NH May Enact First State Tax

by Randolph T. Holhut

A plan drafted by Rep. Elizabeth Hager, (R-Concord), and Sen. Clifton Below, (D-Lebanon), proposed a 4 percent income tax with generous income deductions coupled with a statewide property tax of $6 to $8 per $1,000 of equalized value. It now goes to the Senate, where it seems likely to be approved. If so, it will be the first time the Legislature has ever voted for an income tax. New Hampshire and Alaska are the only two states that do not have income or sales taxes.

But a decades-old tradition of opposing taxes has fallen after a state high court ruling in 1997 concluded that its reliance on local property taxes -- which provide 90 percent of the total cost of education -- does not provide an adequate education for the state's children.

Most towns in New Hampshire have to tax homeowners anywhere from $20 to $30 per $1,000, and towns without much taxable property have to tax themselves even higher. That results in a great disparity in how much money gets raised for education.

Rich towns with plenty of valuable property can set a low rate and raise lots of money for education. Property-poor towns have to heavily tax residents who can't afford to pay just to come up with the bare minimum needed to run their schools.

The court gave the state until April 1 to come up with an alternative way of funding education, and to find a solution lawmakers struggled to overcome a political culture that considers taxes to be an instrument of the devil.

That commission concluded that 25 percent of the average cost of educating a pupil is -- in their words -- "not required to provide the curriculum, programs and services essential for an adequate education."

Unfortunately, even if you cut out extracurricular activities, buying textbooks and office supplies, maintaining school buildings, most of the bus routes and as many teachers as you could get away with, you still would end up spending more than the $3,100 that they deem to be sufficient for an "adequate" education.

That's because of the various mandatory spending obligations that are part of every town's school budget: special education, negotiated contracts with school employees, and so on. All this funding that taxpayers have no control over is the reason the actual per pupil cost is closer to about $4,500 for elementary school and around $5,000 for high school.

It quickly became clear that the $3,100 figure had no basis in reality for funding the real cost of educating a child. It was a purely political conclusion designed to make sure the state is on the hook for as little money as possible. It also became clear that maintaining the current system was not going to work. To raise this much money, enacting some sort of a broad-based tax became all but inevitable.

So how does New Hampshire run even a minimalist government without broad-based taxes? Through sin taxes, which have long been the easy way out for New Hampshire whenever it needed more money.

Back in the 1920s, the state considered an income tax but that idea was just as unpopular then as now. By 1933, the state was starving for revenue, so Governor John G. Winant reluctantly signed a bill that legalized pari-mutuel betting at Rockingham Park in Salem. For the next three decades, it was the state's cash cow.

According to Peter Paul Jesep's new book, Rockingham Park (A History of Power, Glamour and Gambling), the track generated an average of 20 percent of the state's General Fund Budget Appropriations between 1933 and 1969.

Jesep quotes former House speaker and Senate president Stewart Lamprey as saying "We ran the state on booze, butts and bets." In other words, lure the out-of-staters with gambling and cheap smokes and liquor, and we won't have to tax ourselves. When that wasn't enough, the New Hampshire Sweepstakes -- the nation's first state-run lottery, introduced in 1964 -- became another source of easy revenue. The New Hampshire Lottery grossed $180 million in 1997; its take in fiscal 1998 was $57.5 million, which is used for school funding.

But "The Rock" is no longer a cash cow, mirroring the decline of horse racing around the country. The state's four greyhound race tracks are also struggling. They say they're being hurt by the huge Foxwoods and Mohegan Sun casinos in Connecticut and by dog tracks like Lincoln Greyhound Park in Rhode Island that have slot machines and video gambling. Give us slots, the New Hampshire tracks say, and we will stay in business and you'll get nearly $100 million a year in revenue for education.

We know, of course, that gambling revenues from lotteries, pari-mutuel wagers or casinos are the most regressive form of taxation; the property tax system is a model of fairness by comparison. Gambling is also a sucker bet for governments, who find themselves on average spending $3 on social service costs for every $1 in revenue taken in. While there is major opposition to video gambling, it will probably happen anyway to soften the tax bite.

The Hager-Below plan, coupled with increased cigarette taxes and video gambling, will probably fulfill the court's requirements, barring one obstacle: Democratic Governor Jeanne Shaheen. She took "The Pledge" and opposes any income tax. Instead, she wants more gambling, a higher statewide property tax and higher taxes on businesses. Shaheen has also called for a referendum on taxes, but that appears to be illegal under the state's Constitution.

Others support a constitutional amendment to shift control over education funding from the state Supreme Court to the Legislature. That would remove the courts from the equation and allow the state to maintain the current tax structure, and also appears unlikely.