New Hampshire proves---avoids offshoring and partnership form avoidance
David Gamage 17, Professor of Law at Indiana University-Bloomington, Darien Shanske, Professor of Law, UC Davis School of Law, 2017, “Tax Cannibalization And Fiscal Federalism In The United States,” Northwestern University Law Review, 111 Nw. U.L. Rev. 295, lexis
Nevertheless, there are numerous potential alternative ways in which state governments might implement what could be thought of as variations or hybrids on corporate or personal income taxes or on indirect taxes. To consider one example: in addition to its more traditional corporate income tax that mostly piggybacks on the federal government’s tax-base-definition rules (called the “Business Profits Tax”), New Hampshire also levies another business-entity-level tax (called the “Business Enterprise Tax”).172 This Business Enterprise Tax is levied on all business entities conducting substantial activity in New Hampshire—including both corporations and partnerships—on a base consisting of “the total amount of interest paid, dividends paid or accrued, and wages paid or accrued” within New Hampshire.173
For the purposes of assessing tax cannibalization, the key question in considering alternative forms of taxation is the extent to which these alternatives do or do not replicate the flaws in the federally defined corporate and personal income tax bases that result in vertical distortions. New Hampshire’s Business Enterprise Tax bears some resemblance to both more traditional corporate174 and personal175 income taxes. But New Hampshire’s Business Enterprise Tax most likely does not replicate at least some of the flaws in the federally defined corporate and personal income tax bases that result in vertical distortions.
For a relatively simple example as to why, consider that the Business Enterprise Tax applies to partnerships as well as to corporations, and so— in contrast to state corporate income taxes that piggyback on the federal government’s base-definition rules176—the Business Enterprise Tax presumably does not induce the distortionary response of taxpayers shifting from corporate to partnership organizational forms. Similarly, because the Business Enterprise Tax is not based on measuring either business profits or corporate income, it presumably does not induce the sort of profit shifting responses that shrink the federally defined corporate income tax base.177