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December 10. 2013 6:24PM

Charles M. Arlinghaus: How to do tax 'reform' the right way


 

Rep. David Hess wants to tax me, and he is going about it the right way. Tax reform is too often a sneaky way of raising taxes. New Hampshire's history of recent tax reforms shows it doesn't have to be. Tax reform, simplification and loophole elimination often fail at the state and federal levels because the politicians use reform as a guise to increase revenues. Rep. Hess is not doing that and should be applauded for that, whether you like his proposal or not.

New Hampshire's business enterprise tax is assessed on every business enterprise in the state, profit or non-profit. It is a tax assessed on almost everyone, but at a very low rate: just 3/4 of a percentage point. There is only one exception. Those non-profits with a federal 501 (c)(3) tax status are exempt. That includes many small charities such as food banks, but also educational foundations, think tanks like mine, many large hospitals, and some colleges.

Some tax advocates would close the exemption to get more money for the state. Hess would not. Instead, he would eliminate the exemption, but use whatever additional revenue it raised to reduce the overall rate, which would make his proposal revenue neutral. This is important.

Taxpayers are rightly skeptical of any proposal that claims to be seeking fairness, but which has the happy-for-the-tax-collector accident of taking more of our money overall. Too many tax hikes pretend one motivation when the true driver is more money for legislators to spend.

The two most successful tax reforms in the state's history did not do that. They tried to give taxpayers assurance that the state was not grabbing money.

The creation of the business profits tax in 1970 included the elimination of 13 separate taxes on capital. Gov. Walter Peterson wanted to grow the economy by eliminating antiquated capital taxes that discouraged start-up companies from locating here. One new tax was created, but 13 others eliminated.

The BET itself was created in 1993 as a reform of the BPT. Both state and federal tax changes had so riddled the tax with loopholes that 1/2 of 1 percent of taxpayers paid 70 percent of the BPT.

Then-Gov. Steve Merrill supported reform and insisted that any change be revenue neutral. By repealing other taxes and cutting the BPT by 12 percent, the BET reform was actually a small net tax cut.

The debate then was about getting tax policy right. Taxpayers could have confidence in the sponsors' motives because the change was not getting them more money to spend. Rep. Hess's proposed change is similar. Any additional revenue would be offset by a rate cut for everyone. That is precisely the right change, which assures us that Rep. Hess is focused on tax policy and not a money grab.

The other consideration is current tax policy. No tax is imposed in a vacuum. Various classes of taxpayers have additional burdens that have to be taken into account. For example, it probably doesn't make sense to exempt taxpayers like my small organization simply because we happen to be a 501(c)(3) instead of a 501(c)(4). There is no counterbalancing tax I happen to pay. If some non-profits pay — and most do — then perhaps all should.

However, do taxpayers within the exempt group pay other taxes? Hospitals, for example, are taxed significantly under a hospital-only tax called the Medicaid Enhancement Tax (MET). We previously did not care because this was a fake tax that was transferred back to the hospitals under a different name. But in 2011, it became a real tax and a fairly large one.

If it is legitimate to have a very narrowly restricted tax like the MET, which only 26 businesses pay, should one of the taxes be credited against the other? As an example, we do that with insurance taxes. Insurance companies pay a premium tax. To avoid double taxation — or something that functions as double taxation even if there is a technical difference — those taxes are credited against their business taxes.

I'm not necessarily endorsing the extension of the BET to all of those currently exempt, though I find no good reason my organization should be exempt. Even if the exemption is repealed, many new taxpayers may need to be extended other credits because of the other aspects of our system. It may turn out to be a simpler enforcement mechanism to just keep the exemption.

Regardless, Rep. Hess has made an important statement about tax policy that the right and the left should agree on. Tax policy changes can and must be debated in a revenue-neutral context. It's the only way we'll ever trust you.

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Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.


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