Tax Analysts Blog

New Hampshire’s Value Added Tax

Posted on Aug 26, 2013

New Hampshire has no income tax and no sales tax. So it should come as no surprise that the Granite State relies heavily on alternative sources of revenue. Two of those are the state’s Business Profits Tax and Business Enterprise Tax.

The Business Profits Tax is an 8.5-percent tax on the profits of all business with more than $50,000 in annual receipts regardless of legal form. So unlike most business profit taxes that apply only to C corporations, the New Hampshire BPT applies to C corporations, S corporations, limited liability companies, partnerships, and sole proprietorships. The BPT alone is enough to earn New Hampshire credit as one of the most innovative states when it comes to taxation.

But where New Hampshire really shines is with its Business Enterprise Tax. Like the BPT, the BET applies to all business regardless of legal form. Newly-elected Republican Governor Steve Merrill was the driving force behind original passage of the tax in 1993. The original rate was 0.5 percent. It is now 0.75 percent. The tax base is the sum of: (1) compensation paid to employees; (2) interest paid on debt; and (3) distributions to shareholders and owners. Except for the exclusion of undistributed profits from the tax base, the sum of these components is a firm’s value-added tax.

There are at least two reasons the New Hampshire BET does not resemble the value-added taxes used by most every other country in the world except the United States. First, it is calculated by addition rather than by subtracting business purchases from business receipts. Second, it is paid by business and is not separately stated from prices that consumers pay.

From an economic perspective, a consumption tax like the value-added tax is the best way to raise revenue. Unlike the income tax it does not penalize saving and investment. And unlike the corporate tax it does not favor debt over equity and unincorporated businesses over corporate business.

If the United States really wants to vault ahead of other nations on tax competitiveness, it needs to seriously think about greatly downsizing corporate and individual taxes and replacing them with consumption taxes. Michael Graetz of Columbia Law School has proposed such a system, and so have Alan Viard and Robert Carroll of the American Enterprise Institute, to name a few.

Despite all of its pro-growth benefits, conservatives object to the idea of a value-added tax because they view it as a money-machine to fund expanded government. But it ain’t necessarily so, as New Hampshire’s experience shows. If a conservative, anti-tax state like New Hampshire can successfully implement a value-added tax, Republicans in Washington D.C. should at least give it some thought instead of rejecting it out of hand.

Read Comments (2)

Emsig BeobachterAug 26, 2013

Liberals view the VAT as regressive. The U.S. will adopt a VAT when liberals
view the VAT as a "money machine" to fund social programs and conservatives
view the VAT as a regressive tax.

The VAT BastardAug 27, 2013

"If the U.S. really wants to vault ahead of other nations on tax
competitiveness, it needs to seriously think about greatly downsizing corporate
and individual taxes and replacing them with consumption taxes." Marty ... one
can only hope that our elected officials are listening. All roads lead to VAT.
The obstacle is not economics, it's myopic politics.

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