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Dave Solomon's State House Dome: Business tax cuts cited for growth

July 09. 2017 12:30AM

DESPITE CUTS to the state's two primary business taxes that took effect in January 2016, the state will end the two-year budget cycle with robust growth in revenues.

Cash into the state treasury exceeded expectations by $166 million at the end of fiscal year 2016, on June 30 of last year. The preliminary numbers for fiscal year 2017, which just ended, put the actual revenue for the 12 months at $2.4 billion, or nearly $92 million higher than budget.

Numbers like that reinforced the argument for another round of business tax cuts, which formed the centerpiece of economic policy for the Republican majority in the state Senate throughout the session.

The strong revenue for the past two fiscal years assures that the second round of business tax cuts approved in 2015 will take effect on Jan. 1, 2018, with two more rounds to follow thanks to the budget Gov. Chris Sununu just signed into law.

By January 2021, the Business Enterprise Tax will be down to 0.50 percent, while the Business Profits Tax will decrease to 7.5 percent. That compares to a BPT of 8.5 percent and a BET of 0.75 percent at the end of 2015.

When all is said and done, the BET will be cut by 33 percent from 2015 levels and the BPT by more than 10 percent. The BET is essentially a payroll tax, while the BPT is a corporate income tax.

The experience from the first round of tax cuts reinforced the Republican position in the Senate that tax cuts promote growth, while Democrats attributed the revenue surge to a turnaround in the economy.

During the Senate debate on the budget cuts, Sen. Dan Feltes, D-Concord, claimed repeatedly that "no economists agree that cutting business taxes raises revenue."

The experience of the past two years has strengthened the arguments of people like Senate President Chuck Morse, R-Salem, who can point to the revenue growth and say "the proof of the pudding is in the eating."

In 2015, Gov. Maggie Hassan agreed to the first round of tax cuts only after the Legislature agreed to a "circuit-breaker," whereby the second round of cuts would not take place if the state did not meet its revenue goals for the two-year budget.

Now that those revenue goals have not only been met, but exceeded, the confidence in the power of tax cuts to generate growth was so high within the Republican majority in the Senate that House Republicans could not succeed in getting a similar circuit-breaker approved for the newest round of cuts.

Ways and Means Committee Chair Norm Major, R-Plaistow, developed a complicated set of triggers that would suspend the new tax cuts in the case of under-performing revenue, but could not get the Senate side of the conference committee to discuss the idea. It simply was never presented.

A 2013 study by researchers at the University of Richmond, titled "The Effect of State Corporate Income Tax Rate Cuts on Job Creation," compared the employment growth of states that enacted corporate income tax cuts in the past 23 years with those that made no changes.

"Overall employment comparisons from 1990 to 2012 suggest that a reduction in corporate income tax is associated with faster job creation," according to the study.

"The states that cut corporate income taxes started with slower employment growth than the states that made no changes. However, the growth gaps between the two groups of states disappeared in about five years after the tax cuts were made."

No matter what business tax rates are set at, revenues go up in a good economy and down in a recession, so the debate over whether there is a direct cause and effect between tax cuts and growth is likely to go on indefinitely.

Even the conservative Tax Foundation, which promotes tax cuts as stimulating growth, admits that both sides of the debate can find numbers to support their argument.

"The idea that taxes affect economic growth has become politically contentious and the subject of much debate in the press and among advocacy groups," according to the Tax Foundations most recent ranking of states based on business tax policies. "The facts should shed light on the debate. However, the economy is sufficiently complex that virtually any theory can find some support in the data."

And in case you're wondering, the Tax Foundation ranking for New Hampshire on its Business Tax Climate Index has moved up from eighth best in the country to seventh best since the first round of tax cuts was enacted.

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