Update (9/28/2012): The Union Leader follows up Wednesday’s article with one today about a report showing that the state’s former economic strength in the region is faltering, and that New Hampshire now needs to address several weaknesses, including “high costs of electricity, health care and housing, high corporate tax rates, lack of spending on transportation and technology infrastructure, and the low investment in higher education.”
Continue reading the original post, from 9/26/2012, below.
According to the Union Leader, the much-touted “New Hampshire Advantage” is waning.
The Union Leader quotes Brian Gottlob, president of PolEcon Research in Dover:
“I think there has been a New Hampshire Advantage, but it is understood only halfway. We have this tax structure that does favor well-educated, skilled entrepreneurs. But the other side of that is what people really want in the advantage — they want value. They want quality services at a lower cost than they would pay elsewhere.”
At least one political party cites New Hampshire’s lack of a sales or income tax as the state’s engine for economic growth, while ignoring the need and demand–in cities like Manchester and across the state–for better roads, commuter rail, better funding for education and other services, property and business tax relief, and so on. But Mr. Gottlob and other panelists at yesterday’s annual Economic Forecast, hosted by the Greater Manchester Chamber of Commerce, make the point that New Hampshire has focused too much on (some) low taxes at the expense of investment.
And the panelists suggest that the state’s exceptionally strong economy since the 1980s has been more a result of the rapid population growth in the 1980s and 90s than tax policy. Now that the population growth is slowing, so too is the “New Hampshire Advantage.”
Community College System of New Hampshire chancellor Ross Gittell, also a panelist, noted that while the state touts its lack of a sales or income tax as the “New Hampshire Advantage,” New Hampshire actually relies heavily on business, corporate and capital gains taxes, which could actually stifle economic growth and job creation in the state.
Cities & Technology Sector Jobs
As Mr. Gottlob said, New Hampshire’s “southern neighbors whose policies we often deride” are growing much faster, in terms of both population and job growth, while New Hampshire is now somewhere in the middle nationally.
The article suggests that Massachusetts and Connecticut are different from New Hampshire, because the larger urban centers–with big universities–attract technology and start-up investment. But as the Boston Globe discussed at length last month, Manchester has its own booming technology and start-up cluster growing in the Millyard.
Those sort of businesses demand a strong infrastructure, and the young people those businesses need to attract as employees want to live in cities with the robust urban amenities–vibrant neighborhoods, bustling downtowns, good parks and schools, alternatives to driving everywhere–that New Hampshire is drastically under-funding.
And that’s to say nothing of the need for well-educated workforce and low student debt. New Hampshire ranked dead last in funding for higher education before the current legislature cut that funding in half, and the state’s graduates continue to have the highest student debt burden in the country. Those are pretty lousy superlatives when you’re looking to revive the “New Hampshire Advantage” and spur economic development.
New Hampshire is one of the wealthiest states in the country, with the seventh lowest unemployment rate. It doesn’t rank dead last in investment in its youth–and thereby its economic future–because it doesn’t have the money, but because it has an outdated tax structure. New Hampshire does not have a spending problem; it has a revenue problem.
The New Hampshire Disadvantage
New Hampshire may like to deride Massachusetts, but the fact is that without Boston just to the south, the tax-free malls just north of the border wouldn’t exist, and the liquor stores and convenience stores ringing the borders wouldn’t be able to peddle their cheep booze and cigarettes. There’s no doubt that those things bring money and jobs–albeit not necessarily the best paying–into the state, but they’re not sustainable ways to grow the economy, raise much-needed state revenue, or invest in a more vibrant future for the state. In short, much of the so-called “New Hampshire Advantage” is a gimmick.
But the lack of a sales tax probably makes sense: it is a vital component to the state’s retail and tourism economy, and enough has been built up around it–just look at the entire town of Salem and southern Nashua, let alone the malls there–to make implementing a sales tax unrealistic.
Plus, a sales tax is almost as regressive as New Hampshire’s current tax-of-choice, the property tax, which places a disproportionate burden on seniors, and working and middle class families. And as too many people have found in the past few years, you still have to pay the same property taxes even if your income declines.
More problematic to future growth is the state’s lack of an income tax. New Hampshire actually has an income tax–it’s just that it’s limited to income earned from interest and dividends. The last state to implement a new income tax was Connecticut in 1991, which previously had an income tax on interests and dividends, as New Hampshire has had since 1923. And as Mr. Gottlob pointed out, Connecticut’s population and economy are growing much faster than New Hampshire’s.
But the real problem with the current lack of an income tax is that it’s exactly the opposite of what it’s billed as–it’s really a disadvantage. Even with the draconian cuts made by the current legislature, which will almost certainly lead to long-term economic stagnation, New Hampshire struggles to raise enough money to fund infrastructure investment and maintenance, social services, education and so on. And to do those things, it increasingly relies on extraordinarily high property taxes, as well as some of the highest corporate income taxes in the country.
So while the state may be attracting residents to live in suburbs just across the state line, who often continue to work back in Massachusetts, it is making it prohibitively expensive to run a business in the state. When a start-up can enjoy a similar cost-of-living, with lower property and corporate taxes in Lowell than in Manchester, how is that advantageous to New Hampshire?
The Real New Hampshire Advantage & The Future
An income tax may not be the answer to New Hampshire’s chronic revenue problems–and even if it is, we probably won’t see one any time soon. LivableMHT is no tax expert, and there may be other viable alternatives, such as a Land Value Tax. LVT is a tax exclusively on land, not including improvements (buildings, etc.) to it, which has the added benefit of reducing sprawl, and is used in Pennsylvania. There may be other revenue options, but it’s clear that the current over-reliance on property and corporate taxes, coupled with chronic under-funding across the board, and downshifting of costs to cities and towns is unsustainable.
And gimmicks–like casino gambling, border-hugging liquor stores and the current legislature’s lowering of cigarette taxes–aren’t going to cut it. New Hampshire’s revenue structure is simply too unsustainable for those to make a long-term difference. And just as important, we have to ask: what kind of place do we want New Hampshire to be? Do we really want it to be a casino-clogged, cheap cigarette store-lined refuge for wealthy tax-dodgers–some freakish cross between Las Vegas and Switzerland? Or a place where the natural beauty is matched by a skilled, well-educated workforce, and strong communities?
New Hampshire’s real advantage has to do with a lot more than an archaic tax structure. Its landscape, location, people, communities and cost-of-living have a lot more to do with why people choose to live and do business in New Hampshire than its lack of income tax does. Except perhaps for a relatively small number of people living along the border in the heavily populated Merrimack Valley, people choose where to live based on a lot more than income tax rates. And even there, many people may find the lower property taxes and greater investment in education in Massachusetts to be more attractive than the lack of an income tax in New Hampshire. After all, property taxes go up a lot more often than income taxes do.
As the Globe article points out, the bigger advantage for tech start-ups in Manchester isn’t the lower income tax burden on employees, but that real estate costs are about 1/5 of those in Cambridge, Mass. Of course, as lovely as Cambridge is, the 1980s high-rises in Kendall Square pale in comparison to the beauty and warmth of the Millyard with the Merrimack roaring by. So the cheaper rent and the rugged beauty of the landscape are probably both more of a motivator than the tax structure.
In fact, the Globe suggests that that tax structure may, in fact, be a disadvantage:
Even though New Hampshire can point to past successes, it has been awhile since the technology spotlight has shined down on the state in a big way.
“There’s a reason why a lot of companies want to be located here,” said Pamela Goldberg, chief executive of the Massachusetts Technology Collaborative, a quasi-public organization that promotes the Commonwealth’s tech economy. “We have so many smart young people graduating from our colleges who can walk into these start-ups and start contributing from day one.”
Manchester isn’t far from MIT, Harvard, UNH and other schools graduating people looking for start-up jobs, but with New Hampshire’s high in-state tuition and debt-laden graduates, is it any surprise that New Hampshire loses more young residents than any other state in the country?
And that’s to say nothing of the kind of places and amenities that young people look for these days. Oddly enough, they’re not so different from what retirees are looking for–walkable neighborhoods, affordable alternatives to driving (public transit and bike lanes, for instance), good schools, happening downtowns with plenty of dining and nightlife options. Without investing in education and infrastructure, how can we expect young workers, middle-class families or retirees to be able to stay in New Hampshire to drive future economic growth?
When New Hampshire doesn’t raise enough revenue to fix structurally obsolete bridges or properly fund public education, how can we expect it to be able to make the sort of investments needed to encourage economic development? New Hampshire’s current tax structure isn’t an advantage–it has created a structural inability to make necessary investment, and is an increasingly unsustainable revenue source. When our skilled workers need to leave the state to pay off student debt or enjoy an urban lifestyle, when the state’s lower cost-of-living and beautiful landscape aren’t enough to attract or retain residents, when high property taxes force seniors out of their homes and lead to continued sprawl, when the state is growing more slowly than its neighbors with higher personal taxes, and when we can’t make the investments necessary to compete, then we should really call the current tax structure the New Hampshire Disadvantage.