As New Hampshire budget writers faced a June 30th deadline, Revenue Commissioner Kevin Clougherty presented the House-Senate Committee of Conference a memo outlining 11 suggestions to increase state revenues, including the controversial LLC Tax now generating opposition from New Hampshire’s small business community. Clougherty’s June 15th Memo contained five tax changes that were eventually adopted in the state budget law HB2, one that continues to be implemented by the Department of Revenue Administration (Like Kind Exchanges), and five suggestions that were put on the shelf. When the Legislature revisits the widening state budget gap in 2010, it is likely to revisit these five suggestions. Here is a preview of five changes in tax law likely to be considered next year.

1) Real Estate Transfer Tax
The Real Estate Transfer Tax, or RETT, is among the most cyclical of New Hampshire’s business taxes. It booms when the real estate market is hot, and craters when real estate slows. Currently, home buyers and commercial real estate buyers pay a 0.75% tax when real property is transferred. Clougherty outlines three possible expansions of the RETT. The DRA Memo charts projected revenues for Fiscal Years 2010 and 2011 based on the current rate, and on increasing the rate to 1%, 1.15%, 1.25%, and 1.5%. It also calculates how much revenue would be generated if the tax included an exemption on the first $25,000, $50,000, $75,000, or $100,000 in property value. According to the DRA memo, the RETT would have generated anywhere between $69 million to $200 million over the next two years based on the tax rate and exemption levels chosen.

However, the most controversial change suggested by the DRA Memo as an extension of the RETT to cover refinancing as well as property transfers. According to Clougherty, taxing real estate refinancing would generate revenue as the real estate market and interest rates decline, cushioning the cyclical nature of real estate tax collections. Governor John Lynch originally supported this expansion of real estate taxes, which met with thunderous protests from the real estate community, who argued that the new tax would target homeowners attempting to refinance their mortgages in order to stay in their homes. Lynch and the Legislature eventually shelved the Refi Tax

Revenue Commissioner Kevin Clougherty (center) and staff

2) BET Credits against the BPT
As the Business Enterprise Tax was designed as a way to spread New Hampshire’s business tax burden away from its largest firms and over a broader base, the new tax was written so that no business would pay twice. All firms pay the BET, but only businesses making a profit in a given year pay the Business Profits Tax. However, tax payments under the BET are fully credited against BPT liability. Effectively, businesses pay either the BET or the BPT, which is higher, but not both.

The DRA Memo cites 2208 statistics in which 18,154 tax filers applied for $121,506,595 in BET credits against the BPT, of which $41 million was from the top 100 business taxpayers. Clougherty says that since the business tax base shrinks during a recession, lawmakers can’t count on that large an increase in revenues if the credit were removed this year. He also warns that the tax increase would have a disproportionate impact on the largest taxpayers, and hit the banking community especially hard due to the way that interest in treated under the tax.

3) BET Thresholds
The Business Enterprise Tax requires businesses large and small to pay the state based not on their profits, but on their total receipts. The tax was put in place in 1993 to broaden the state’s business tax base, which had concentrated to a few large, profitable businesses paying the Business Profits Tax. But the BET only kicks in after a business has reached a threshold of $150,000 in gross receipts or $75,000 in enterprise value. Once a business grows to that level, it pays 0.75% in taxes on every dollar that comes in the door, regardless of expenses.

The DRA Memo suggests lowering those thresholds to their original levels of $100,000 and $50,000, and estimates that the lower threshold would generate an additional $2 million annually.

4) Net Operating Losses
Under current law, businesses are allowed to carryover net operating losses into future tax years in order to offset future tax liability. The carry forward amount for NOL’s generated after July 1, 2005 is $1 million each year. The DRA Memo mentions that the original carry forward amount was limited to $250,000 annually back in 1988, and was NOL’s could only be carried over for five years. The DRA Memo does not estimate how much additional revenue would be generated by reverting to the lower limits.

5) Online Booking of Room Rentals
According to the DRA Memo, online travel companies charge customers for hotel occupancy taxes when they book their rooms, but pay only a portion of those taxes to local and state governments. Clougherty argues that the issue in current under litigation, but recommended that New Hampshire create a new category of “wholesaler” to apply to online travel companies. However, administering this tax, and collecting it from out-of-state businesses with no link to New Hampshire could be difficult. Clougherty explains that his office is working with the Federation of Tax Administrators to draft federal legislation to enable states to collect taxes charged by online travel companies.