The Interest & Dividends Tax is a New Hampshire disadvantage

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Eight U.S. states have no income tax. 

New Hampshire is not one of them.

The Interest & Dividends tax lingers. A tax on passive income is still a tax on income, and this one has given New Hampshire an asterisk by its name when listed among the nation’s low-tax states.

At midnight on Dec. 31, 2020, Tennessee’s tax in interest and dividends ended, making it the eighth state with no tax on income. Six months later, New Hampshire legislators passed a budget that included a five-year phase out of our Interest & Dividends Tax.

But with policymakers in other states chasing the New Hampshire Advantage ever more aggressively, there is interest in eliminating the I&D Tax by the end of 2023 rather than 2026. 

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming are the only states that don’t tax income. (Washington passed a capital gains tax in 2021 but it’s been blocked by a court pending a challenge to its constitutionality.)

Florida, Tennessee and Texas all want to become known as the freest state in the nation. Florida Gov. Ron DeSantis already refers to the Sunshine State as the “Free State of Florida.” 

New Hampshire is losing its reputation as a refuge from burdensome taxation.

In the Tax Foundation’s State and Local Tax Burdens ranking, Tennessee ranks third, Texas sixth and Florida 11th. New Hampshire is down to 16th place. 

Florida ranks higher than New Hampshire in the Tax Foundation’s Business Tax Climate Index. It places fourth. New Hampshire is sixth. 

Florida last year passed New Hampshire to claim the top spot in the Fraser Institute’s Economic Freedom in North America report. 

The New Hampshire Advantage is real. By creating a low-tax, relatively low-regulation refuge in the Northeastern United States, New Hampshire policymakers have delivered profound benefits for Granite Staters. 

From 1977-2019, New Hampshire’s economy grew by an astounding 335%. Massachusetts had the second highest economic growth in New England at 234%, a full hundred percentage points below New Hampshire.  The U.S. economy grew by 203% in those same years.

This growth has given Granite Staters the highest median household income in northern New England, 25% higher than Vermont’s and 35% higher than Maine’s. 

Over those years, however, officials in other states have watched and learned. They’re chasing — and often passing — New Hampshire.

After the eight states with no income tax are the nine states with a flat income tax. New Hampshire is in this group, which used to be very small but is growing rapidly. 

Five other states have passed legislation to move to a flat income tax. Others, including North Carolina, are phasing out their income taxes on the way to joining the elite group of states with no tax on income. 

Policymakers in these states are intentionally trying to keep their people, employers and entrepreneurs — and attract those in other states — by narrowing the gap between their tax burden and the burdens in states like New Hampshire. 

In other words, they are trying to put an end to the New Hampshire Advantage by creating a tax and regulatory environment more favorable than ours. 

Having the Interest & Dividends Tax on the books is hurting New Hampshire in this increasingly competitive landscape. Investors, retirees and many entrepreneurs know that they gain nothing financially by moving to New Hampshire because we tax their investment income. 

Even AARP has pointed out to its members that New Hampshire is a less desirable place to retire than Florida, Tennessee, Texas or any of the other truly income-tax-free states because we tax investment income. 

“Nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — have no income taxes. New Hampshire, however, taxes interest and dividends, according to the Tax Foundation,” AARP’s website warned its members in a post last year. 

Turbotax warned its users in December that New Hampshire taxes passive income. After listing the states with no income tax, it noted that “New Hampshire limits its tax to interest and dividend income, not income from wages.”

Maintaining the Interest & Dividends tax creates a small but real drag on both economic and population growth. 

“Over the past decade, states which forgo income taxes have seen their populations grow at twice the national rate, and gross state product grew 56 percent faster in states without an income tax than it did in those with one over that period,” the Tax Foundation noted in 2021. 

As long as this tax remains on the books, it discourages relocation to New Hampshire by individuals who could use their assets to invest in local start-ups, commercial and residential real estate development, and local non-profits. 

It also chases away wealthier Granite Staters and retirees. When financially successful Granite Staters move to Florida and Tennessee to avoid the Interest & Dividends Tax, New Hampshire loses. 

The most commonly made objection to ending the Interest & Dividends Tax is that it would reduce state revenues. But i’s unclear how much revenue the state would lose.

Revenue from the I&D Tax has varied over the last decade. The tax brought in $93 million in fiscal year 2013, and fluctuated between a low of $79.8 million and a high of $96.9 million through fiscal year 2017. Since fiscal year 2018, the tax has generated more than $100 million in revenue annually, spiking to a record $157.5 million in fiscal year 2022. 

The 2022 revenue was driven by unusually large stock market gains that year.

Assuming annual revenues in the $100 million to $125 million range, the question is whether the state could weather the loss of those funds without making severe budget cuts. The answer is obviously yes.

For the last decade, state General Fund and Education Trust Fund revenues have exceeded budgeted amounts in every year save one. Revenues were $435.5 million above plan in FY 2022, $323.7 million above plan in FY 2021, $173 million above plan in FY 2019, $133 million above plan in FY 2018, $96 million above plan in FY 2017, $166 million above plan in FY 2016, $47 million above plan in FY 2015, $3.8 million above plan in FY 2014, and $45.7 million above plan in FY 2013.

In the last decade, revenues were below plan only during the pandemic year of 2020, when the sharp decline in business activity caused business tax and rooms and meals tax revenue to plunge. 

New Hampshire’s growing economy has already generated enough surplus state revenue to replace the I&D Tax receipts. 

And eliminating the I&D Tax would end a strong disincentive for higher-wealth individuals to live in New Hampshire. Making the state more attractive to investors and entrepreneurs would have positive economic effects, which would be felt in state revenues over time.

Accelerating the repeal of the I&D Tax would make New Hampshire more attractive to retirees, investors and entrepreneurs by the end of this year. If the state can afford to eliminate the tax now, why wait three years to enjoy the benefits of making New Hampshire more economically competitive?

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Massachusetts votes to raise New Hampshire’s median income

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One of the more important New Hampshire stories of the 2022 mid-term elections happened in Massachusetts, where voters approved a so-called “millionaires tax.” That vote represents a pivot back toward the old “Taxachusetts” days when Bay State lawmakers disregarded the interstate competitive effects of their tax policies.

When it takes effect, the “millionaires tax” will levy a punitive 4% tax rate on incomes of $1 million or more. That is on top of the state’s existing 5% income tax. This 80% tax increase for people who earn $1 million or more is likely to motivate a lot of people to seek shelter in places that don’t treat them as cash cows to be milked for the benefit of others.

Massachusetts abuts just one state that does not view people as resources to be exploited. That would be the live-free-or-die state. Accordingly, New Hampshire’s population of millionaires — and people who aspire to that status — should increase a bit in the near future.

The Center for State Policy Analysis at Tufts University estimated that the new tax will raise $1.3 billion next year for the People’s Republic of Massachusetts. That figure would be $2.1 billion, the center estimates, but tax avoidance strategies, including cross-border migration by high-income individuals, will cut the expected revenue by $800 million. 

“Together, cross-border moves and tax avoidance would reduce millionaires tax revenue by roughly 35 percent,” the center concluded.

The $1.3 billion figure represents about 2.5% of the Massachusetts state budget. Advocates argued that the state needed this additional money, even though revenues were so high in the last fiscal year that the state was required by law to return $2.94 billion of state surplus to taxpayers.

This was a revenue grab, not a necessary tax increase. Legislators (who initiated the proposal) wanted more money, but didn’t want to raise general taxes, so they singled out an unpopular minority for excessive taxation. 

Massachusetts residents who expect this revenue to go to roads and schools might be disappointed. The money goes into the general fund, not specifically to those causes. The Boston Globe observed that the narrower-than-expected margin of victory indicates a suspicion among voters that legislators will squander the money. 

“That the measure passed by such a narrow margin — about 52 percent to 48 percent — says more about voters’ mistrust of the Legislature to actually follow through on spending those tax dollars wisely than it does their concern for the state’s wealthier citizens,” The Globe wrote in an editorial after the vote. 

That’s not the only cause for concern. Massachusetts now has a graduated, not a flat, income tax. That creates precedent — and an invitation — for the introduction of other rates above 5%. 

It also represents a shift away from Massachusetts’ efforts to shed its “Taxachusetts” reputation and make itself more economically competitive in the Northeast. If it continues to move in this direction, New Hampshire could enjoy some of the spillover effects, in the form of fleeing investors, entrepreneurs and capital. 

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IRS data show migration from high-tax to lower-tax states, including New Hampshire

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IRS migration data show that “taxpayers prefer to move to states with lower tax burdens and away from states with higher tax burdens,” an analysis from the National Taxpayers Union shows. (The data are from tax returns received in 2019 and 2020.)

“Right from the start, the three states losing the most taxpayers and income – New York, California, and Illinois – are the three largest high-tax states. The top two states gaining taxpayers and income, Florida and Texas, are the two largest low-tax states (Arizona, though it does not have this reputation to the same extent, still enjoys a below-average tax burden).”

“The top ten states gaining taxpayers acquired a net total of 321,000 households and $53 billion in AGI [Adjusted Gross Income]. On the other hand, the top ten states losing taxpayer dollars lost a net total of nearly 367,000 households and $58 billion in AGI.

“All told, the top ten states losing the most income had a weighted average of about the 11th-highest tax burden in the country that year, according to Tax Foundation statistics. The top ten states gaining the most income, on the other hand, had a weighted average of about the 38th-highest (or the 12th-lowest) tax burden in the country.”

The overall trend held when states were ranked for total tax burden and property and income tax rates.

“Additionally, states with distinct advantages to their tax systems tend to gain taxpayers. Florida, Nevada, Texas, and Tennessee all have no individual income tax and all appear in the top 10 states gaining taxpayers. Meanwhile, every state in the top ten tax migration losers levies an individual income or sales tax.”

No-income-tax states Nevada, New Hampshire and Wyoming, and states without a sales tax (Montana, New Hampshire, and Delaware) make the top-ten list after adjusting for population size.

“The IRS tax migration data showcases the sharp distinctions between states losing and gaining taxpayers,” the NTU analysis concludes. 

“States gaining taxpayers tend to place less of an emphasis on draining the wealth of their taxpayers into state coffers, instead allowing taxpayers more freedom with what they do with their own money. Taxes are an important factor that taxpayers consider when deciding where to live.”

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States inaugurate a flat tax revolution

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The Tax Foundation’s Jared Walczak writes that a push for flat taxes is spreading through the states. This wave of tax reform can make these states more economically competitive, which is worth watching from a New Hampshire policy perspective.

Walczak writes:

In more than a century of state income taxes, only four states have ever transitioned from a graduated-rate income tax to a flat tax. Another four may adopt legislation doing so this year, and a planned transition in a fifth state can now go forward under a recent court decision. In what is already a year of significant bipartisan focus on tax relief, 2022 is also launching something of a flat tax revolution.

In 1987, the 75th anniversary of state income taxation, Colorado replaced its half century-old graduated-rate income tax with a single-rate tax. It would take another 30 years for another state to follow suit, when Utah implemented a flat tax in 2007. Next came North Carolina in 2014, as part of that state’s comprehensive reforms, and most recently, Kentucky implemented a single rate of 5 percent in 2019. They joined five other states which already had flat taxes: Illinois, Indiana, Massachusetts, Michigan, and Pennsylvania.

The first state income tax, implemented in Wisconsin in 1912, had a two-rate structure. The first flat tax was Massachusetts’ tax, which went into effect in 1917. Five states had income taxes back then, with Massachusetts and Virginia both implementing them that January. Only five years passed between the first progressive income tax and the first flat income tax, but 75 years passed between the first progressive income tax and the first time one was transitioned from graduated to single rate. It took more than a century for three to do so—and three states have adopted legislation to make that transition just this year, with a fourth cleared for the transition by a court decision and a fifth potentially in the wings.

Iowa is phasing in a 3.9 percent flat individual income tax by 2026, going from a graduated-rate tax that not long ago topped out at 8.98 percent. Mississippi will have a flat tax as of next year, with a 4 percent rate by 2026. Georgia’s income tax is now scheduled to convert to a flat rate of 5.49 percent, eventually phasing down to 4.99 percent. A court cleared the way for the implementation of Arizona’s transition to a 2.5 percent flat tax, which should happen, pending revenue availability, in 2024. And a flat tax remains an active consideration in Oklahoma as well.

See the rest here.

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A gas tax holiday is just a holiday from reality

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Rising gas prices have prompted calls for a state gas tax holiday. Though a gas tax holiday would provide some immediate relief from high prices, the cost would have to be paid later, possibly through higher taxes or deteriorating road conditions. 

In New Hampshire, the gas tax is not a general tax. It’s a user fee. Part 2, Article 6-a of the New Hampshire Constitution requires that it be used exclusively for road construction and maintenance.

State gas tax revenues have not kept up with inflation this century. In the fiscal year ending in June of 2000, total unrestricted gas tax revenues were $116 million. That would equal $182 million in 2021 dollars. But in FY 2009, unrestricted gas tax revenues were $131.6  million before falling back to $116.5 million in FY 2021. 

While the state’s population grew by 13% since 2000, gas tax revenues have remained essentially flat in nominal terms and have fallen in real terms. 

Because the gas tax is a user fee, a holiday would stop charging people for use of the public roads for its duration. But it wouldn’t stop the wear and tear on the roads. If that funding is not made up later, the state would have to forego repairs and maintenance, replace the lost revenue with higher taxes or transfers from somewhere else, or find some way to reduce costs. 

Given current inflation, it’s not clear how the DOT would reduce costs, leaving the other two options as the most likely long-term effects of a gas tax holiday. 

Legislators have floated the revenue transfer idea. But two proposals to do that were rejected this week in the House Finance Committee. The first would have had motorists fill out a rebate form to receive checks from the state. Motorists would have had to keep their gas receipts. 

The costs of administering that scheme prompted the amendment to be replaced with a plan to send every owner of a registered motor vehicle a $25 check for each vehicle. The cost was estimated at $40 million. The money would come from the general fund, not the highway fund, so it wouldn’t be a gas tax rebate. It would simply be a check from the state to help people cover the cost of paying for fuel. 

At this week’s prices, $25 wouldn’t cover even half the cost of filling a 12-gallon gas tank.

Such one-time tax rebates are not good tax policy. They don’t have the kind of stimulating effects that tax rate cuts do. 

“The tax code should not be used like an appropriations bill to dole out benefits, effectively putting a chicken in every pot,’” as the Tax Foundation put it in a 2001 policy brief. “The primary purpose of the tax system is to raise revenue, not to micromanage the economy with subsidies. It should create a level playing field in which individual and business decisions are made to achieve the best economic outcomes.”

In this case, the general fund should not be used to dole out benefits. It should pay for necessary public services. 

If the state has a surplus of federal COVID money or other one-time revenues, it would best be used to cover state obligations that are difficult to cover with recurring revenues, such as reducing the shortfall in the state pension system. 

If the state has an ongoing surplus of recurring revenues, it should consider another tax rate cut.

As the Tax Foundation has pointed out regarding a federal gas tax holiday, it would do nothing to change the underlying causes of gas price increases and could create other problems.

Though it sounds like a nice way to give consumers some short-term relief, a gas tax holiday is not sound policy.  

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The dumb fight over an 0.1% business tax cut

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Republicans in the Legislature are pushing to lower New Hampshire’s Business Profits Tax by one tenth of one percentage point, from 7.6% to 7.5%. This tiny change would make New Hampshire’s rate the same as Connecticut’s. We would then be tied for the second-lowest top corporate tax rate in New England. (Rhode Island’s rate is 7%. Maine and Vermont have graduated corporate tax rates.)

But of course, there’s a fight over it.

 

New England Top Corporate Tax Rates

Maine: 8.93%

Vermont: 8.5%

Massachusetts: 8.0%

New Hampshire: 7.6%

Connecticut: 7.5%

Rhode Island: 7%

 

Democrats oppose the rate cut, saying it would cost the state $8.5 million a year. That number comes from the Legislative Budget Assistant’s (LBA) fiscal note on House Bill 1221, the bill to reduce the rate.

That’s a tiny amount in the $13.5 billion state budget. It’s also probably wrong, as the LBA doesn’t measure the impact tax reductions will have on human behavior. The office simply calculates the reduction in revenue based on the assumption that a lower rate will automatically bring in less money. 

As we’ve pointed out, the business tax rate cuts implemented since 2015 have not reduced state revenue, as the LBA had predicted. 

“In 2017, the Office of Legislative Budget Assistant projected that the additional business tax rate reductions passed in 2017 would cause an $11 million reduction in business tax revenues in FY 2019. Business tax revenues came in $151.6 million above plan that year.”

Even if the 0.1% rate cut allowed businesses to keep an additional $8.5 million a year of their own money, the state would hardly notice. It’s awash in business tax receipts it didn’t plan to have.

As we reported in January, business tax revenues surpassed budgeted amounts by $649.6 million from the 2012-2021 fiscal years. 

So far this fiscal year, business tax revenues are $91.5 million (18.5%) above plan and $121.3 million (26.2%) above the prior fiscal year. 

The other talking point used against the proposed cut is that it will benefit only, or primarily, out-of-state corporations. That’s misleading.

New Hampshire has a single, flat Business Profits Tax rate. All businesses that pay taxes pay the same 7.6% rate. That includes everyone from the mom-and-pop store to Walmart, Target and BAE Systems. 

As of this tax year, any business with gross income of at least $92,000 pays the tax. (Prior to this year, the threshold was $50,000.)

There were 170,000 registered businesses in good standing in New Hampshire in 2019, and 76.3% of them paid no BPT. That’s by design. (The number will increase this year, as the filing threshold was nearly doubled.)

Democrats claim that BPT rate cuts are for “out-of-state corporations” because businesses with headquarters outside New Hampshire pay 60% of all BPT taxes collected. What they don’t say is that those companies represent a very small portion of all BPT-filing businesses in New Hampshire. 

Out-of-state companies made up only 5.7% of BPT filers in 2019, according to the state Department of Revenue Administration’s 2021 annual report. So 94.3% of companies that made a Business Profits Tax filing were based in New Hampshire.

We asked the DRA to break down the numbers by payers instead of filers, as some filers don’t have a tax liability. These previously unpublished numbers show that New Hampshire companies make up the vast majority of BPT payers.

Out-of-state corporations made up only 10.6% of BPT payers in 2019. The remaining 89.4% of businesses that paid BPT in 2019 were New Hampshire-based businesses.

And many of them are small businesses. Proprietorships, which are defined by the state as any unincorporated business owned by an individual, paid only 3.6% of BPT revenue collected in 2019 but made up 20.1% of BPT payers. Partnerships made up another 19.6%, fiduciaries 1.7%, and corporations rounded out the rest at 48%.

Contrary to the opponents’ talking points, just shy of 90% of the businesses that would benefit from a BPT tax cut are headquartered in New Hampshire.  

New Hampshire-based businesses pay a smaller share of the total amount collected because they’re smaller companies with relatively smaller profits. But because they’re smaller, rate cutes can be more meaningful to them than to large national or multi-national businesses.

This tax cut would move New Hampshire into a tie for the second-lowest top corporate tax rate in New England. And it would do so at little to no cost. It’s kind of surprising there’s even a fight about it.

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N.H. business tax revenues’ stunning surge

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New Hampshire’s booming economy continues to fill state coffers with excess cash drawn from business taxation, with impressive numbers posted each month. But a longer look back illustrates the stunning sums businesses have contributed to the state budget in the past decade. 

From Fiscal Year 2012 through Fiscal Year 2021, business tax revenues exceeded budget projections by $649.6 million — or 100.1 percentage points. 

That is, over that time businesses gave legislators an additional $649.6 million to spend beyond what lawmakers had budgeted. 

State Fiscal Year 2022 began last July, and so far the trend continues.    

Since the start of the fiscal year in July, business tax revenues are $109.5 million (27.9%) above the prior fiscal year and $72.7 million (16.9%) above budget.

Add this to the total from FY 2012-2021, and business tax revenues have come in over budget by $722.3 million since FY 2012. 

To get an idea of just how much larger state business tax revenues are today, consider that in FY 2012, Business Profits Tax revenue from July-December totaled $140.5 million. 

Adjusted for inflation, that $140.5 million would be approximately $166 million in 2021.

Actual BPT revenues for July-December of 2021, however, were a record $381.2 million — 240.7 million (171%) higher than in 2012.

Combined BPT and BET revenues in the first six months of FY 2012 were $231.7 million. 

In the first six months of FY 2022, they were $501.8 million, a 216.5% increase.

The historical context shows that state is playing with house money, so to speak, when it comes to business tax revenues. It shows further that additional small reductions to business tax rates are not only affordable, but fully justified. 

The state has taken in nearly 3/4 of a billion dollars in unanticipated business tax revenue since 2012. Claims that tiny rate reductions will bankrupt the state or devastate essential services are laughably unfounded. 

Business tax rate reductions that began in the 2016 fiscal year did not cause business tax revenue to fall below previous levels, as critics had predicted. Then-Gov. Maggie Hassan said the rate cuts would reduce business tax revenue by $90 million. Instead, business tax revenues were $132.8 million (23.4%) above plan in FY 2016. 

From FY 2012-2021, business tax revenues came in below budget for the year only twice: in 2014 (before the start of the business tax cuts) and in 2020 (when businesses were hit by the pandemic). The huge gains in other years more than made up for those relatively small declines (2% and 13%, respectively). 

Businesses in New Hampshire have fed the state budget astonishing sums over the last decade. Yet every time anyone suggests slight reductions in corporate tax rates, advocates of higher taxes attack businesses as greedy, selfish, avaricious, even unpatriotic. 

In truth, New Hampshire employers have enabled the state’s ever growing social welfare spending, and most have remained in New Hampshire despite the lure of lower corporate tax rates in other states. They should be thanked for their contributions, not vilified. Adjusting their rates to let them keep a little more of their income would be a reasonable way to say thank you.

 

 

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Supreme Court refusal to hear N.H. tax case puts all remote workers’ cross-border income in jeopardy

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The U.S. Supreme Court on Monday declined to hear New Hampshire’s lawsuit challenging the constitutionality of a Massachusetts rule taxing non-resident remote workers. The decision puts remote workers anywhere in the world at risk of having their incomes permanently taxed by the state where their employer is located. 

“It’s hard to see a limiting principle that would restrain states from taxing remote workers going forward, particularly given the Biden administration’s brief to the court arguing that states have the authority to do that,” Josiah Bartlett Center for Public Policy President Andrew Cline said. 

The Biden administration argued in a brief to the court that because remote workers benefit from government services provided to their employers, a “telecommuting employee’s physical location thus need not map precisely onto the location of the governmental services needed to support that employee’s work.”

Massachusetts’ rule was intended to be temporary for the duration of the COVID-19 emergency. However, six states already have permanent rules that tax the incomes of telecommuters who work from home for their own convenience. The Supreme Court’s decision to let Massachusetts’ rule stand not only keeps these rules in place, but could encourage the further expansion of remote worker taxation.

New York, Connecticut and four other states have what are known as “convenience of the employer” (COTE) rules that tax remote workers’ incomes if they work out-of-state for their own convenience, rather than out of necessity. 

Under these rules, if a remote worker has to work in another state, his or her income is not taxed. But if the worker chooses to work in another state purely for his or her personal convenience, the income is taxed. Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania had COTE rules before the pandemic. The Tax Foundation has a good COTE explainer here. 

The Supreme Court’s refusal to hear New Hampshire’s case leaves such COTE taxation of remote workers intact. But it also has the strong potential to encourage blanket remote worker taxation under the Biden administration’s theory that states may tax any employee of a company located within their borders because state services benefit both the company and all of its employees.

The Biden administration’s brief could even prompt local governments to tax remote worker incomes. It specifically mentioned local services such as roads and fire protection as justifying the taxation of remote workers. 

Refusing to hear New Hampshire’s case does not mean that the issue is settled, Edward Zelinsky, professor at the Benjamin Cardozo School of Law in New York City, told the Josiah Bartlett Center. 

“I am disappointed that the Supreme Court would not hear this case but the Court’s denial is the beginning not the end of the process,” Zelinsky said. “It will now be necessary for individual taxpayers to start their own challenges to New York’s and Massachusetts’ unconstitutional taxation of remote workers. I am confident that these challenges will soon begin.”

Professor Zelinsky has sued New York over a similar remote taxation policy. He filed an amicus brief in New Hampshire’s case. The states of Connecticut, Hawaii, Iowa and New Jersey also filed briefs supporting New Hampshire. 

Writing in March for the American Bar Association, two Louisiana attorneys argued that a U.S. Supreme Court ruling on remote taxation is needed because the increasing prevalence of remote work is likely to generate more competition among states for revenues generated by the incomes of remote workers. 

“If states continue to struggle with declining tax revenues in 2021 and 2022, there will likely be even fiercer competition for those tax revenues between states where the employer and its primary offices are located and those whose residents, prior to the pandemic, regularly commuted to those states for work.”

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Senate budget would make New Hampshire truly income-tax-free

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If the Senate Finance Committee’s proposed budget becomes law, New Hampshire will at last become the only Northeastern state with no personal income tax.

New Hampshire markets itself as having no sales or income tax. But that’s not precisely true. Though the state does not tax individual earned income, it does tax personal income derived from interest and dividends. That is a personal income tax. 

The budget proposed by the Senate Finance Committee would phase out the state’s interest and dividends tax over five years. (The House-passed budget and the governor’s proposed budget also would phase out the tax.)

That tax brought in $105.8 million in Fiscal Year 2018, $114.7 million in Fiscal Year 2019, and $125.7 million in Fiscal Year 2020.

That might sound like a lot of money, but for context state business taxes alone have brought in $174.5 million in additional, unplanned revenue so far this fiscal year. The state is more than $200 million in the black this year, and that’s despite a $65 million pandemic-related drop in rooms and meal tax revenue below what was budgeted. 

In eliminating the interest and dividends tax, New Hampshire would follow Tennessee, which eliminated its Hall tax (on interest and dividend income) on Dec. 31, 2020. That tax was phased out over several years, beginning in 2016.

Being situated in Northern New England, New Hampshire has numerous geographical disadvantages that make it challenging to recruit businesses, entrepreneurs, retirees, and young people. It can’t change its weather or 18-mile coastline. But it can change its economic climate.

With an eye on economic and population growth, many other states are pursuing aggressive growth strategies that involve lowering tax rates and regulatory burdens. New Hampshire’s astounding economic growth over the last several decades can largely be attributed to its singular focus on growth-based economic policies. But as Massachusetts and other states have copied states like New Hampshire, Texas, Florida, and Tennessee, it’s become more difficult for New Hampshire to stand out — and to recruit entrepreneurs, businesses, and employees. 

If it eliminated the interest and dividends tax, New Hampshire would join Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming to become the ninth state to levy no tax at all on personal income. 

New Hampshire not only would be the only Northeastern state with no income tax, it would be the only one North and East of Tennessee. On top of New Hampshire’s already relatively competitive economic policies, that would help keep the New Hampshire Advantage alive.

Becoming truly income-tax-free would improve New Hampshire’s competitive position, not just in New England, but internationally. It would help preserve the New Hampshire Advantage in an increasingly competitive era in which states are working non-stop to attract an increasingly mobile workforce and entrepreneurial base.

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Biden administration argues that states can tax non-resident telecommuters

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Siding with Massachusetts in a lawsuit brought by New Hampshire, the Biden administration on Wednesday told the U.S. Supreme Court that states could justify taxing non-resident telecommuters. 

New Hampshire sued Massachusetts in October over the Bay State’s effort to collect income taxes from Granite Staters who used to cross the border for work but had to switch to telecommuting during the pandemic.

The bulk of the Biden administration’s legal brief on behalf of Massachusetts addressed technical legal questions, primarily whether New Hampshire is the right party to bring the suit and whether it’s proper for the Supreme Court to take it. Media reporting of the administration’s brief focused on these issues.

But further down in the 18-page document, Acting Solicitor General Elizabeth Prelogar argued that a state could legally and constitutionally tax telecommuters who never physically entered the state’s borders. 

“New Hampshire correctly observes (Br. in Support 25-30; Reply Br. 10-13) that a New Hampshire resident who works from home will rely on New Hampshire services like police and fire protection,” Prelogar wrote. “Yet that resident’s work also may continue to depend on and benefit from services provided by Massachusetts. For example, Massachusetts and its municipalities might provide similar protections to the infrastructure and staff critical to the work of the New Hampshire resident who is temporarily working from home—such as computer servers that enable and store the employee’s work product, courts that enforce contracts, and financial institutions and transactions necessary to the work.

“And the employer located in Massachusetts, where the employee worked before (and may well return after) the pandemic, will continue to benefit from the services Massachusetts affords in the interim, thus helping to sustain the employee’s continued employment during that temporary period. A telecommuting employee’s physical location thus need not map precisely onto the location of the governmental services needed to support that employee’s work.”

Under Prelogar’s theory, a state would be justified in taxing the incomes of all people who work for a local company, regardless of where on the planet they live, because that state’s services benefit the employer, thus “helping to sustain the employee’s continued employment…”

The Biden administration’s interest in New Hampshire’s lawsuit clearly goes far beyond mere legal technicalities. The administration has sided with Massachusetts on the merits and has signaled that the U.S. government sees nothing wrong, either morally or constitutionally, with a state’s cross-border taxation of non-resident telecommuters. 

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