The interest and dividends tax has quietly emerged as a significant campaign issue. (N.H. Department of Revenue screenshot: www.revenue.nh.gov)
As Democrat Joyce Craig and Republican Kelly Ayotte hone their final pitches to voters over who should be the next governor, one topic has proven particularly contentious: taxes.
Craig has assailed New Hampshire Republicans’ moves to repeal the interest and dividends tax, which has been phased out since 2022 and will be eliminated for the 2025 tax year and beyond. The Democrat has portrayed the move as a handout to the wealthy and said she would push to restore the tax and modify it to focus on higher earners.
“I’m open to increasing the threshold and looking at the top 1 percent and that’s $80 million,” Craig said at a debate Thursday at the Manchester Chamber of Commerce, referring to the amount of revenue she expected her tax to bring in.
Ayotte, meanwhile, has attacked that stance and used it to say that Craig supports raising taxes.
“What is open?” Ayotte said. “Open means hold on to your wallet folks, because that is so nonspecific.”
Amid a housing crisis, inflation concerns, and continued worries over abortion rights, the interest and dividends tax has quietly emerged as a significant campaign issue.
Here’s what you need to know about it.
What is the interest and dividends tax?
The interest and dividends tax is a state tax on distributions, dividends, and interest income often accrued from investments.
Any New Hampshire resident who received more than $2,400 per year from any of those categories – or $4,800 per year if filing jointly – must pay the tax.
Eligible income under the tax includes dividends, or earnings distributions sent by companies; and interest, which can encompass any interest payments by banks, credit unions, and trust companies, as well as any personal life insurance interest, personal loans, annuities, and income from trusts, among other areas.
For decades, the tax levied 5 percent of that income. As it was phased out, it dropped to 4 percent for tax year 2023, 3 percent for 2024, and will be zero percent for 2025. That means this coming April, when residents file their 2024 taxes, will be the last time Granite Staters will need to pay the tax.
How many people pay the tax?
Most Granite Staters do not pay the interest and dividends tax, data shows.
About 10 percent of all tax filers in New Hampshire paid the state interest and dividends tax in the 2021 tax year, according to data from state and federal agencies.
There were 73,054 filers of the interest and dividends tax in tax year 2021, and 729,290 filers of federal income tax that same year, noted Phil Sletten, research director at the New Hampshire Fiscal Policy Institute, in an interview.
But that represents the number of filed taxes; not everyone who filed needed to pay the tax. About 7.8 percent of people that year paid something toward the interest and dividends tax.
The number of filers encompasses joint filers and individual filers, so it is difficult to know how many individual people paid the interest and dividends tax. But the comparison gives a sense of scale, Sletten noted.
How is the tax distributed among income levels?
The tax is largely paid by upper income taxpayers.
An analysis of the 2020 tax year by the Fiscal Policy Institute, found that 52 percent of the revenue from the tax that year came from filers who had made at least $200,000 in interest and dividends income, while another 38 percent came from those who had made between $20,000 and $200,000 in similar income. Those numbers do not reflect any potential additional sources of income for those same filers.
The same analysis suggested that the repeal of the tax would benefit higher income households more. The institute found that 90 percent of the tax was paid by the top of 20 percent of income earners in the state, and that 58 percent of the tax was paid by the top 1 percent of income earners.
Why is the tax going away?
Republican lawmakers began phasing out the tax in the 2021 budget, arguing that it wrongly impacts people using investments as retirement income. They have said that while wealthy investors do pay the tax, it can also sweep up people with modest investment accounts, too.
They also made a broader point: New Hampshire, long known for having no broad-based income tax, should eliminate the interest and dividends tax as the last income-based tax on the books.
Democrats have countered that the tax largely affects higher income people and that it should be tweaked so that it exempts more lower income people, but not repealed entirely.
One bill last legislative session, House Bill 1492, would have restored the tax to 5 percent but raised the threshold so that it affected individual filers making at least $7,500 in interest and dividend income – tripling the current minimum amount. The House sent that bill to interim study in February, a move that stopped it from passing.
How much money does the tax bring in to the state?
In the state fiscal year 2023, which ran from July 2022 to June 2023, the tax brought in $147.3 million.
In the 2024 fiscal year, the tax collected $184.3 million, even though the percentage is lower. Those numbers are preliminary; they are being audited and their final totals will be released in December.
The revenue the tax brings in is comparable to the annual budget of the Department of Corrections, which received $177.3 million for this fiscal year, as well as the whole of the Division for Children, Youth, and Families, which received $167 million, Sletten noted.
Why has the tax collected more revenue recently?
It may seem counterintuitive that the tax appears to have brought in more revenue in the last full fiscal year even as it is being phased out. But much of the bump can be attributed to higher federal interest rates, which have led to higher returns on some investments.
In May 2024, just after tax day, the Department of Administrative Services noted in a monthly report that the interest and dividends tax had brought in 54.2 percent more revenue at that point in the fiscal year than expected.
That boost “was primarily due to an increase in the number of filers due to higher interest rates increasing interest and dividends payments resulting in an increase in returns and extensions,” the department wrote, citing an analysis by the Department of Revenue Administration.
“Further, tax notices increased due to audit activity,” the summary continued.
In other words, higher interest rates led more people to hit the threshold to pay the tax.
What have the gubernatorial candidates said about the interest and dividends tax?
Craig has been critical of the repeal of the tax, framing it as a tax break for millionaires.
She has suggested she would restore it while raising the threshold of who needs to pay it, but has not indicated a specific level at which the threshold should be raised.
Democrats have sought to present the tax cuts as unfair to lower income residents who aren’t affected by the interest and dividends tax, arguing that the elimination will lead to smaller state budgets that could force cities and towns to raise local property taxes.
“If Kelly gets her way, the burden to strengthen our public schools and other essential services will continue to be pushed onto cities and towns, which will drive property taxes even higher for hardworking Granite Staters,” reads an Oct. 24 press release from the Craig campaign. “Only Joyce Craig will make sure the wealthiest pay their fair share and will work to bring costs down for hardworking Granite Staters.”
Ayotte and Republicans, meanwhile, say the interest and dividends tax should have been repealed, and have attempted to use Craig’s positions against her, portraying her stance as a move to raise taxes for “seniors, small businesses, and retirees,” as one recent email from the Ayotte campaign states.
“Joyce Craig is doubling down on her plan to bring back the interest and dividends income tax, but the cost of her tax hike continues to be a moving target,” the email added.