NH ranks last in corporate tax climate, 7th best for business overall

By Grant Bosse on October 26, 2010
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(CONCORD) New Hampshire’s tax climate is pretty good for business, despite having the harshest corporate tax burden in the country, according to a new study released today by the Tax Foundation. The Washington based think tank annually ranks each state’s tax policies.

The Tax Foundation examines how each state’s tax policies compare in five areas; corporate, income, sales, unemployment, and property taxes. New Hampshire has ranked 7th best for overall business tax climate since 2007. In 2006, the Granite State was 6th. South Dakota retained the top ranking nationally, having passed Wyoming last year. New York and California are the least competitive states for business, according to the study. After four years on the bottom, New Jersey moved up two spots this year, now boasting the 48th best business climate in the nation.

New Hampshire’s economic competitiveness was dragged down in the rankings by its worst in the nation corporate tax policy. Author Kail Padgitt tells New Hampshire Watchdog that business competitiveness is harmed by having both a corporate income tax, the Business Profits Tax, and a form of gross receipts tax, the Business Enterprise Tax.  While the BET is at a low rate, Padgitt says businesses have to pay it on every dollar they spend, whether or not they’re making money.

“It’s going after businesses that might not earn a profit that year. And even though they can deduct it from the BPT, it adds to the complexity in that businesses are filing two tax returns each year.”

Padgitt also notes that New Hampshire is one of only two states that limits the net operating losses that a business can carry forward as a tax deductions.

“Only Pennsylvania and New Hampshire limit carry-forwards. As a result, these states score poorly in this variable.”

New Hampshire has dropped from 39th to 50th in corporate tax competitiveness since 2006.

Though New Hampshire does not have a broad-based income tax, it only ranked 10th in the nation, since it does tax income derived from interest and dividends. That ranking is down one spot from last year. Padgitt says this ranking includes New Hampshire’s short-lived LLC Tax, which required business owners to pay the Interest and Dividends Tax on earnings beyond what state tax collectors deemed reasonable.

New Hampshire does have the lowest overall sales tax burden in the country, since it doesn’t have any broad-based sales tax, nor does it allow municipalities to impose their own. The Granite State does impose levies on gasoline, diesel fuel, and cigarettes, keeping from a perfect ranking, according to Padgitt.

“New Hampshire tends to do very well when it comes to excise taxes. The cigarette tax is somewhat high, but most of these taxes do pretty well.”

New Hampshire and Delaware have alternated the top spot in sales tax rankings for several years.  Padgitt notes that New Hampshire has relatively low excise taxes on alcohol sales, pointing out that while Virginia also holds a monopoly on hard alcohol sales, its imposes stiff taxes that New Hampshire avoids.

New Hampshire’s high unemployment and property taxes pushed it well below the national average in those rankings. Its score was hurt by the complexity of the formula that state officials use to determine what rate each business will pay. The study also marked New Hampshire down for raising taxes on employers even when an employee quits or is fired for cause. But Padgitt says despite recent increases in the unemployment tax rate and base, the Granite State’s low unemployment rate kept it from losing too much ground.

“A lot of states have seen changes in this. States that have higher than the national average unemployment tended to fare worse, and states that were lower tended to fare better.”

The study also collected data on overall property tax collections, including state, county, and local taxes. Overall, New Hampshire ranked 35th in terms of total property tax burden. But it has the third highest property taxes as a percentage of income at 6.2%.

“There are two ways we’re trying to look at property taxes,” Padgitt explained. “We look at it per capita, and roughly as a percentage of the state GDP numbers.”

Padgitt argues that while the BPT and BET hurt New Hampshire economic competitiveness, lawmakers have managed to avoid the mistakes of its New England neighbors.

“New Hampshire is a state that has no other good business tax climates around it. You’re surrounding by poor tax climates,” Padgitt added. “That’s what makes New Hampshire interesting; it’s ability to hold it to a pretty good tax regime despite poor tax climates around it.”

New Hampshire (#7), Delaware (#8), and Pennsylvania (#12) are the only Northeastern states in the top half of the Tax Foundation rankings.

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