New Hampshire's economy is humming along, and fiscal conditions are better than they have been for years. In large part, that's thanks to business profits tax cuts and a cautious, one-off distribution of surpluses on the part of Gov. Chris Sununu and state legislators to address local challenges, according to tax and public policy experts.
Then Gov. Maggie Hassan and supporters in the New Hampshire legislature led a successful initiative to implement a multi-year program of gradual business profits tax reductions from 2016 through 2022. The first went into effect Jan. 1, 2016. Successive rounds are to be triggered biennially only if tax revenues reach or exceed minimum levels set out in the legislation. Those minimums have not only been reached, but exceeded.
New Hampshire has been running substantial budget surpluses for three consecutive fiscal years. That has left the Granite State in an enviable position when compared to neighboring and many other U.S. states, said Greg Moore, Americans for Prosperity's state director for New Hampshire.
“State legislators were very conservative in their revenue forecasts," Moore told Watchdog.org. "Revenues have been higher than expected, so the state has been able to take care of other priorities outside the budget.”
A more competitive business tax environment
“New Hampshire is very different from other states in that our business profits tax, effectively our corporate income tax, is levied on income earned by LLCs , partnerships and 'S' corporations. That distinguishes New Hampshire [from all other U.S. states]," Scott Moody, CEO of public policy think tank the Granite Institute, told Watchdog.org. 'We're the only state that does that, essentially because we don't have a personal income tax.”
The income distributed by New Hampshire LLCs, “S” corporations and partnerships is taxed indirectly via personal income taxes.
“It's especially important for us to cut those rates, and that's what we're doing,” Moody said. Doing so takes on even greater importance in light of the fact that neighboring states, such as Maine and Massachusetts, have been reducing corporate and business tax rates, he added.
“We have had a relatively high business tax environment as compared to neighboring states, and a lot of them have been reducing business taxes. The regulatory environment is becoming more competitive, so we need these business profits tax reductions to maintain what's known as the New Hampshire advantage,” Moody said.
Furthermore, Gov. Sununu and state legislators also have been prudent when it comes to managing recent years' surpluses, Moore said. Rather than launching overly ambitious, long-term programs or expanding those already in effect, they have chosen to redistribute surplus funds locally on a one-off basis for specific purposes.
The state's “rainy day” fund balance has swelled to around $100 million, up from $22.3 million since the first business profits tax cut went into effect on Jan. 1, 2016, according to Moore.
“That helps the state's bond rating. At the same, in fiscal 2017 the state was able to appropriate $142 million beyond what was in the budget thanks to revenue surpluses,” Moore said.
For example, the state was able to completely close the Health & Human Services Department's $70 million 2017 fiscal deficit in just one year – without having to make reductions or delay payments to providers, Moore pointed out. In addition, with a comparatively small population of around 1.35 million people, Sununu last year was able to send $36 million back to local districts to invest in roads and bridges. He also sent $19 million to local school districts to invest in building and facility improvements.
Budget surpluses most welcome
“All this is absolutely most welcome,” Moore said. He pointed out that the cuts in business profits taxes are having indirect, beneficial impacts elsewhere in the state budget. Excise taxes have been increasing in parallel with the mandated reductions in business profits taxes as people have more money to spend. More substantially, property taxes are rising as real estate values increase.
“So the total, net impact of business tax relief has been greater [than its direct impact alone] as it's helping drive revenue increases in other areas,” Moore said.
New Hampshire does not tax individuals' personal income. It does not have a sales tax either. The state does levy relatively high excise taxes on specific products, such as alcoholic beverages and tobacco. That said, what at the end of the day amounts to a low individual tax environment has been a popular selling point for people looking to relocate, particularly those with fixed incomes, such as retirees.
Critics have long singled out New Hampshire's comparatively onerous business tax system as a prime factor in limiting economic growth, employment gains and the fiscal deficits that characterized budgetary conditions prior to enactment of the business profits tax reduction agenda.
As a result of the business profits tax reduction agenda, the overall tax and economic environment in New Hampshire is better than any state in the New England region, according to Moore.
“It's an easy environment to sell to prospective businesses in Massachusetts or Connecticut, for example, or to businesses already here in New Hampshire that might consider moving out,” he said.
Adjusted for inflation, the state's Real Gross Domestic Product rose to $69.135 billion in 2016, up 3.01 percent year over year and up 6.95 percent over three years. Those are the the highest rates in the New England region.
“We certainly have a tailwind economically. Not only is the American economy doing quite well, especially with federal tax cuts, but New Hampshire is doing quite well," Moody said. "We're practically at full employment and major infrastructure projects, such as expansion of Interstate 93 to Boston, are well under way. I think we can really expect the state economy to grow robustly in coming years.”
The state's workforce, as well as its businesses, is benefiting as a result.
“New Hampshire has been able to bring what amounts to a 6 percent raise for workers as compared to Massachusetts," Moore said. "That provides an incentive for workers and businesses to relocate or expand here."