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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N.H. remote workers face taxation without representation

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By Andrew Cline and Robert Alt

When Massachusetts Gov. Charlie Baker declared a state of emergency on March 10, 2020, many New Hampshire residents who were commuting to the Bay State began working from home instead.

Ordinarily, Massachusetts could not continue withholding taxes from these workers’ paychecks while they were not working in the Bay State. But under a new Baker administration rule, out-of-state remote workers were required to continue paying income tax to Massachusetts—a state where they do not live, cannot vote, and no longer work.

Remote-working Granite Staters were understandably outraged. As was New Hampshire Gov. Chris Sununu. Accordingly, New Hampshire Attorney General Gordon MacDonald filed an original jurisdiction case with the U.S. Supreme Court to protect Granite Staters from Massachusetts’ unconstitutional money-grab. Fourteen other states, along with several public interest groups including The Buckeye Institute, have urged the high court to hear this consequential case.

New Hampshire v. Massachusetts should matter to anyone who works from home or employs remote workers. Teleworking has skyrocketed during the pandemic, with approximately half of Americans now working from home, according to a recent study by the Brookings Institution.

Software giant Salesforce.com, the largest private employer in San Francisco, recently announced that most of its employees would continue to work remotely after the pandemic, and that the company would shrink its physical office space, as a leading indicator that American work and commuting patterns are changing for the long term.

This shift to remote work started well before the pandemic and benefits employers and employees alike. It enables employers to attract top-notch talent from outside of their immediate geographic area. It gives employees the flexibility to locate their households in more affordable or otherwise preferable areas. And it saves everyone money.

A Global Workplace Analytics study found that those who work remotely half the time can save nearly $11,000 per year for their employers and between $2,500 and $4,000 per year for themselves.

The remote-work revolution can also help bridge the growing urban-rural economic divide. People who work from home are almost twice as likely to earn a six-figure salary compared to the general population, and small towns and rural areas stand to profit substantially if more high-income earners relocate there while telecommuting to work for employers in larger metropolitan areas.

Some government officials have lauded the shift to telework, and even encouraged it. As Gov. Baker himself said, “Now as we look to the weeks and months ahead, we’re urging businesses to continue to promote remote-work and work from home as much as possible.”

The governor, it seems, wants to have his cake and eat it too—advising Granite Staters to stay home at the same time he taxes them as though they didn’t.

If being taxed without representation weren’t enough, Massachusetts—home to John Hancock and the Boston Tea Party—wants to levy taxes for unused services, too.

Being taxed where you work makes sense only because the taxing jurisdiction generally incurs commuters’ wear-and-tear burden on its roads, utilities, community services, and infrastructure.

But absent the commuter presence and burden to pay for the same, there is no good reason—short of greed—to tax telecommuters’ wages while they have no say or vote on the tax or the election of its assessors.

If Massachusetts prevails in New Hampshire v. Massachusetts, other states and jurisdictions will quickly adopt a similar soak-the-teleworker tax policy. In Ohio, for example, cities are already taxing the income of remote workers who used to work there, but are now working elsewhere.

Income taxes should be paid by people who live or, at the very least, actually perform work there.

Working from home is here to stay. Employers and employees have both learned to adapt and adjust their budgets to meet the demands of that new normal. Governments should, too.

Unconstitutional taxes levied upon the income of those who have no vote is neither just nor sustainable given our new post-pandemic realities—and Massachusetts (of all places) should know better.

Andrew Cline is president of the Josiah Bartlett Center for Public Policy in Concord. Robert Alt is president and CEO of The Buckeye Institute in Columbus, Ohio. This column was originally published in The Lowell Sun. 

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State business tax cuts have not led to a reduction in state revenue

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Many people believe that cutting tax rates always and automatically lowers government revenue. They believe this even when shown that it isn’t true. 

When House Bill 10, a bill to continue reducing the Business Profits Tax and Business Enterprise Tax rates, had its turn in the House Ways & Means Committee on Thursday, the predictable objection was made. Opponents said it would reduce state revenue. 

But this prediction was made before every business tax rate cut in the last five years. It has yet to prove true. 

In 2015, Gov. Maggie Hassan predicted that the business tax rate reductions put into place by the Legislature starting in the 2016 fiscal year would blow a $90 million hole in the upcoming two-year state budget. 

To quote Harry Doyle, that prediction was just a bit outside. Business tax revenues were $132.8 million (23.4%) above plan in FY 2016 and $72.7 million (12.9%) above plan in FY 2017. Instead of a $90 million budget hole, the state wound up with $205.5 million more than planned. 

The trend continued for the next two years. Business tax revenues were $118.8 million (17.9%) above plan in FY 2018 and $151.6 million (23.2%) above plan in FY 2019. 

In those four years, business tax revenues exceeded budget projections by a combined $475.6 million. 

So after the state began cutting business tax rates, business taxes generated almost half a billion in unplanned revenue in just four years— an enormous windfall. 

But what about the four years before? Surely the economy, and with it state revenues, were growing rapidly before the tax cuts.

Business tax revenues were $13.1 million above plan in FY 2012, $33.7 million above plan in 2013, $11.5 million below plan in 2014, and $6.5 million below plan in 2015. 

After the state cut business tax rates, business tax revenues took off like a cheetah that wandered into a Nigerian hacker hangout and ransacked the entire stash of Red Bull. 

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. 

It would be a mistake to attribute all of those revenue gains to the state business tax cuts. Other factors, such as national economic growth and federal tax changes, played a large role, as the Sununu administration has pointed out. 

But one also cannot attribute all of those gains to the national economy. From 2016-2019, the U.S. GDP grew by 9.3%, while New Hampshire’s grew by 11.6%, according to Federal Reserve figures. 

Not long ago, New Hampshire had the highest business tax rates in New England. Thankfully, that is no longer true, though our rates are higher than notoriously high-tax Rhode Island and Connecticut.

Despite recent reductions, our business tax rates remain very high. We are near the bottom — 41st in the country — in the Tax Foundation’s ranking of corporate tax rates.

High business tax rates have been shown to have a negative effect on business startups, job creation, productivity, and economic growth. Pushing New Hampshire’s high rates down a bit more would, at the very least, increase our economic competitiveness and make us more attractive to employers. It also would improve the atmosphere for small-business startups.

As the state’s experience since 2016 shows, it is a mistake to assume that further business tax rate reductions would trigger automatic state revenue reductions. All recent predictions that this would happen have proven false. 

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N.J. legislators ask to join N.H. tax lawsuit against Massachusetts

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Three days after New Hampshire sued Massachusetts to stop it from taxing the income of remote workers, a New Jersey Senate committee passed a bill requiring their state treasurer to explore joining the suit. If New Jersey joins, New Hampshire will have started a multi-state effort to stop high-tax states from reaching across their borders to tax non-resident commuters. 

Last week, Massachusetts adopted a new administrative rule allowing it to collect income taxes on New Hampshire residents who work remotely for Massachusetts companies. On Monday, New Hampshire sued in federal court, calling the practice unconstitutional. But Massachusetts isn’t the only state to do this, and other states have taken notice of New Hampshire’s suit. 

For decades, New York State has applied its income tax to people who work remotely for New York companies. Hundreds of thousands of New Jersey and Connecticut residents have to pay New York income taxes even if they don’t physically commute into the state.

New Jersey state Sen. Declan O’Scanlon told the Josiah Bartlett Center that the New Hampshire lawsuit could bring justice for New Jersey residents too. 

“The lawsuit between New Hampshire and Massachusetts may very well pave the way to helping make the case,” he said.

O’Scanlon is co-sponsor of a bill that would require New Jersey’s treasurer to study the commuter tax issue and make a report to the state legislature. On Thursday, the N.J. Senate Budget and Appropriations Committee unanimously amended the bill to instruct the treasurer to explore joining New Hampshire’s lawsuit.

The bill then unanimously passed the committee. Its next step would be a vote before the full Senate, O’Scanlon said.

He and the bill’s prime sponsor, Sen. Steven Oroho, had been interested in pursuing a fight against New York for a while, O’Scanlon said.

“I had a couple of people send me stories about the New Hampshire lawsuit, knowing I have an interest in this,” he said. 

“There is no logical explanation of why we wouldn’t pursue our residents paying New Jersey taxes rather than New York taxes.”

A spokesman for the New Jersey treasurer was unavailable for comment, but O’Scanlon said the effort has bipartisan support and the governor’s office has taken notice. 

“I am hearing from within the Murphy administration that there is interest in this,” he said. 

When the bill gets to the full Senate, O’Scanlon said he doesn’t foresee any serious opposition.

“It should be like a hot knife through butter,” he said. “It will help our taxpayers and enhance our revenue. Not often do you have an issue that lines up like that. “

New Jersey allows residents to take a tax credit for income taxes paid to New York. So New York’s taxation of commuters costs New Jersey lots of money. Senators on the Budget and Appropriations Committee speculated that the cost could be in the billions of dollars. 

Edward Zelinsky, who teaches tax law at Benjamin Cardozo School of Law in New York City, told the Josiah Bartlett Center that New Jersey and New Hampshire are in the same position. 

“I believe it’s identical. From a constitutional perspective and a tax policy perspective, the issues are the same,” he said. 

“If the employer is in New York or in Massachusetts and you are at home in Connecticut or in New Hampshire, their position is that you owe income taxes. 

“Now, in fact, New York has gone very aggressively. New York is not just sending tax bills to people in Connecticut. New York has sent tax bills to people in Tennessee, in Arizona. Their position is that they can overstep the boundaries and send tax bills to anyone they want. In Massachusetts, they are technically saying the same thing.”

Zelinsky, who lives in Connecticut and works some days in New York City, sued New York over this issue in 1994 and lost in the New York state courts. The U.S. Supreme Court refused to take up the case.  But he said that legal scholars have come to see his — and New Hampshire’s — position favorably.

“I lost in court; I won in the arena of academic opinion,” he said.

In its lawsuit, New Hampshire states that “Massachusetts has unilaterally imposed an income tax within New Hampshire that New Hampshire, in its sovereign discretion, has deliberately chosen not to impose.”

The suit states that its purpose is “to rectify Massachusetts’ unconstitutional, extraterritorial conduct.”

Zelinsky said the constitution favors New Hampshire, but the big question is whether the Supreme Court will hear the case. That will be up to the discretion of the justices. But he will be among the many commuters and remote workers pulling for the Granite State.

“I’m saying very openly that I’m cheering New Hampshire on.”

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