Since 2015 the Legislature, prodded by Governor Chris Sununu, has steadily trimmed business tax rates, assuming lower tax liabilities would prompt businesses to locate or expand their operations in New Hampshire and spur growth of the state economy, which in turn would increase state revenues.

Between FYs 2015 and 2022, the rates of the Business Profits Tax (BPT) and Business Enterprise Tax (BET), which together represent nearly a third of total tax revenue, have been reduced from 8.5 percent to 7.5 percent, and from 0.75 percent to 0.55 percent, respectively.

At the same time, revenues from the two taxes more than doubled, increasing by 118 percent, appearing to confirm the fiscal strategy a success.

However, a recent analysis by Phil Sletten, research director at the New Hampshire Fiscal Policy Institute, finds the supposed effects of lowering business tax rates illusory. “This analysis found no evidence that concurrent business tax rate reductions led to increased revenue by spurring more economic activity in the state,” his report reads.

Without disproving any relationship between reduced tax rates and economic growth, the report finds that the economic effects of tax reduction are too limited to explain the increase in tax revenue. Instead, he concludes by reducing business tax rates the state failed to capture the revenue generated by the growth driven by other factors, forgoing between $496 million and $729 million in revenue between 2016 and 2022.

BPT calculations

The report draws on a study of business taxes in all 50 states between 1977 and 2005 undertaken by economists at Harvard University and Texas A&M University that concluded, “State business tax cuts have little to no positive impact on gross state product, job creation, personal income, poverty rates and business establishments.”

A similar study of large firms from 1977 to 2011 by Stanford University and Massachusetts Institute of Technology found some corporations expanded employment and operations in the short term.

Economic models constructed in California and Oregon estimated that about 16 percent of the revenue foregone by reducing tax rates would be recouped throughout increased employment. A model for the state of Arizona estimated for each $1 of revenue lost to lower rates between $0.05 and $0.18 would be recovered.

In New Hampshire the Commission to Study Business Taxes reported in 2014 that “businesses do not consider the current BPT rate (8.5 percent) as a primary factor in making decisions to expand or locate within the state.”

Instead, firms are more concerned about the cost of energy and real estate, size and quality of the workforce and infrastructure, as well as property taxes, which represent almost half of all tax dollars paid by businesses.

Sletten calculates that firms owing between $1,000 and $10,000 in taxes, the largest share of BPT filers, would receive an average reduction of $50 with the 0.1 percent lower rate in Tax Year FY 2022. The 78 BPT filers with tax liability of $1 million or more accounting for 38 percent of all receipts, would be spared just $33,350 in taxes, or $12,348 less than the median annual wage.

“Very few businesses would receive enough of a tax reduction to reinvest resources into the state economy that would be sufficient to hire more employees or make significant additional investments that would spur substantial economic growth,” Sletten writes.

The National Bureau of Economic Research found that 40 percent of the benefits from reducing state corporate tax rates flow to owners of firms, including shareholders, and another 25 to 30 to landowners.

According to the Tax Policy Center, some 40 percent of corporate shareholders are foreign investors. Consequently, a significant share of corporate dollars may flow out of the state.

Sletten notes that, between 2008 and 2020, the number of tax filers rose by 16 percent while revenues increased 48 percent. Likewise, between 2015 and 2022, the number of work sites grew 18 percent, while business tax revenues jumped 87 percent.

“If tax revenue growth were driven by businesses moving to, expanding in or being created within the state, the number of filers would likely increase more consistently relative to revenue rather than falling substantially behind revenue growth,” he concludes.

Sletten traces the increase in New Hampshire’s business tax revenue to factors beyond state borders, chiefly changes in the federal tax code and a steep rise in corporate profits.

Increasing revenues

Revenues from the two business taxes began to rise in 2016 — before the tax rates were reduced — driven by taxes other than the BPT and BET. Business tax revenue began to increase in 2018, following the Tax Cut and Jobs Act enacted by Congress in 2017. Among other things, the legislation provided tax incentives for multinational companies to transfer assets held overseas to affiliates in the United States. The effect was to broaden the base of the BPT.

Between 2017 and 2019, BPT and BET revenues climbed 26 percent as corporate tax revenue grew 34 percent nationwide, including in neighboring states where corporate tax revenues rose 34 percent in Massachusetts, 35 percent in Vermont and 44 percent in Maine.

Business tax revenues were also boosted by the recent sharp jump in corporate profits, which were 51.1 percent higher in the fourth quarter of 2022 than they were seven years earlier and grew 21.6 percent in the two years following the third quarter of 2020, after the immediate impact of the pandemic.

BPT and BET revenues increased 41 percent between FYs 2020 and 2021, compared to the 71 percent increase nationwide and increases of 45 percent in Massachusetts, 18 percent in Vermont and 32 percent in Maine.

Increasing revenue from business taxes is not unique to New Hampshire. Far from spurring economic growth, Sletten suggests reducing business tax rates may have slowed it.

Reducing business tax rates do not appear to have spurred one-time growth in the economy. From 2003 to 2022, the growth New Hampshire’s gross state product (GSP) ran 0.1 percent ahead of the combined growth of the New England states by 0.1 percent a year. Since the rates were reduced the state’s average growth of GSP was 0.5 percent less than its neighbors.

Nor, Sletten finds, have lower tax rates boosted employment. In the four years immediately after the rate reductions, job growth in New Hampshire trailed the national average by 0.5 percent and the pace in Massachusetts by 0.4 percent.

No state draws a greater share of its revenue from business taxes than New Hampshire, where the BPT and BET generated 31 percent of all state tax revenue in FY 2021, more than twice that of the 14 percent in runner-up New Jersey. Changes in tax policy can have significant impacts on both the state budget and wider economy.

Sletten concedes that measuring the revenue forgone by lowering tax rates is fraught with challenges and quandaries. He assumes either 32 percent or none of the revenue forgone between 2016 and 2022 would have been recouped through expanded economic activity, and estimates forgone revenue of between $496 million and $729 million.

Noting that the tax bases of both the BPT and the BET have grown as both profits and wages have risen, Sletten expects revenue losses to rise. Projected losses for the 2022 tax year fall between $154 million and $226 million.

The report includes data from Moody’s Analytics comparing the returns on a dollar invested in selected federal expenditures, which finds that a dollar of corporate tax rate reduction returns $0.32. On the other hand, a dollar invested in transportation infrastructure returns $1.29, Supplemental Nutrition Assistance Benefits (SNAP) returns $1.61, in supplemental unemployment insurance $1.49, in aid to state and local government $1.34, in Earned Income Tax Credit $1.27, and in Child Tax Credit $1.25. Likewise, revenue invested in addressing the shortfall in housing supply, backlog of school building projects and straitened public higher education system would also have had stimulative effects.

The increase in New Hampshire’s business tax revenue can be traced to factors beyond state borders, chiefly changes in the federal tax code and a steep rise in corporate profits.