cut from 0.75% in 2015 to 0.55% in 2024. 

This tax is paid on gross receipts or enterprise value of at least $281,000. Companies that qualify pay this tax even if they have no profits.

Fully 96% of BET payers paid less than $100,000 in 2022. Out-of-state corporations paid 49.7% of BET revenue in 2022, but made up only 7.1% of filers, again showing that the vast majority of companies that paid the tax are New Hampshire companies.

The Interest & Dividends Tax is not a business tax per se, but it is paid by business owners who take dividends from limited liability companies and partnerships. Progressives claim that this tax, which phases out at the end of 2024, is paid by “millionaires and billionaires.” But, again, it’s one rate for all payers. And 73.5% of those who made an I&D Tax filing in 2022 paid less than $1,000.  

The I&D Tax rate in 2022 was 5%. (It is 3% this year, before disappearing in 2025.) That 73.5% of filers includes 14,252 people or entities who owed no tax but had to file. Counting just those who paid the tax, 54% paid less than $1,000.

These figures indicate that this tax is paid primarily by people who aren’t necessarily millionaires. At a 5% rate, someone paying $1,000 in this tax would have a dividend or interest payment of $20,000. That’s what one would earn on $400,000 invested at a 5% rate of return. Surely some of those people are millionaires, but it would be inaccurate to say that the tax is a millionaire’s tax.

Taxing “the rich” means fundamentally changing NH’s tax code

If a politician says she wants to raise taxes only on big businesses or millionaires and billionaires, that can mean one of only three things. 

  1. She doesn’t understand the state’s tax system at all.
  2. She wants to replace New Hampshire’s flat taxes with a new, progressive tax system. 
  3. She wants to keep New Hampshire’s flat taxes but raise the thresholds so that only big corporations and millionaires pay any taxes.

We can probably rule out option three. Progressives who lament the recent tax cuts say the cuts reduced state revenue. They didn’t. State revenue has boomed since 2015, and the last fiscal year brought in record revenue. But eliminating all taxes for the vast majority of business taxpayers and I&D Tax payers certainly would cause a drop in revenues. 

Option one is always a possibility. 

Option three, however, is where reporters and voters should focus. If a candidate for state office says she wants to raise taxes only on the wealthy or large businesses, the obvious question is: how?

New Hampshire’s constitution prohibits taxing people at different rates. Anyone who proposes to raise revenue by taxing only the rich or big businesses must admit one of two possibilities:

  1. They want to raise taxes on all businesses or all qualifying investors;
  2. They want to amend the constitution and create an entirely new progressive tax system with higher rates for higher-income individuals and larger businesses.

Those are the only options, assuming the goal is to raise more revenue.

Reporters and voters really should call candidates and high-profile activists out on this. If they did, it could end, or at least reduce, a lot of the deliberately misleading tax talk that comes up every election season.

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Belichick: Patriots’ recruiting hurt by “Taxachusetts”

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Massachusetts’ millionaires tax makes it harder for the New England Patriots to recruit top players, former Patriots coach Bill Belichick said on Monday.

Asked about the millionaires tax on The Pat McAfee show, Belichick said, “That’s Taxachusetts. They take more from you.”

Because the NFL’s high pay makes most players millionaires these days, the tax implications of playing in Massachusetts are factored into player contract talks, the Patriots legend said.

“Virtually every player, even the practice squad, even the minimum players are pretty close to $1 million,” he said. “Once you hit the $1 million threshold, you pay more state tax in Massachusetts. Just another thing you’ve got to contend with in negotiations up there. It’s not like Tennessee or Florida or Nevada. Some of these teams have no state income tax. You get hit pretty hard on that with the agents.”

How many people can name any of the handful of states that have no income tax? Belichick quickly rattled off the names of three without even thinking about it.

If NFL players, coaches and agents think enough about high taxes to know which states have no income tax, what about other high earners?

For the second year in a row, the Massachusetts Society of Certified Public Accountants has issued a report warning that the millionaires tax is driving high-income professionals out of the state.

“The survey results indicate a concerning trend: a significant number of high-income individuals and businesses are considering or have already relocated out of Massachusetts,” according to the report. “This outmigration coincides with the surge in the number of taxpayers impacted by the surtax.”

More specifically:

“Every individual surveyed said that overall tax policy in the Commonwealth was either the primary reason clients are moving or one of the reasons that clients are considering moving. 55% of those surveyed earlier this year indicated that tax policy was the primary reason for relocating. Nearly everyone surveyed stated that the millionaires tax specifically factored into their client’s decision to relocate, with 64% stating that the tax was one of the reasons that their client is considering moving their domicile and 34% indicating that the tax was the primary reason for relocating.

‘Two-thirds of those surveyed reported that at least one of their clients has already established their domicile away from Massachusetts within the last 12 months. Many high-income residents are seriously considering changing their domicile, with 90% of respondents indicating that their high-income clients are considering moving from Massachusetts in the next year. This has increased by 8% in just one calendar year, from 82% of individuals surveyed in 2023.”

The top states Massachusetts millionaires say they’re eyeing? New Hampshire, Florida and Texas. (Two of the three have NFL teams, by the way. All three have no income tax.)

“Fifty-three percent of accounting professionals say that their clients are considering moving across the border to New Hampshire, suggesting that the tax burden imposed by Massachusetts plays an important part in the decision to relocate — and refuting the claims that individuals are just relocating due to a desire for sunnier weather and more coastline,” according to the CPAs’ report.

High taxes don’t send only millionaires packing. For years, the Tax Foundation has documented the moving habits of Americans and found that there’s a consistent trend of people moving from high-tax to lower-tax states. This year’s report showed that average Americans continue to flee high-tax states for lower-tax ones.

“The U.S. population grew 0.49 percent between July 2022 and July 2023, an increase from the previous year’s 0.37 percent. While international migration contributed to population growth at the national level, interstate migration was the key driver of net population changes at the state level. The U.S. Census Bureau’s most recent interstate migration estimates show that New York lost the greatest share of its population (1.1 percent) to other states between July 2022 and July 2023. Not far behind was California, which lost 0.9 percent of its residents, followed by Hawaii (0.8 percent), Alaska (also 0.8 percent), and Illinois (0.7 percent). At the other end of the spectrum, South Carolina saw the greatest population growth from net domestic inbound migration (1.6 percent), followed by Delaware(1.0 percent) and North Carolina, Tennessee, and Florida (all 0.9 percent).

“This population shift paints a clear picture: Americans are leaving high-tax, high-cost-of-living states in favor of lower-tax, lower-cost alternatives. Of the 32 states whose overall state and local tax burdens per capita were below the national average in 2022, 24 experienced net inbound migration in FY 2023. Meanwhile, of the 18 states and D.C. with tax burdens per capita at or above the national average, 14 of those jurisdictions experienced net outbound migration.

“Though only one component of overall tax burdens, the individual income tax is particularly illustrative here. In the top third of states for population growth attributable to domestic migration, the average combined top marginal state income tax rate is about 3.8 percent. In the bottom third (including D.C.), it’s 3.5 percentage points higher, at about 7.3 percent.”

Supporters of Massachusetts’ millionaires tax boast that it brought in far more revenue than predicted. This means that it’s a net gain for the state, they say. Given that 53% of Massachusetts accounting professionals said their wealthiest clients are considering moving to New Hampshire for its low taxes, it would be to New Hampshire’s short-term advantage for Bay State politicians to continue thinking that this punitive 9% income tax is good for their state. When wealthy people move here to escape high taxes, they tend to vote to keep New Hampshire’s taxes low. They also invest in their new home state, give to its charities and otherwise participate in its economic and civic life.

But in the long run, this misguided tax will hurt New Hampshire too if it slows down the Massachusetts economy. We do better when our neighbors do better. Ultimately, all of New England would benefit were Massachusetts (as well as all of our other high-tax neighbors) to pursue a competitive rather than a punitive tax policy.

 

 

 

 

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Massachusetts punishes NBA champs by taking extra half million in taxes

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Congratulations to the Boston Celtics, the 2024 NBA champions! Sixteen years to the date of their last championship, the Celtics became the winningest basketball franchise in history. Now the players can spend the offseason celebrating—and paying their taxes.

Aside from the players and Celtics staff, probably no one is celebrating the title more than the Massachusetts state government, which is taking a large cut of the players’ bonuses.

Having won the franchise’s record-breaking 18th championship, each Celtics player will earn a reported $804,000 in bonuses. Fourteen Celtics players already earned more than $1 million in salary this year. With the bonus, at least two others will break the $1 million threshold and therefore be subject to Massachusetts’ new millionaires tax.

Massachusetts’ income tax is a flat 5%. But for annual incomes of $1 million or more, the state takes an additional 4%. The $804,000 championship bonus, like the salary of any player earning at least $1 million, will be subject to this 9% income tax rate rather than the 5% rate that applies to everyone with incomes of less than $1 million.

At a total tax hit of 9%, the 16 Celtics players earning at least $1 million this past season will have to forfeit $72,360 each to the Commonwealth in taxes on their bonus alone.

Without the 4% millionaires tax, each Celtics player would pay the regular state income tax rate of 5% on his championship bonus, or $40,200.

The millionaires tax thus confiscates an additional $32,160 from each qualifying player’s bonus. At 16 qualifying players, that comes to a $514,560 bonus for the state.

The difference is that the players earned their bonuses.

You might think that millionaire NBA players aren’t sympathetic figures, so who cares? But their case illustrates how the millionaires tax works to confiscate earned wealth while offering no additional services to those whose wealth was taken.

Some Celtics players earn tens of millions of dollars a year, but most don’t. The lowest-paid players might enjoy an income of more than $1 million for just this year, or for a few years. They’ll have to continue making a living outside the NBA for many decades. Being able to invest an additional $32,160 this year could make a big difference in their lives.

The same considerations apply to regular Massachusetts residents who might experience one or two exceptionally good years financially. The state confiscates an additional 4% of their income too.

New Hampshire doesn’t have an NBA team, of course, so we can’t lure Celtics players away. They’ll pay Massachusetts taxes for the work they do in Boston, even if they live here. But most other Bay Staters, particularly entrepreneurs and investors, can relocate for work more easily than professional athletes can. And many already have, including Celtics co-owner Steve Pagliuca, who warned after he relocated to Florida (not because of the tax), that the high rate posed a threat to the state’s long-term economic health.

“If we become ‘Taxachusetts’ again…the main effect will be not about a basketball player, it will be about business formation,” Pagliuca told Boston Business Journal last year. “It’s going to make it tougher to attract businesses in Massachusetts.”

The Celtics players’ tax hit illustrates the tangible difference between living and working in a low-tax, low-spending state versus one with high taxes, a billion-dollar budget deficit and not much to show for it.

WBUR on Monday labeled the millionaires tax a success because its $1.8 million in new revenue was dedicated in part to education, transportation and “free public school meals for every child in the state.”

But simply generating more revenue for government to spend doesn’t equal success. The MBTA is a money pit, and providing school meals at no charge for middle- and upper-class families who can feed their own kids is a curious use of public tax dollars for a state with a poverty rate more than three percentage points higher than New Hampshire’s.

Massachusetts taxpayers don’t get a better return for all the state’s spending. They just get more spending and higher tax rates.

In terms of taxpayer return on investment (ROI), New Hampshire taxpayers are the champions. Granite Staters receive the biggest bang for their buck, finishing first in WalletHub’s 2024 ROI rankings. And the dichotomy with our neighbor to the south couldn’t be clearer. Massachusetts came in at a distant 41st in taxpayer ROI.

Too often, people assume that high taxes equal high state revenues and therefore better public services. But higher spending doesn’t equal better services. As New Hampshire’s example shows, constraints on spending force policymakers to spend more frugally, which keeps the tax burden low and government more efficient.

Though the millionaires tax has brought in additional revenue for Massachusetts, it has not caused wiser or more careful spending. Just the opposite is true. And the long-term economic impact remains unseen. Given the well-reported exodus of wealthy taxpayers, Pagliuca’s warning still holds.

Unlike NBA players, higher-income Americans can live and work just about anywhere thanks in part to remote work options. Yet even NBA players can be motivated by lower state tax rates. Former Celtics star Grant Williams said last year that he accepted a trade to Dallas partly because of the Massachusetts millionaires tax.

If the tax can drive NBA players out of state, imagine its effect on people who aspire to become millionaires and who have the ability to live and work anywhere they want, not just in a city with an NBA team.

As Celtics fans celebrate the team’s 18th championship, the Commonwealth of Massachusetts is celebrating an additional half-million dollars in revenue. But that revenue comes from punishing most of the players by confiscating an additional 4% of their winnings. A state that treats its own sports heroes that way signals that it’s not a welcoming place for anyone who aspires to create wealth.

Bay Staters have already gotten that message. Massachusetts is among 24 states that experienced a net loss of income tax filers from 2020–2021. It ranked 45th in net migration, while New Hampshire ranked 11th.

The millionaires tax might be generating a lot of revenue now. But Celtics fans should hope that more players don’t get wise to the tax implications that come from working in Boston versus Dallas or Miami.

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Legislators vote to strengthen local tax caps, especially for school districts

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While crime stories, campus protests and political drama captured much of the media attention this week, a bill with tremendous potential consequences for taxpayers quietly passed the House on Thursday.

Senate Bill 383, which has passed both chambers in slightly different versions, would strengthen local tax caps and allow school district caps to be tied to enrollment. 

Under current state law, town and school district tax caps can apply to estimated taxes “as shown on the budget.” That excludes off-budget warrant articles that might also have a tax impact. SB 383 would cover the budget and “all other warrant articles with a tax impact.”

RSA 32:5-b II mandates that a town or district “tax cap shall be either a fixed dollar amount or a fixed percentage applied to the amount of local taxes raised by the town or district for the prior fiscal year…”

SB 383 authorizes voters to use “a multiplication factor” that would cap tax increases at the inflation rate times population growth. That’s been the general idea behind tax caps from the start. The bill lets towns use this more precise formula rather than a fixed amount or rate. Those fixed numbers were always basically a proxy for the multiplier anyway.

Perhaps most consequentially, SB 383 creates a new formula for school district tax caps. The school district formula would be a combination of inflation times enrollment, rather than municipal population growth. That’s an important change. School budgets can be the largest portion of local budgets and the largest driver of local spending and tax increases.

Our 2023 analysis of district school spending in New Hampshire found that there generally wasn’t a strong correlation between school enrollments and local school spending. New Hampshire public school districts lost 29,946 students from 2001-2019, but increased spending by an inflation-adjusted $937 million. School district budgets tend to grow faster than the inflation rate, and faster than all other areas of government spending, even when enrollment is falling, we found. 

In Manchester, for example, school district enrollment fell by 13% from 1995-2018. During those same years, city school district spending grew by a remarkable 68%. 

This year, the Manchester school district’s proposed budget was 7.9% higher than the 2020-21 school budget—after adjusting for inflation—though enrollment was 4.3% lower than in the 2020-21 school year.

Now, Manchester has a tax cap, and that cap applies to the school district’s proposed budget. Neither the city nor the school district is allowed to propose a budget that exceeds the average inflation rate of the prior three years. 

(City tax caps are regulated in a separate section of state law (RSA 49) than are town tax caps. Manchester’s cap, like Nashua’s, is tied to the inflation rate.)

Though SB 383 doesn’t apply to cities, and thus wouldn’t affect Manchester’s school district tax cap, Manchester’s experience shows how the formula in the bill would put a further constraint on spending.

Manchester’s school district taxes have been restrained by this cap for more than a decade, but spending still grew rapidly despite falling enrollment. The formula Manchester uses does not take into account district enrollment. If it had, the cap would’ve been lower, and therefore might have prompted some efficiencies in district budgeting.

The city school district accounts for about 52% of Manchester’s budget, which shows how consequential the new caps allowed in SB 383 could be. 

The formulas allowed in SB 383 are more flexible than the fixed number or rate caps towns and districts can adopt now. That could weaken some of the opposition to tax caps, leading to their more widespread adoption. At the same time, the bill lets voters strengthen caps by covering warrant articles that have tax impacts and by tying school district tax changes to enrollment. On the whole, the bill would turn tax caps into a more powerful and more appealing tool for taxpayers.

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