When the House Ways and Means Committee meets on Thursday, they will consider the most unusual of legislative proposals: A tax hike supported by Republicans.

Well, sort of.

The issue is business taxes and how companies who operate in multiple states pay them. For years, New Hampshire and most other states used a three-factor test to evaluate how much of a multi-state business’s revenue was taxable in their state: Payroll, property, and sales.

But over the years, about half of all states — including Massachusetts, Maine, Rhode Island, and Connecticut — have gone to what tax professionals call the “Single Sales” rule, using just the percentage of sales in each state to determine their tax burden.

New Hampshire’s rules are scheduled to change on January 1, 2022, however, thanks to the 2019 budget deal, when the state senate stuck in the “Single Sales” rule over objections from the House. Businesses are already conducting business based on the new rule, which will almost certainly lower taxes on large, capital-intensive businesses like manufacturers.

On Thursday the House Ways and Means Committee is taking up HB 281, which would postpone the effective date of the rule change until January 1, 2026.  Critics say that, for New Hampshire-based businesses that have employees and facilities located here, this delay will result in a sharp tax increase. The change would effectively pull the rug out from under the planning that these businesses have done to bring new jobs to New Hampshire.

So why are the notoriously business-friendly Republicans on the Ways and Means Committee considering this bill?

“We’re not like those other states,” says committee vice-chair Patrick Abrami (R-Stratham). “We don’t have a sales or income tax to fall back on. We’ve got to get the revenue right.”

Abrami told NHJournal he doesn’t object to the Single Sales rule, but he has concerns both about how it was implemented and the lack of data about its impact on revenue in New Hampshire’s unique taxation system.

“Look, we rely on business taxes, that’s just how it is. And we also have the ’80-20′ effect — about 80 percent of the business taxes are paid by 20 percent of the bigger businesses.

“Most are manufacturers who sell a lot of their product in other states, so we need to understand how much [revenue] we’re giving away,” Abrami says.

The bill is co-sponsored by Democrat Richard Ames of Jaffrey, but the committee as a whole wanted to take it up, according to Abrami. He also notes there won’t be a vote on Thursday, just a hearing — something the senate measure implementing the “Single Sales” rule never received when it was put in the budget.

And, he says, the committee will also be considering a bill to cut the state’s Business Profits Tax and Business Enterprise Tax across the board.

“I’m so pro-business, it hurts,” Abrami insists.

But the fact remains that keeping the current system makes New Hampshire less competitive. “The tax burden is falling unfairly on businesses domiciled in New Hampshire, and that’s just not fair,” said Rep. Alan Bershstein (R-Nottingham), who also serves on the committee.

Under the three-factor approach New Hampshire currently uses, businesses that have more employees and facilities in the state would owe more taxes.  So, if a business moved employees to the state, it also raised its own taxes.

But under a Single Sales rule, bringing new jobs and plants to the Granite State won’t increase taxes. In other words, critics say, Single Sales eliminates a ‘jobs penalty’ that harms local businesses.  Businesses with few employees or jobs in New Hampshire but who does significant business here (that is, out-of-state businesses) would pay slightly more tax under the Single Sales rule.

One change that’s already in place is how multi-state service businesses are taxed in New Hampshire. The state just shifted from a cost-of-performance state (you’re taxed where the service is performed) to market-based sourcing, which taxes businesses in the state where the benefit of services was received.

This change, Abrami says, is yet another reason to push back the start date of the Single Sales rule. “We’re still waiting on the numbers from this change. We just want some breathing room to see the results from that.”

Abrami says he’s already planning to amend his bill to shorten the delay, perhaps from four years to two, though he declined to commit. And, he noted, it’s unlikely the state senate will accept any delay, which means the new rule is likely to take effect in less than a year regardless of what the Ways and Means committee decides.

One wild card is the Sununu administration. The governor hasn’t spoken out on this potential tax hike, and there’s some thinking that his Department of Revenue Administration (DRA) might be ok with delaying the rule another year or two as the impact of COVID continues to be felt on the state budget.

Supporters say the issue has been studied for more than two decades.  Reports often recognized the national trend toward Single Sales and the positive economic development impacts. The DRA has issued analyses showing that Single Sales sometimes would have resulted in greater total revenues, and other years would have reduced total revenues.

In a sense, the entire issue comes down to betting on growth — competitive tax rates will bring more large employers and capital-intensive businesses to the state — vs. holding on to the revenue the state has now.

Which way will House Republicans bet?

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