by ZACH MOTTL
New Hampshire is considering a potentially game-changing shift in its business tax code. In January, the House of Representatives will vote on whether or not to close the current “water’s edge” loophole written into state tax law. It’s an opportunity for New Hampshire to reclaim an estimated $177 million in lost annual tax revenues.
All that state lawmakers have to do is end the clever accounting tricks that allow foreign multinational companies to avoid paying the same business taxes as local companies.
What this really comes down to is ending tax discrimination against New Hampshire companies. Literally dozens of multinational firms regularly pay little or no state taxes each year. They do so through clever tax tricks — establishing subsidiary operations in low-tax countries such as Bermuda and the Cayman Islands. That allows them to transfer profits offshore from their New Hampshire sales and avoid state tax obligations.
This has been going on since 1986, when the Granite State shifted to a “water’s edge” tax formula. Essentially, foreign multinationals transfer their profits beyond the water’s edge — beyond the reach of tax collectors in Concord.
It’s a sweet deal for global multinationals, since it greatly reduces the taxes they owe on profits made in New Hampshire. Unfortunately, it also discriminates against local businesses that employ New Hampshire workers, invest in the state and pay a full tax burden. It’s why the state Supreme Court subsequently noted that the water’s edge rule was “adopted for the benefit of foreign businesses.”
It’s an unfair situation. New Hampshire’s domestic companies simply lack the resources to pull off such clever accounting tricks. And so they end up paying an oversized share of state business taxes.
My interest in the issue is personal. I’m the president of an Illinois manufacturing company, and we produce metal products used in various industries. When we make a profit, we pay a hefty state tax bill. But what’s frustrating is that we compete against foreign multinationals that use “water’s edge” to avoid paying the same, high Illinois corporate tax rate. That helps them undercut my company’s prices.
Essentially, the “water’s edge” rule encourages companies to move their profits out of states such as Illinois and New Hampshire — and out of the United States.
I’m hoping the New Hampshire House can set a precedent for the nation in January by voting to end the water’s edge rule and shift to what is called “worldwide combined reporting.”
Doing so would simplify New Hampshire’s business tax code. Consider, for example, that a company earning $1 million in profit from its sales in New Hampshire would simply be taxed on that $1 million. No more using tax havens to hide profits.
The Institute on Taxation and Economic Policy has already determined that if New Hampshire corrected this problem, it could gain an additional $177 million in annual tax revenues from overseas multinationals.
It’s time to stop tax discrimination against local businesses. This January, the House should take the bold step of correcting the water’s edge mistake. Doing so would mean foreign companies no longer taking advantage of New Hampshire — making money there but not paying the state’s taxes. Otherwise, New Hampshire’s tax code will remain tilted in favor of multinational firms at the expense of local businesses.
