Business taxes are the heart of the state’s revenue system, accounting for more than a third of the general and education fund money that covers government’s core services.
The state has two business taxes, the business profits tax and the business enterprise tax.
The business profits tax applies to businesses that make money, while the business enterprise tax applies to all businesses in the state.
The business enterprise tax is on a company’s dividends, payroll and capital. It is really a value-added tax much like those in Europe and was instituted to address a lawsuit brought by then the biggest manufacturing company in the state, Cabletron.
The owners objected to paying business taxes while lawyers, doctors and other professional organizations did not, because they turned their profits into salaries. New Hampshire — as you know — has never had an income tax, outside of the interest and dividends tax, which is being phased out beginning next fiscal year.
The business profits tax is based on a company’s real property, payroll and sales within the state, but beginning next fiscal year, it will be based solely on sales within the state.
If you look at the monthly revenue reports from Administrative Services, you will see that to date this fiscal year, business taxes have produced $745.2 million, which is $124.4 million more than budget writers anticipated and is the major source of the current $252 million revenue surplus.
But while one business tax is producing significant revenue surpluses and the other is producing less than budget writers anticipated and that is important.
The BPT collects most of its receipts from large multinational corporations, many of which have produced record profits as they adjusted to take advantage of the world’s needs during the pandemic. The United States, like other countries, has increased spending significantly in the face of the pandemic.
And the revenue paid by these companies is usually based on last year’s earnings so the current receipts are more reflective of last year’s business activity than this year’s.
On the other hand, the business enterprise tax is paid mostly by New Hampshire companies large and small, mostly small, and it is not particularly reflective of what is happening in the global market, but reflects more the regional market.
And finding enough employees has been a major problem for New Hampshire companies and one-third of the state’s BET collection is from payroll.
At the end of March, three-quarters of the way through the current fiscal year, the BET showed a revenue deficit of $7.4 million or about 3.7 percent.
The BPT however, has a revenue surplus of $148.8 million or 34.5 percent.
What that says is business on the national and international level has been booming based on last year’s activity, but not so much in New Hampshire.
With war in Ukraine and the economic disruptions that causes, the boom times may be about to end for the global marketplace and countries attempting to slow inflation by raising interest rates could also impact economic growth.
The potential slowdown will not be reflected in this fiscal year’s BPT revenue, but will begin to be felt in the next fiscal year and beyond.
If that was the only issue, there would be some adjustments, but that is not what New Hampshire is facing beginning next year and maybe even in the last few months of this fiscal year.
The big unknown is what the single sales factor will do to BPT revenue beginning next fiscal year. Tax receipts will longer include a company’s payroll and real property in the state and that could drop the revenue significantly.
Due to an agreement between British Prime Minister Margaret Thatcher and then United States President Ronald Reagan, most of the states in this country use a “water’s edge” tax factor meaning only a company’s business activity located in New Hampshire or Vermont or Wisconsin is taxed.
This can lead to some financial sleight of hand like locating only an advertising office in a state while the company does robust business in sales.
That tends to reduce the amount of business tax revenues states can claim on international companies rather than basing taxes on the percentage of business done here.
But that affects all states, not just New Hampshire.
What New Hampshire is facing is the drop-off of revenue beyond the sales a company makes in the state.
The change was aimed at out-of-state companies who do a lot of business here but have not paid business taxes. Netflix was one company often mentioned when lawmakers were debating the change.
The change was sold on the premise it would help in-state companies and hit out-of-state companies, but that remains an undecided question for many.
New Hampshire also has another unique problem which is the money companies received through the federal payroll protection plan during the early days of the pandemic.
Under state tax law until last year, the money companies received was taxable although the federal government and many states waived their liability. They could afford to do that because they recoup much of the lost money through the income tax on salaries paid with the federal money, but New Hampshire could not.
The state also decided to let the companies claim business expenses with the money paid to employees which further reduced what the state could collect.
While the legislature was debating whether to waive the tax liability, many companies anticipated they would have to pay on the PPP money and did so when they filed with the state Department of Revenue Administration.
The estimate for what the state will have to return to those companies is $90 million over three years, beginning soon.
So in essence, business tax revenue has three major unknowns: the single sales factor, a slowing world economy and the money owed for the PPP payments.
That is a future problem of hundreds of millions of dollars during the next few years.
The big unknown is one reason the House Ways and Means Committee removed the rate reduction for the BET in House Bill 1221, while keeping the reduction for the BPT rate, but the Senate is likely to add some reduction in the BET rate back into the bill.
At the same time, lawmakers are finding lots of uses of the projected revenue surplus.
They have set aside $100 for a settlement fund to address physical and sexual abuse allegations over the last 20 years at the Youth Detention Center at the Sununu Youth Center in Manchester and that figure may not be enough.
Legislative leadership also seeks to set aside $35 million for a new legislative parking garage where the Attorney General’s Office is located and tear down the current garage over Storrs Street.
And there are discussions about holidays for paying the gas tax and the rooms and meals tax, which could mean tens of millions of dollars the state does not collect.
Those activities would be one-time expenditures and not added to ongoing government operations, which is what the GOP likes to do when there is surplus money floating around.
There is also a bill that passed the House that would have the state begin to pay again a portion of the state retirement system costs for municipalities, school districts and counties, and another for a one-time $500 grant to state system retirees of five years or more.
The state has a record amount of money in the rainy day fund and that could be a good thing, because the next budget lawmakers craft may have a very different look if revenues drop significantly — as they could — in the next year.