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The Business Profits Tax Affects Everyone

Charlie Arlinghaus

February 11, 2014

As originally published in the New Hampshire Union Leader

The vast majority of businesses in New Hampshire are non-employers. Interestingly, just 10 percent of firms account for 95 percent of the jobs. As states across the country and the region look to increase competitiveness by lowering business profits taxes, these numbers become very important. But the most important reason to lower taxes is to be competitive in attracting new jobs to New Hampshire.

Naysayers have tried to argue that the business profits tax affects few people or few businesses, but those claims are based on a poor understanding of businesses in New Hampshire.

The Bureau of Labor Statistics and the Census collect data regularly on businesses in the 50 states. In 2012, there were 132,800 businesses in New Hampshire. The lion’s share of them (more than 100,000) are “non-employers.” A non-employer might be a sole proprietorship or a nominal business created to account for a small sideline of self-employment income. That sector does account for a small fraction of overall employment, but only about 2 percent of the total employed population.

Of the 30,500 firms with employees, most jobs come from a small number of companies. The 4,900 firms (3.7 percent of the total) that have at least 20 employees account for 80 percent of the jobs. If we expand that universe to every employer with at least five employees, it includes 13,500 employers (about 10 percent of the total number of firms) and 95 percent of the jobs.

Not coincidentally, those employers representing 95 percent of the jobs approximate the number of firms that pay the business profits tax. Last year 15,865 firms paid the business profits tax. That’s a 10-year high. The lowest number of the last decade was 11,375 in fiscal year 2011.

It is reasonable to presume a significant overlap between the 13,500 firms that have 95 percent of the jobs and the 15,000 taxpaying firms. In that respect, we can conclude that the business profits tax affects nearly all the jobs in the state.

From an economic development standpoint, we are interested in businesses that employ people. We know that the business profits tax will have an impact on virtually every business that employs people.
Lowering the business profits tax becomes essential because all of our competitors are looking to attract those same jobs to their state. Businesses across the country and the region know that a lower corporate tax is a visible and tangible signal to companies to come and do business. While the rate is important, the act of becoming competitive sends a strong message about the state’s mindset.

Last year, New York state embarked on major reductions that reduce complexity and loopholes as well lower the rate to its lowest level since 1968 (6.5 percent). Those changes could ultimately affect the state’s standing in the corporate index rankings of the Tax Foundation, moving New York from 25th to 4th. New Hampshire is 48th in that category.

Massachusetts lowered its top corporate tax rate three times (in 2010, 2011 and 2012), reducing it from 9.5 percent to 8 percent. “Taxachusetts” now has lower business taxes than we do and is eating our lunch in the contest for jobs.

Not to be left out, Maine is looking to make a change. Long the economic doormat of the region, Maine’s governor wants to eliminate the highest corporate rate of nearly 9 percent and lower the top rate to 6.75 percent.

Surrounded by tax cutters in Massachusetts, Maine, New York and Rhode Island, New Hampshire could emerge as an island of high rates surrounded by a sea of states putting out welcome signs for business. How’s that for a historic reversal?

Some policymakers will avoid lowering taxes for everyone and instead focus on a deduction here or waiving taxes for new businesses for a short term. That would be a terrible mistake. Tax reform involves creating an incentive for everyone, not some legislators picking and choosing winners and losers to pretend they did something at minimal cost.

New Hampshire has a history of keeping its laws as simple as possible, not creating a tax code with exceptions and exemptions. 

Lowering the business profits tax helps in several ways. It covers virtually all the businesses in the state that employ Granite Staters, and it offers equal treatment for new companies we hope to attract and old companies we hope to keep.

It also is the most visible and effective signal that this state (or any other) can send to the economic development world. That’s why every state is getting ahead of us. Let’s not fall behind.
 

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Taxation Can Only Happen With Representation

Charlie Arlinghaus

July 30, 2014

As originally published in the New Hampshire Union Leader

New Hampshire has had and continues to have a problem with administrative tax increases. Taxes, the removal of your money from you by force of law, is a fairly aggressive governmental act and should only take place through legislation debated openly and acted upon by elected officials directly accountable at election time. Unfortunately, administrators are sometimes encouraged, directly or indirectly, to act so that legislators don’t have to.

The idea of administrative tax hikes taking the place of legislation is something we’ve had to talk about often in New Hampshire. In a 2005, I sounded an alarm titled “Bureaucratic tax proposals subvert the democratic process.” A more recent piece a few years ago had the more descriptive title “Taxes should be voted on not snuck in through regulation.” Yet despite my incessant diatribes, we are faced with these issues again.

There is currently a dispute between the governor’s administration and some Republican state senators about whether a proposed regulatory change would have the effect of extending the Real Estate Transfer Tax to things it does not currently apply to. Whether that is a tax hike or an obscure administrative change ought to be obvious. Sadly, it is a dispute all too common in our recent history.

Tax laws are not always as easy as “pay 9% of this purchase.” The legislature may pass a law intending to tax certain things. They then explain in both the law and in regulation how to calculate which things are included and which are not. So far, so simple. But then human nature rears its ugly head.

It is easier for lawmakers when they have more money during budget season. With more money, they say no fewer times, have fewer difficult choices to make, and have to decide less often between interests competing for the same dollars. However, simply raising taxes and taking more of our money is not politically palatable. Apparently voters – the people who decide whether or not the lawmakers return – react negatively to having their taxes raised.

Some clever politicians though have figured out what might be called an end around. One way they can see more money but not technically vote to raise taxes is to get an administrator to “close a loophole” or “clarify the application of the tax.” Both of these things seem reasonable but both are open to abuse.

A loophole may exist because of an error in language that didn’t capture legislative intent. But more often, the tax was only applied to certain things and other categories were left out. What gets described as a loophole is merely an attempt to extend the tax to things the original law didn’t plan on.

As a matter of tax policy, it is not unreasonable to take a tax and make sure it applies to everything in its category equally – all restaurants not some, all of a particular kind of service or property, some categories but not others. Occasionally, advances in commerce can lead to some descriptions being outdated. But rewriting the tax code, changing the law or the moral equivalent of the law, requires accountability.

Too often lawmakers in need of money will ask an administrator to draft a change and will find it easier to have that change made quietly and without legislative hoopla or too much public notice. In 2009, lawmakers crafting a budget had a gap on the last day when the revenue commissioner came in with a multiple page shopping list of changes that might be pushed through on the last day without benefit of public hearing or discussion. This was a godsend to lawmakers who wanted to raise revenue in a way that they could describe as not raising taxes (about half the changes were made and half were not).

This is not a nefarious action on the part of the administrator any more than the recent actions by Gov. Hassan’s commissioner are nefarious. Instead is part of a horrible tradition: you make the change so we don’t get blamed.

The solution to this game is simple and obvious. If any regulatory or administrative change has the effect of taking something not currently taxed and now taxing it, that change must be proposed by the legislature, go through the process of a hearing, and be voted upon. Without a vote by the people who we elect to act on our behalf and can also toss out, no new taxation can or should exist.

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Budgets Can and Should be About Job Creation

Charlie Arlinghaus

August 1, 2012

As originally published in the New Hampshire Union Leader

Election season breeds people blowing hard but spreading little other than hot air (insert your own joke here about my column). Let me shorten some of it for you but then suggest a few constructive things.

Each economic report that comes out will be an opportunity for those in power to explain how their ideas, although crafted for long term, are even now having an impact. See? Sweetness and light are even now being spread to the masses in desperate need spurred not because our policies took effect but because our very presence is a signal. Those out of power will say the opposite: even now the wasteland of destruction sure to be created by the bad guys is leaking out and the scariness of that desolation depresses everyone we need to be happy.

No matter your political philosophy, feel free to take this as a criticism of the other guys. In New Hampshire we have the fortune of living under the authority of a left-leaning Democratic president and a right-leaning Republican legislature. Clearly the success we enjoy is because one of those two is doing the right thing and countering the bad bits of the other.

Political windbags aside, all of this focus on jobs and the economy is a good thing. Whether you want to expand social programs to cover more people or make them more efficient, a growing economy and job base in New Hampshire benefits everyone.

The budget difficulties of the last few years were a direct result of the collapse of state revenue. Revenues go up when there are more jobs and down when there are fewer. Fewer jobs mean more people on state services. Regardless of your support for a social safety net, everyone’s ultimate goal is to have more people working. Almost no one prefers being a ward of the state to having an actual job.

So the task for those men and women who would be governor or would be legislators is to identify changes they can make to bring more and better jobs to the state.

Every candidate will talk about the things they don’t like, the things wrong with what’s happening in Concord or what used to be happening in Concord. More important is that we take this opportunity to redirect their conversation.

As a voter, we can say thank you for telling us what was right and wrong with the last session but please tell us what you would do instead.

Every economic development professional will tell you that the first thing people ask about is taxes. New Hampshire is very attractive to most business in some ways on taxes and less so on others. In general, the lack of a sales or income tax is a huge benefit and a big signal to most businesses. However, coupled with that is our Achilles heel: direct business taxation.

New Hampshire’s business tax is a Business Profits Tax and a linked Business Enterprise Tax. The combined tax makes up about one quarter of the state’s general and education fund revenue (the state operating budget) and is more than twice as large as the next largest tax.

The difficulty is that the rate over the last two decades has climbed to 8.5% (the creditable BET is 0.75% of a different base). According to the Tax Foundation, an arbiter of these things used by people on both ends of the spectrum, that gives us the highest business taxes in the country. Our competitiveness in their rankings is improves in other areas but on that subcategory, very important to sectors like manufacturing for site location, we are at a serious disadvantage.

The last legislature needed to balance the budget which was in a very bad spot – deficit estimates ranged from $600-$900 million. Cutting spending first was important to put us in a position to be able to reduce taxes as a business incentive.

I think they made a mistake cutting tobacco taxes first. Although tobacco taxes rose four of the previous five years and are extraordinarily regressive (poor people smoke in much greater proportion that wealthy people), lowering them creates little economic incentive. The first tax we should lower is the business profits tax.

Taxes are fundamentally a price on economic activity. Lowering the price of specific activities creates more of that activity – the incentives are stronger in some area than others but business taxation is among the most responsive areas.

As a candidate, tell me what you want to do about the budget – the most concern of state government. But tell me why. Let’s get our candidates thinking about job creation not just political wind.

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