What policy option would do more to increase jobs and stimulate economic growth in New Hampshire – increasing tax credits for research and development, lowering businesses taxes or investing in roads, education and infrastructure?
This is precisely the sort of question lawmakers in Concord should be asking – and answering – before they act. In fact, it is the kind of question that needs to be asked whenever the state considers establishing or expanding a tax incentive program like the research and development tax credit.
Six years ago, New Hampshire re-established a research and development tax credit. Businesses could apply for credit against their business taxes based on the wages paid to employees who worked primarily on new products or processes. The tax credit was limited to $50,000 per business per year and the program as a whole was limited to $1 million.
Now a bill in the Senate would double the money available for credits and make the program permanent. As a result, New Hampshire would forgo $2 million in business taxes every year to encourage research and development.
Is that because the tax credits worked? Have more jobs been created? Have the businesses involved been able to grow in new ways?
Well, one thing is clear – businesses took advantage of the tax credit. According to the most recent data from the Department of Revenue Administration, 71 businesses applied for the tax credit the first year and 111 applied last year. The $1 million wasn’t enough to cover all the qualified applicants so the money was distributed on a pro-rated basis. The average tax credit ended up being about $9,000 last year.
Again, key questions remain – what did taxpayers get in return for waiving $1 million in taxes from a particular subset of businesses? If the state doubles the credits, does it get a greater benefit?
Lawmakers should ensure they have answers to these questions before expanding the program. At the very least, they should add provisions requiring some information to be collected as part of the tax credit expansion so New Hampshire taxpayers will know what benefit they are getting from this policy – and to make this standard practice whenever the state approves or reauthorizes a tax credit.
State economic development and revenue officials say they are planning a survey of businesses that use the credit and will begin collecting data on the impact of the tax credits. But participation would be voluntary so the data may be incomplete.
Last year, the Pew Center on the States released a study, “Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth,” that provides some useful guidance to states that want the best value for the tax dollars they forego via credits.
Here are some of the questions the Pew report suggests they ask:
- To what extent did tax incentives change businesses’ decisions, and how much did they reward what would have happened anyway?
- To what extent did the incentive benefit some businesses and individuals at the expense of others?
- How much of the benefit of the incentives flowed across state borders?
- When do the costs and benefits of the incentive occur and how long do they last?
- What were the adverse economic impacts of the tax increases or spending cuts made to fund the incentive? Do the benefits of the incentive outweigh those impacts?
- To what extent do the investments of companies receiving incentives filter into the broader economy, causing further economic gains?
It seems natural to ask questions about value when we talk about state spending. It’s equally important when we talk about reducing state revenue via tax credits. A tax credit that saves one person money can require another person to pay more.
By asking these kinds of questions, policymakers will eventually get a clearer idea of what works to stimulate growth and development in our state, what attracts businesses, what leads to new, good-paying jobs. They will need to require full participation from the businesses that benefit to get good data.
Gathering information will allow us to make the best policy judgments about tax credits going forward – doing right by New Hampshire’s taxpayers and its businesses. Anything less amounts to a tax give-away with no accountability.