New Hampshire’s New Taxes Bad for Businesses and Poor

July 2, 2009

Gov. John Lynch (D) signed into law the state’s budget, which increases the cigarette tax by one-third, to $1.78 per pack, increases restaurant and hotel taxes to 9%, and imposes a 5% dividends tax on limited liability companies (LLCs). A new 10% tax on gambling winnings over $600 was also enacted, as well as increased car and boat registration fees.

The cigarette tax is an easy political gimmick because it is targeted at a minority; however, it is poor tax policy. For Governor Lynch, it’s nice to pretend that cigarette taxes will come out of the pockets of Big Tobacco. In reality, cigarette taxes hit mostly low-income individuals more than any other income group. Notice, however, that N.H. has been careful to keep its rate lower than Massachusetts’s so as not to stifle the bargain hunting traffic coming across the border to shop.

One tax which has seen some resistance from the business community is an extension of the Rooms Tax to campers. Typically, room and meal tax just applies to places like hotels. David Edgerly, manager of Great Bay Camping in Newfield N.H., says a 9 percent meal and room tax increase could put many campgrounds out of business. However, principled tax policy calls for all lodging to be taxed equally, so the state is not without justification for this change.

This budget continues the recent trend in the Northeast of taxing out-of-staters. Maine just passed numerous items specifically designed to disproportionately tax tourists such as car rentals, entertainment and recreation services. My colleague Kail Padgitt predicted in a recent report that “this tax-your-neighbor strategy is likely to draw retaliation from neighboring states and distort economic decision making.” Were New Hampshire legislators more comfortable hiking taxes on tourists because of this trend?

Governor Lynch is imposing a 5% dividends tax on the owners of limited liability corporations (LLCs). While all types of businesses, including C-Corporations, S-Corporations and LLCs, pay the same state business profits and enterprise tax in New Hampshire, the owners of LLCs have been the only ones to avoid tax on any interest or dividends earned. No longer.

By extending the 5% interest and dividends tax to include the owners of LLCs, the state seems to be moving closer to treating three business structures equally. People who accuse the state of levying a double tax are correct: by taxing business income at the entity level and then again at the personal level, the state is double-taxing business income. However, there’s no good reason to favor LLCs over other business forms. Unsurprisingly, it has been the fastest growing business structure in the state.

Ideally, the goal should be to create a tax structure which fosters competition and should be neutral to firm structure. If this truly closed loopholes, it ought to reduce the rate as well in order to encourage a competitive business environment. This tax may move closer to treating firms equally. However, there are many variables in corporate laws that create distortions outside of just the tax rate. Preferably, there should be a low, broad rate which is neutral to firm structure, and business owners would choose the best firm structure for other reasons than tax liability.


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