On Thursday, New Hampshire lawmakers are scheduled to take up a budget conference report which contains several tax reforms negotiated by both chambers that would ultimately make New Hampshire the ninth state to impose no tax on individual income. These reforms floated at the beginning of the 2021 session found their way into HB 2, including rate reductions in the Business Profits Tax (BPT) and Business Enterprise Tax (BET) and a phaseout of the interest and dividends tax.

Under this package, the BPT would be reduced from 7.7 percent to 7.6 percent and the BET from 0.6 percent to 0.55 percent for tax year 2022. The BET threshold would also increase from $200,000 to $250,000. These provisions differ slightly from the earlier suggestion in HB 10, which would have decreased those taxes to 7.5 and 0.5 percent respectively in tax year 2023, and from earlier versions of the budget bill which set slightly lower rates.

The BPT can be understood as a typical corporate income tax, but the BET falls more in line with a value-added tax (VAT). While it is a tax levied on businesses, the BET is essentially a universal consumption tax. Its base includes all the labor and capital inputs of a business, as it measures wages, dividends paid to investors, and interest paid on loans in order to reflect general consumption. VATs like the BET have the advantage of an extremely broad base that allows for stability and applies to businesses of all sizes and categories. Businesses can deduct taxes paid on the BET from their BPT liability.

Under current law, BPT and BET rate reductions are subject to a tax trigger, but its design makes it unlikely that the rate reductions would phase in on their own even as state revenue grows. Under the current system, if the amount of combined unrestricted general and education trust fund revenue is 6 percent or more below official revenue estimates, the BPT increases to 7.9 percent and the BET increases to 0.675 percent. If that same revenue is 6 percent or more above estimates, the BPT and BET decrease to 7.5 and 0.5 percent respectively. The same provision was in place for tax year 2021 but was not triggered in either direction. HB 2 would replace these triggers with lower, fixed rates.

While tax triggers can be a useful tool to bring about tax reform without ignoring revenue concerns, New Hampshire’s trigger is notable in a few ways. First, it could cause either a decrease or an increase, leaving businesses open to tax increases in times when they are already struggling. The trigger is also based on the difference between revenue estimates and collections. While such numbers do give some indication of how a state is doing, tying rate changes to actual revenue growth compared to an established baseline would provide a better indication for whether a state can afford rate reductions. If revenue projections are off dramatically in either direction, a rate increase or decrease could be triggered even though actual revenue changes would not otherwise indicate a revision.

Used properly, tax triggers can limit the volatility and unpredictability associated with rate reductions. However, New Hampshire would do well to move away from the BPT and BET trigger currently in place, as it causes uncertainty for businesses in times of economic downturn and does not accurately track the state’s revenue growth. The state also has the fiscal capacity it needs to move forward with these rate reductions now.

Finally, New Hampshire does not levy a typical individual income tax, but still taxes income from interest and dividends. Tennessee did likewise up until this year, when it completed the phaseout of its Hall Income Tax. With HB 2, New Hampshire could follow suit. If the bill passes, the state will begin to phase out the interest and dividends tax in tax year 2024, reducing the 5 percent tax by 1 percentage point each year until it is phased out completely in tax year 2027.

New Hampshire is doing well financially, with a monthly comparison from the Department of Revenue showing that business tax collections are performing well in fiscal year 2021, even surpassing 2019 numbers in most months. In cutting income taxes this year, New Hampshire would join a long list of states that have either already cut income tax rates this year (Idaho, Iowa, Louisiana, Montana, Nebraska, and Oklahoma) or are actively considering doing so (Arizona, Michigan, North Carolina, and Ohio). With workforces increasingly mobile, these states are positioning for success in an era of enhanced tax competition.