State revenue slumped after N.H. exempted internet access from 7% communications tax

Last modified: 9/15/2013 1:07:20 AM
The Legislature’s decision last year to exempt internet access from New Hampshire’s 7 percent tax on communications services led to a deeper-than-expected dip in revenue for the state government.

Last spring, officials estimated the change would mean $6 million less in state revenue as customers paid less under the Communications Services Tax. The New Hampshire Fiscal Policy Institute warned the hit could be $12 million a year.

In fact, revenue from the tax in fiscal 2013 was $22.1 million lower than the previous year, according to unaudited figures, and $25.2 million below the state’s original projection for the fiscal year that ended June 30.

“It should have been clear from the outset that making this change would have an effect on the budget. People use the internet,” said Jeff McLynch, executive director of the liberal-leaning Fiscal Policy Institute. “And as it turns out, this was a much more substantial hit than the Legislature anticipated.”

For many New Hampshire customers, the change has meant less expensive access to the internet. A 1998 federal law made it illegal to tax internet access, though New Hampshire and a handful of other states were exempt because they already had taxes in place.

Now that New Hampshire got rid of the tax, it can’t bring it back barring a change in federal policy – not that lawmakers would want to reverse course even if they could.

“It was the right thing to do,” said Sen. Bob Odell, a Lempster Republican and chairman of the Senate Ways and Means Committee.

John Beardmore, commissioner of the Department of Revenue Administration, said it’s impossible to say if the drop in revenue is entirely due to the new exemption for internet services. But, he said, “something happened, and the only thing that we know happened is the change to the law.”

Even under the new two-year state budget, with projections designed to take the decline into account, revenue is down. The tax brought in 13.1 percent less than expected in the first two months of fiscal 2014 – $9.3 million in July and August, compared with a planned $10.7 million and $12.6 million over the same period in fiscal 2013.

Linda Hodgdon, commissioner of the Department of Administrative Services, called that trend “a little disappointing.”

But Odell isn’t panicking.

“We knew there would be a decline, and when we put the revenue projection numbers together, we took that into account,” he said.

Odell added, “I see other taxes that are up. There is a pattern in taxes being up and down. . . . I don’t look at this as a particularly dire situation.”

Small but significant

The Communications Services Tax, which was created in 1990 as a levy on “those who use 2-way communications services,” represents a small chunk of the state budget. The $62.5 million it’s expected to generate in fiscal 2014 represents 2.8 percent of total revenue for the state’s general and education funds.

But given New Hampshire’s perennially tight budgets, the reduced revenue isn’t insignificant.

“It certainly creates greater stress in the budget, and it certainly creates trade-offs,” McLynch said.

The Legislature decided to act last year because, lawmakers said, the tax was being applied inconsistently depending on whether internet service providers bundled or unbundled charges for internet and other services.

“New Hampshire is not going to tax the internet,” declared Sen. Chuck Morse in April 2012. The Salem Republican was then chairman of the Senate Finance Committee, and now is Senate president.

At the time, Republicans controlled both the House and Senate. Then-Gov. John Lynch, a Democrat, allowed the bill containing the internet tax exemption to become law without his signature last June, near the end of the 2012 fiscal year.

The bill, which also contained several changes to business tax laws, had passed the Senate unanimously and cleared the House on a final vote of 244 to 46.

In fiscal 2012, the Communications Services Tax brought in $79.3 million, up from $76.5 million in 2011. In 2013 revenue from the tax was $57.2 million, according to unaudited figures.

Still, total state revenue came in $18.1 million above plan for fiscal 2013, not including money from legal settlements, according to the unaudited figures. Lower-than-expected revenue from the communications tax and the Medicaid Enhancement Tax was more than balanced out by stronger-than-expected revenue from business taxes, the meals-and-rooms tax, the real estate transfer tax and other state levies.

As of 2012, New Hampshire was one of just nine states that taxed internet access, according to the Fiscal Policy Institute. The federal Internet Tax Freedom Act barred such taxes except for those already in place when the law took effect in 1998.

That law is set to expire in 2014, though several bills have been filed in Congress to make the ban permanent. One was introduced in January by U.S. Sen. Kelly Ayotte, a New Hampshire Republican.

“E-commerce is thriving largely because the internet is free from burdensome tax restrictions. Unfortunately, tax collectors see it as a new revenue source, and they must be stopped,” Ayotte said in a statement at the time. “This legislation will provide certainty to the marketplace, helping the internet continue to be a driving force for jobs and growth.”

(Ben Leubsdorf can be reached at 369-3307 or or on Twitter @BenLeubsdorf.)

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