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.

Why the Business Enterprise Tax is Good Tax Policy

Today, the Union Leader ran a story on the Tax Foundation’s latest State Business Tax Climate Index (pdf) (Disclosure: Wendy and I are the original co-creators of the Index).  Unfortunately, the Tax Foundation mis-characterizes the Business Enterprise Tax (BET) as a “modified gross-receipts tax” and partially blames it for New Hampshire’s low corporate income tax rank.

The BET is technically an “income-additive value-added tax” (pdf) that only taxes consumption and is model for good tax reform.  When it was first enacted in the early 1990s, the BET improved NH’s corporate tax climate because it was used to reduce/eliminate many other business taxes.  For example, the corporate income tax rate was lowered to 7 percent.

However, since then various money-grabs by the state has raised the corporate income tax rate back to its current nose-bleed level of 8.5 percent.  It’s not the BET that is the problem, it is over-spending by the state government.

Bill Ardinger, one of the architects of the BET, wrote an excellent article summarizing the ten benefits of the BET as a model for tax reform which are shown below (read the whole article here):

  1. It is an economically neutral tax.
  2. It is a simple tax to compute and administer.
  3. It is a fair tax.
  4. It is a comprehensive tax.
  5. It is deductible for federal income tax purposes.
  6. It was enacted as a revenue-neutral tax reform.
  7. It avoided an “all at once” academic approach to tax reform.
  8. It addresses the jurisdictional challenges to traditional tax systems resulting from changing economies and technologies.
  9. It is a financially stable tax.
  10. It is a politically stable tax.

Ardinger has also pitched the BET to other states as model tax reform legislation.  Here is his presentation (pdf) to the Pennsylvania Business Tax Reform Commission.