A Business Flat Tax: True Tax Reform for New Hampshire

Hammer365: 087/278 Taxes Are Done!

Check out our latest study–A Business Flat Tax: True Tax Reform for New Hampshire. Here is Executive Summary:

The holy grail of tax reform is a system that would tax all consumption in the economy a single time. Only one tax reform plan truly meets that definition and has become popularly known as “The Flat Tax.” The Flat Tax was first introduced by economists Robert Hall and Alvin Rabushka in a book by the same name published by the venerable Hoover Institution. Various attempts to enact the Flat Tax at the national level have been attempted such as the Armey-Shelby Flat Tax plan (named for Former Representative Dick Armey of Texas and Senator Shelby of Alabama and the 1996 Steve Forbes Flat Tax plan.

Unfortunately, the broader national tax reform movement has made little progress at the state level. Most state tax reform efforts have simply involved shifting one existing tax into another existing tax with marginal changes that lack a fundamental reexamination of the overall tax structure.

One significant exception to this was New Hampshire’s adoption of the Business Enterprise Tax (BET) in 1993. The BET was created from the ground-up with the goal of creating a true consumption tax. Thanks to the pioneering efforts of Bill Ardinger, Stan Arnold, and others, New Hampshire made a tremendous leap forward for the state tax reform movement.

In the intervening 20 years, however, the tax reform movement in New Hampshire has remained incomplete and at times has moved backwards as both the BET and Business Profit Tax (BPT) tax rates have been increased solely as a means for higher tax revenue. Each increase in the tax rate represented a squandered opportunity to completing the path toward a true consumption tax.

Now is the time to continue the push for tax reform as New Hampshire’s economic growth has downshifted under the weight of higher tax rates. In fact, after the 1993 tax reform the average annual growth rate was an astounding 3.8 percent, but has since fallen to an anemic rate of only 1.1 percent. This downshifting has cost New Hampshire households dearly in lost income, which is the true cost of higher taxes.

This study will explain how folding the existing tax structure, including the BPT, BET, the now-defunct Medicaid Enhancement Tax (MET), and harmonizing the Interest and Dividends (I&D) tax rate, into a new Business Flat Tax (BFT) would make another dramatic leap in the journey for tax reform. The BFT takes its cues from the national Flat Tax plan that would tax all consumption in the New Hampshire economy a single time at the business level.

New Hampshire is nationally lauded for its low overall tax burden. The enactment of the BFT would also propel New Hampshire’s tax structure into the same level of prominence.

Gubernatorial Candidate Andrew Hemingway has already seized our tax reform plan as a way to move New Hampshire’s economy forward. 

Download a pdf of the study here.

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NH Does Not Need an Estate Tax

This op-ed by the American College of Trust and Estate Counsel sums up why:

For reasons of tax policy, we oppose the New Hampshire estate tax proposed in Senate Bill 450.

If adopted, the proposed statute would impose an 8 percent tax on all estates over $2 million passing to anyone other than a spouse. But the adoption of an estate tax will not provide a net benefit to the state.

The proposed tax will affect only the very wealthy who live here or who have property here. These individuals usually can choose where they live, and they can decide whether they want to maintain expensive properties in New Hampshire.

Many of the affluent clients we advise have homes in Florida or other warm-weather states (including California, Arizona and South Carolina) that have no estate tax. Our clients with homes in Florida often ask whether they should be New Hampshire residents or Florida residents. When the estate tax is a neutral issue (meaning neither state has such a tax), New Hampshire and Florida are more or less equal. Not surprisingly, our clients with New Hampshire connections tend to remain New Hampshire residents or to retain residential property here because they are not concerned that it will be exposed to taxation when they die.

The other New England states all have estate taxes. Many people choose New Hampshireas their state of residence rather than one of our neighboring states (notablyMassachusetts) because of the absence of an estate tax. Often, these are retirees who would not otherwise be here. Accordingly, we are concerned that if we adopt the proposed estate tax, New Hampshire will lose its favorable position as a place that does not penalize its wealthy property owners when they die. This could cause people who can conveniently do so to move their state of residence to Florida or elsewhere – or cause others not to move to New Hampshire in the first place.

Here are folks who are in the trenches telling us that “taxes matter” in relocation decisions.

Another Reason why New Hampshire Should Avoid the Sales Tax

The Kennebec Journal in central Maine is reporting a new plaque for Maine tax officials–a computer program called the “Sales Tax Zapper” designed to avoid Maine’s sales tax:

But some lawmakers are concerned the state may be losing significant revenue from the latest computer technology, called “zappers” because they alter sales records in a more subtle way that still yields a lot of cash for the seller.

“It’s clearly subversive and against our process of treating people fairly, equitably and everyone paying their fair share of the tax burden,” said Rep. Garry Knight, R-Livermore Falls, co-chairman of the Legislature’s Taxation Committee. “I would suggest that zappers be outlawed in this state.”

He said his panel has not looked at the expanding use of technology to cheat on tax laws, but he said if it is happening in other states, Maine should assume some is happening here.

With a zapper program, a $6 burger-and-fries combo at a restaurant, for example, could be altered by the software to reflect a $4 burger sale. In Maine, that would mean 14 cents going to the restaurant owner that should be paid in taxes. In other states, that has added up to a lot of lost revenue.

A retailer can have the program change the sales price of an item. For example, a $20 shirt is reported as selling for $18. In Maine, that’s a loss of a dime; but all of those nickels, dimes and pennies add up.

A retailer can have the program change the sales price of an item. For example, a $20 shirt is reported as selling for $18. In Maine, that’s a loss of a dime; but all of those nickels, dimes and pennies add up.

“Tax evasion is something that we always should take seriously,” said Rep. Seth Berry, D-Bowdoinham, the lead Democrat on the Taxation Committee. “Zappers are something that Maine Revenue Services is not able to track. It is a very difficult enforcement problem.”

He said Maine should watch what other states are doing and consider adopting policies and laws that seem to work the best. He agreed Maine may want to outlaw the computer programs, although he is not sure how effective that may be.

Of course this cat-and-mouse game between businesses and the Maine Revenue Service also increases tax compliance costs for everyone. Now aren’t you glad New Hampshire doesn’t have a sale tax 🙂