NEW HAMPSHIRE is often said to be a no income tax state. But that is not exactly true.
While the Granite State does boast the absence of a tax on wage income, it still imposes a 5% tax on income earned from interest and dividends.
The interest and dividends tax is the reason New Hampshire appears with an asterisk by its name when listed as a no income state. To truly be considered a state that does not tax individual income, New Hampshire will have to eliminate its I&D tax.
There are now eight true no income tax states: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Like New Hampshire, for years, Tennessee was often mistaken for a no income tax state when, in fact, it was not. While Tennessee also did not tax wage income, it did impose a 6% tax on investment income, which was known as the “Hall Tax.”
In order to make Tennessee more competitive, Republicans in 2016 put the Hall Tax on the path to zero. The rate was reduced to 5% that year, and then reduced by 1 percentage point every year until it was eliminated entirely for tax years beginning January 1, 2021 and beyond. Thanks to their leadership, Tennessee can now honestly say it does not tax individual income.
New Hampshire should follow suit. While New Hampshire has remained a competitive state thanks to its overall low tax burden — it is one of nine states that do not tax wage income, one of five states without a statewide sales tax, and one of four states that also ban the collection of local sales taxes — it should not get complacent.
Recognizing that more and more people and jobs are moving into no income tax states, roughly a dozen states are currently exploring ways to eliminate their individual income taxes. This movement will only grow, and as more states begin eliminating their income taxes and joining the list of true no income tax states, the more the asterisk by New Hampshire’s name will become a problem.
Another reason to eliminate the I&D tax is that it would end a form of double taxation. The source of interest and dividends are corporate profits. Those profits are taxed at the entity level.
When I&D taxes are imposed, that same business income is taxed again, at the personal level. This is a practice that economists and tax policy experts agree should not exist in an optimal tax climate.
Fortunately, Rep. Norm Silber’s House Bill 568, which is expected to be voted out of the House Ways and Means Committee with an ought-to-pass recommendation in the coming days, would solve these concerns.
If enacted, this pro-growth bill would hollow out the I&D tax by increasing the threshold to be subject to it over the next three years. In the fourth year, the I&D would be repealed entirely, and New Hampshire would become a true no income tax state.
HB 568 has a strong chance at becoming law this year. It has the maximum number of possible co-sponsors, including Rep. David Binford, Rep. Erica Layon, Rep. Carol McGuire, Rep. John Potucek, Rep. Maureen Mooney, Rep. Al Baldasaro, Rep. Jason Osborne, Senator Denise Ricciardi, and Senator Gary Daniels.
Making New Hampshire a true no income tax state is also a big priority for members of House and Senate leadership, as well as Gov. Chris Sununu, who called for a phase-out of the I&D tax in his Executive Budget Summary released earlier this week.
This is great news for all residents of New Hampshire, particularly seniors. Because the I&D tax applies to income that is typically used as savings, eliminating the I&D tax would give relief to retirees who live off investments.
Now is the time for New Hampshire to become a true no income tax state. Doing so would send a strong reminder to all about the Granite State’s longstanding commitment to low taxes, and ensure that New Hampshire remains competitive over the long term. Even as more states eliminate their income taxes.