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From Governing’s
”We believe,” says Neal Kurk, who chairs the Finance Committee of the state House, “that each citizen, if not adversely affected by government action, is capable of achieving his maximum God-given potential, and the purpose of state government is to facilitate that. As a result, we believe in a smaller role for government ... so we don’t interfere in the activities which will maximize their potential.”
Nothing wrong there. By all accounts, the state’s Department of Revenue Administration has historically done a reasonably good job at collecting the nearly 20 miscellaneous taxes upon which its revenues are based, including levies on hotel rooms and restaurant meals, gasoline, and business licenses and profits. Until relatively recently, this one-of-a-kind tax system seemed sufficient to support the state indefinitely. But there was a simmering problem. Unable to draw any significant help from the state treasury, localities were forced to pay for education almost entirely on their own. Pupils in the wealthier areas of the state were treated to a far more elaborate education than their counterparts from the less flush districts. In 1999, the state Supreme Court decided that was unconstitutional and forced New Hampshire to start kicking in more money. The legislature ultimately had to put about $900 million a year into local education — roughly half of which had to come out of new revenues. Most of that came from increases in the taxes on business profits, telecommunications and real estate transfers. To derive sufficient funding to satisfy the court, New Hampshire also had to utilize a new state property tax to replace local school property taxes, although they’re still assessed and collected by localities. This move split the state into property-rich communities that sent more to Concord than they got back — the so-called “donors” — and poorer ones that are net beneficiaries of the new system. The donors are miserable, in part because high property values don’t necessarily equal greater wealth. “It’s driving everyone nuts,” says John Crosier, president of the Business and Industry Association of New Hampshire. “The resort communities around mountains and lakes have escalating property values and taxes, and it’s hammering the low- and moderate-income people there.” For years, some politicians have encouraged the state to establish an income tax. In New Hampshire, these politicians are otherwise called “losers.” Last year’s Democratic gubernatorial nominee, Mark Fernald, argued that “we have been living with a tax myth for years in New Hampshire ... that we run the whole state on the cheap.” Fernald lost by almost 100,000 votes out of about 440,000 cast. Since the state has no broad-based income or sales tax, it didn’t enjoy the same explosion in revenues as its neighbors did during the economic boom of the late 1990s, and its $40 million shortfall for the upcoming year is proportionately smaller than in most places with a conventional revenue structure. Leaders believe they can close that gap without any dramatic change to the system. Meanwhile, the bond rating agencies have accepted the Granite State’s singular approach. “They see that we don’t fit into any of their models,” says Ross Gittell, professor of management at the University of New Hampshire. “And the governor says, ’We’ll balance our books.’ And Wall Street trusts New Hampshire.” For the long term, however, there are many open questions about New Hampshire’s ability to maintain the status quo. Will the high property and business taxes necessitated by the Supreme Court decision stifle economic growth? Will the meager array of public services be a disincentive to continued in-migration of the well-educated citizens the state’s economy needs? Will short-changing the public universities — New Hampshire has the nation’s lowest level of student aid — eventually damage the quality of the labor force? Such issues will linger on for years. Of more immediate concern is a different question: How is the state going to make up for the revenues it lost with its recent decision to eliminate the inheritance tax? The estate tax in New Hampshire has always been peculiar — lineal heirs such as sons and daughters didn’t have to pay, while others did. But instead of fixing the oddities of the law, the legislature is getting rid of it completely. A state with a more diverse tax structure might be able to do that and not notice much of a hole in the budget. But New Hampshire needs just about all of its array of quirky taxes to make ends meet. “The legislature created a $100 million problem,” says Lou D’Allesandro, chairman of the Senate Ways and Means Committee. “It’s a phased-in repeal, but the problem is going to exacerbate as we move through the next biennium, because we have been spending that estate tax money and it’s gone.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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nlike politicians in most states, those in New Hampshire love to talk about their state motto, “Live Free or Die.” What they really mean is “live tax-free” — or as close to it as can possibly be arranged. Theirs is one of only two states in the nation with neither a broad-based income tax nor a significant sales tax. But unlike the other one, Alaska, New Hampshire isn’t floating on a sea of oil. Its only real option has been to keep state government as small as possible.