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Tuesday, November 15, 2011

Is N.H.’s unique tax pledge an economic advantage?

EDITOR’S NOTE: This is the third in a six-part series examining various aspects of the “New Hampshire Advantage” and whether the Granite State has been able to maintain its competitiveness in these areas.

Across New Hampshire, the debate over taxes begins and ends with two words: “The Pledge.” And those words are as divisive as any in state politics.

Since the 1960s, candidates for state and local office have been taking The Pledge, vowing not to support any new sales, income or other broad-based tax. Supporters have long contended that the declaration preserves a key piece of the “New Hampshire Advantage,” creating a tax burden that measures among the country’s lowest, according to tax policy analysts.

“Just look around us. Massachusetts, Connecticut, New York, they have sales and income taxes … and they don’t have any better results,” said Jane Aitken, a board member of the Coalition of New Hampshire Taxpayers, which administers The Pledge. “Quite the opposite, in fact.”

But, with state revenues suffering under the national recession, opponents argue that The Pledge not only preserves an unequal tax structure, but it kills any hope for change.

“(The Pledge) doesn’t just limit the conversation. It shuts down the conversation entirely,” said Cathy Silber, executive director of Granite State Priorities, a Concord-based nonprofit that works to promote tax reform across the state.

“There’s no shortage of common sense in New Hampshire,” Silber said last month. “There surely are many common sense solutions that would work. We just have to be able to put them out there and discuss them intelligently.”

Unique structure

Analysts on both sides of the aisle agree, for better or worse, the Granite State’s tax structure is unique if nothing else.

New Hampshire is one of five states across the country without a statewide sales tax, and it’s one of nine with no statewide income tax, according to a study by the Tax Foundation, a tax policy group in Washington, D.C.

But it is one of only two states without either. And even Alaska, the other state without statewide sales or income levies, offers the option of a local sales tax to cities and towns.

Local communities do not have such an option in New Hampshire.

“It’s certainly a unique tax structure,” said Mark Rodden, an economist with the Tax Foundation. “There are states that have no sales tax, no personal income tax, no corporate income tax. But there are very few states that have none of these. … What are the consequences of this? People argue it on both sides.”

Supporters contend that the benefits of New Hampshire’s tax structure play out in the numbers.

Year after year, New Hampshire boasts one of the country’s lowest tax burdens, according to the U.S. Census Bureau. In 2009, the most recent data available, about 8.8 percent of Granite State residents’ total income went toward taxes, according to census data.

This number, which measures about 1.6 percent lower than the national average, ranks New Hampshire 46th among the 50 states. This not only benefits individual taxpayers, but serves as one of the state’s great selling points to businesses from across state lines, according to Charles Arlinghaus, president of the Josiah Bartlett Center for Public Policy, a conservative think tank in Concord.

“We don’t have a giant metro area like Boston, but what we do have is an economic competitiveness in those areas because of that tax advantage,” Arlinghaus said last month. “That’s become so important to our economy.”

Struggling to meet costs

Still other policy analysts contend the state rankings don’t paint a full picture of New Hampshire’s tax system, which struggles to meet the needs of many state residents, they argue.

Without sales and income taxes, local communities rely largely on property taxes to fund their municipal and school operations. About 62 percent of the state’s tax dollars were raised through property taxes in 2008, a higher ratio than any other state, according to a Tax Foundation report.

But by its nature, New Hampshire’s reliance on property taxes leaves the state constantly struggling to meet the state budget costs, according to critics.

First, property taxes, unlike an income tax, don’t reflect current economic changes, including population growth and inflation, which change the costs of state services, according to Silber, of the Granite State Priorities group.

“Income tax is generally responsive to those changes,” she said. “When the population grows, you have more taxpayers. If income goes up, you’re paying taxes on those raises.

But under New Hampshire’s system, the property tax raises only enough to maintain services without considering the growing costs.

“In New Hampshire, our revenues lag just behind,” she said. “It’s a jerry-rigged system.”

Further, while supporters contend that property taxes allow more local control over spending, opponents argue that it is an inherently regressive tax, which falls more heavily on those who can least afford to pay.

Because the property tax varies from community to community based on land values, those with less valuable properties are often charged at higher rates than those in property-rich communities to generate the needed revenues.

According to a report by the Institute on Taxation and Economic Policy, the bottom 20 percent of state earners pay 5.6 percent of their income to property taxes – more than three times as much as the top 1 percent of earners, who pay 1.7 percent of their income.

“It’s a regressive system,” said Jeff McLynch, executive director of the New Hampshire Fiscal Policy Institute, a Concord-based analysis group that focuses on tax impacts to the middle and lower classes.

“You could meet the needs (of the state) through a less regressive tax structure that doesn’t ask as much of the middle or lower classes.”

Across the country, many states employ a range of tax relief programs to ease the burden on low income earners. Often included among them is a homestead exemption on part of the value of the home, as well as a circuit-breaker, which limits the taxes paid on personal income. But New Hampshire doesn’t have a homestead exception, and it’s circuit-breaker is limited only to the state portion of the education property tax, according to McLynch.

“Under a more meaningful circuit-breaker program, property taxes don’t exceed a certain percentage of income,” he said. “We have a modest version of that. … It doesn’t go terribly far.”

Other solutions

Short of implementing a broad-based income or sales tax, state lawmakers could take a number of steps to generate additional revenues and create a more fair tax system, according to McLynch, of the Fiscal Policy Institute. They could return to an estate or inheritance tax, which would tax money passed from one person to another through a will, he said.

Or they could expand the state’s interest and dividends tax to include capital gains.

Still others are looking to bring an end to the discussion of an income tax before it starts.

No longer content with The Pledge, a contingent of Republican legislators, including House Speaker William O’Brien, of Mont Vernon, has proposed a constitutional amendment that would bar lawmakers from implementing an income tax.

The proposal, which passed the House Ways and Means Committee last month, is likely to go before the full House early next year.

If it passes the House and Senate with 60 percent approval, it would then go to voters on the November 2012 ballot.

“We know uncontrolled spending drives new taxes,” O’Brien said earlier this month. “Without some sort of constitutional prohibition, there may be those majorities who would just turn to (an income tax), change the nature of this state entirely.”

But others contend that, like The Pledge, such an amendment would only stifle conversation and leave the state with fewer options to address its taxing woes.

“You can’t just tie the hands of future legislatures; that’s crazy,” said state Rep. Christine Hamm, D-Hopkinton, who voted against the proposal last month in the Ways and Means Committee.

“This is a conversation that we need to have, and we’re going to be needing to have it for a long time to come,” added Silber, of Granite State Priorities. “This is our state we’re talking about, and we need to make sure all our options are available to us.”

Jake Berry can be reached at 594-6402 or jberry@nashuatelegraph.com.