April 23, 2018
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Learning from New Hampshire’s tax scheme: It’s complicated

Eric Zelz | BDN
Eric Zelz | BDN

To small-government conservatives, New Hampshire is the all-star state that gets it right. To liberals who believe taxes and government spending are essential for a vibrant economy and healthy society, New Hampshire is that annoying pebble in your shoe that you can’t quite shake loose.

It’s not hyperbole to say New Hampshire is a singular case among the nation’s 50 states. It is one of only two states that does not have a broad-based tax, such as income or sales tax. Alaska, the other state, has lots of revenue from oil and gas and actually spends more per capita than many states, so let’s set that aside. So New Hampshire, Maine’s lone neighboring state, stands alone, thumbing its nose at big state taxes.

The Granite State is frequently held up here in Maine as the more successful New England sibling. Not only do its state and local governments spend less than the national average per capita, but it also has a higher median household income than the New England average.

Specifically, using 2007, pre-recession data, New Hampshire collects $6,504 in revenues per capita, which is 22 percent below the New England average. Maine’s per capita revenue collection is about $7,800. The Granite State spends $6,442 per capita — that’s 20 percent lower than the regional average — while Maine spends about $7,500 per capita.

And New Hampshire residents aren’t living in austerity because of lower state spending. The median household income is $67,508, compared with $48,568 in Maine.

The big question, of course, is does the lack of those taxes bring this happy, low-spending, high-income outcome? And a secondary, equally important question: Is New Hampshire getting a good deal — effective K-12 and college education, good hospitals and health, an adequate safety net, well-maintained infrastructure — through its tax policies?

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A report by Federal Reserve Bank of Boston’s New England Public Policy Center doesn’t answer these questions, but it provides some important data that should direct Maine policy makers. Given the current administration’s commitment to rolling back spending and taxes, New Hampshire is worthy of closer scrutiny.

Several Maine policy makers gathered at the State House last week to hear the report’s author, Jennifer Weiner, explain her findings.

Ms. Weiner divided the data between circumstances and choices. She concluded that about 40 percent of New Hampshire’s success in keeping per capita government spending down came through circumstances. Some of those circumstances include lower labor costs for businesses, and lower medical costs and a lower residential cost of living (all of which are largely out of the control of state government, hence the circumstantial explanation).

And its geography cannot be ignored. Unlike Maine, southern New Hampshire lies at the crossroads of New England. It captures Greater Boston’s overflow economic growth and many residents commute to northern Massachusetts to work, thereby bringing their wages back to their state.

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But Ms. Weiner concluded that 60 percent of New Hampshire’s status as a low-tax state comes through policy choices. These are worthy of Maine’s consideration. The first is that New Hampshire spends the least in New England — $1,347 per capita — for social service programs. Maine spends $2,345 per capita.

In fact, the Granite State’s lower welfare spending accounts for almost a third of the spending gap between New Hampshire and the New England average.

One might argue that the need is greater in Maine. But Ms. Weiner points out that New Hampshire sets its Medicaid eligibility levels at 45 percent to 56 percent of federal poverty guidelines, while Maine offers it for those with incomes of 200 percent to 207 percent of federal poverty levels.

New Hampshire also does not offer universal pre-kindergarten classes and only recently added universal kindergarten. New Hampshire’s public colleges and universities rely more on tuition and fees and less on state appropriations than Maine.

Its contribution to the state employee pension system is the lowest in New England and public employees in New Hampshire are paid less than in other New England states.

So where does New Hampshire get its revenue? Primarily, it comes through a state property tax (16 percent of revenue). A business profits tax accounted for 15 percent of revenue. And a business enterprise tax — 0.75 percent on wages, interest and dividends paid, whether the business is profitable or not — accounts for 11 percent. The remaining revenue comes from meals and room taxes (9 percent) and 11 other categories.

Diversifying tax sources in Maine has been a tough sell; can you imagine how a business enterprise tax would be greeted? But it’s a step the Legislature should consider.

Lastly, perception cannot be ignored. New Hampshire is revered among libertarians and free staters as a bastion of laissez faire government. Maine must do a better job of waving its flag. And it also should consider tightening spending as its neighbor has.

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