Last week, the New Hampshire House of Representatives Committee on Ways and Means held a two-day information session for its members and other interested legislators on the state’s revenue structure, its ability to finance public services, and its relationship with the state’s economy. 

ITEP was one of three national organizations invited to participate and offered its views on the shortcomings of the current system.  In particular, ITEP's Jeff McLynch discussed the consequences that New Hampshire’s imbalanced tax system has for both individual taxpayers and for the state’s budget. (The Granite State and Alaska are the only two states to levy neither a sales tax nor a broad-based income tax.) McLynch explained that adopting an income tax would help not only to mitigate the inequities that low- and moderate-income residents now face but also to address the state’s long-standing structural deficit. 

The purpose of the session was straightforward enough. Legislators nationwide regularly meet to receive testimony from analysts and constituents alike on topics ranging from agriculture to zero-based budgeting. But some opponents of sound and fair taxation reacted as though it were one part of a much larger conspiracy, leading to a couple dozen protestors outside the session and a volley of press releases decrying the involvement of groups from outside the state in the days leading up to the event. 

Indeed, as the Concord Monitor noted, “The committee was careful to ensure that the representatives of both sides of the issue had a chance to air their views. That didn't quiet critics who treat the state's unfair tax structure like previous generations treated suicide, cancer and divorce, something that should not be discussed in public.  But silence allows ignorance to prevail and problems to worsen.” 

To learn more about the various perspectives presented at the session, visit the Ways and Means Committee website.

New Hampshire has long been an outlier in state tax policy. It shares the dubious distinction of lacking both an income and a sales tax with only Alaska. Unsurprisingly, it now faces a serious budget deficit. In response, the state's House Ways & Means Committee has chosen a course of action that deviates from the well-worn public policy path in the Granite State, approving a pair of bills that would generate $95 million in revenue over the next two years and do so in a very progressive manner. Specifically, legislation endorsed by the Committee would impose a 5 percent tax on income from capital gains and would revive the state's estate tax, albeit with a larger exemption and lower rate than existed prior to the tax's repeal in 2002. Needless to say, a comprehensive, broad-based income tax should remain the goal in New Hampshire, but these changes would certainly be steps in the right direction.

One of the few benefits of a crisis as severe as the recession in which the United States now finds itself is that it may lead some to question long-established practices and to ask whether there might be a better way of doing things. In New Hampshire, which faces a budget deficit of several hundred million dollars over the coming biennium, that might mean reconsidering its status as one of only nine states without a broad-based income tax. Indeed, the New Hampshire House Ways & Means Committee last week held a hearing on a bill (H.B. 642, introduced by Representative Jessie Osborne in January) that would both establish an income tax and reduce state property taxes for a large number of homeowners. Consequently, the bill would not only generate close to $500 million per year in new revenue, but it would also make New Hampshire's tax system much fairer.

For more details, read ITEP's testimony on HB 642 here.

People of different political leanings often have quite different views about the proper and necessary role of government in society. Most would agree though (probably almost unanimously, in fact) that one of the essential functions of government is the administration of justice. Yet, in New Hampshire, the state's budget shortfall is so severe -- and the traditional hostility to taxes is so great -- that officials announced this week that the state will suspend jury trials for the month of February. It also will likely leave open one pending vacancy on the Supreme Court and seven existing trial court vacancies (out of a total of 59 such judgeships).

Needless to say, when government begins to falter in performing its most fundamental responsibilities, it is clearly time to re-examine some of the fundamental beliefs, such as the state's long-standing opposition to an income or sales tax, that contribute to such difficulties. Without new thinking, can announcements that local police and fire departments have been disbanded or that school children have been sent home for the year be far behind?

As we've argued in past Digest articles, there are good reasons for relying on gas tax revenues to fund transportation -- at least when an effort is made to offset the tax's stark regressivity. To the extent that the gas tax falls most heavily on those people who drive the furthest distances, or who drive the heaviest vehicles, there are certainly some advantages to the gas tax. But when the people driving the furthest distances are doing so because they can't afford to live near their places of work, for example, that advantage becomes much less appealing. In this light, recent news regarding the funding of transportation has been both good and bad. While states are seemingly beginning to come around to the idea that gas taxes will need to be raised to provide an adequate transportation infrastructure, interest in offsetting the tax's regressivity has yet to pick up steam.

Support for increasing the gas tax has gained some notable momentum in New Hampshire and Massachusetts as of late, and in Oregon, the Governor even included a small gas tax hike in his recent budget proposal. Utah has taken the idea to another level, as top officials are reportedly considering both increasing and restructuring the state's gas tax. In Vermont, however, while raising the gas tax has gotten some attention, the more prominent proposal has been to simply obtain permission from the federal government to continue using federal highway dollars without having to match that money with state funds (of which it has none). But while there are persuasive reasons for considering aid to the states as one form of stimulus for our troubled economy, one has to wonder why some Vermonters are apparently more averse than these other four states to the idea of paying for their own transportation network.

Unfortunately, while there has been an increasing acceptance of the fact that existing gas tax revenues are inadequate in many states, little notice has been given to the idea of offsetting the stark regressivity of gas tax hikes with low-income refundable credits. This idea was recently made a reality in Minnesota, and has been proposed by the Commonwealth Institute in Virginia as well. Notably, eight states already offer similar credits to offset the regressivity of the sales tax (usually designed specifically to offset the tax on groceries). Nineteen states and D.C. offer refundable EITC's, which while not designed specifically to offset regressive taxes, could perhaps be used in a similar matter. In states in need of additional transportation dollars, coupling any transportation related tax increases with the enactment of a low-income refundable credit, or the enhancement of an existing credit, should be a top priority.

As the fiscal contagion spreads among the states, policymakers are clearly casting about for ways to close large and growing budget deficits. In Nevada, Governor Jim Gibbons may be open to tax increases in light of a shortfall that is projected to reach $1.8 billion over the next two and half years, but he has also floated the idea of 'voluntary' payroll reductions of 5 percent. New Hampshire faces an approximately $600 million budget gap over the same period, with lawmakers weighing such options as selling state properties, legalizing gambling, or deferring needed payments to the state pension fund. Florida may have to confront an eye-popping deficit of $6 billion over just 18 months, driving elected officials to think about raiding a variety of trust funds and imposing a 4 percent across-the-board cut in agency budgets.

Of course, these three states have more in common than difficult days ahead. They also share a steadfast refusal to levy a personal income tax. Rather than continue to cast about for half-measures and temporary fixes -- or, worse, policies that would undermine working families' already precarious economic situations -- policymakers in states like Nevada, New Hampshire, Florida, Washington, and Tennessee need to acknowledge the elephant in the room and consider whether the tax policies that brought them to this point are the ones that will carry them to a better future.

Last month we brought you word of a brewing controversy in New Hampshire. Retailers in the state were lobbying hard to delay a cigarette tax hike in hopes that more people would come to the state to purchase cigarettes proving that it wasn't necessary to raise the tax. Unfortunately for retailers, people in New Hampshire and surrounding states seem to have become aware that smoking is bad for their health. Cigarette tax revenues didn't hit the revenue target state officials identified and last week the state's cigarette tax rose by 25 cents to $1.33 a pack. But despite this increase in the tax, smokers who purchase cigarettes in New Hampshire will still pay a lower tax than smokers in neighboring states.

Kansas Governor Kathleen Sebelius this week again voiced support for a 50 cent cigarette tax hike, proposing that the revenue be dedicated to expanding health care coverage to more low-income Kansans. This story should sound familiar, as numerous tax-phobic states in search of ways to pay for popular government services have recently turned to the cigarette tax.

The benefits that a higher cigarette tax would produce in terms of reduced smoking deaths and improved public health are well-documented in the recommendations included in a recent report from the Kansas Health Policy Authority. But it's the tension such an arrangement would create between efforts to reduce smoking, and efforts to fund health care, that is controversial.

Arkansas this year attempted to pass a similar cigarette tax hike dedicated to funding a new health trauma system. South Carolina pursued similar legislation (eventually vetoed by the Governor) that was designed to direct new cigarette tax hike revenues into a popular health-care expansion.

In each of these cases, legislators were seeking to fund vital programs (each of which naturally increases in cost over time) with a revenue source that is sure to decline with time. South Carolina briefly considered one interesting approach to this problem (indexing the amount of its tax to a measure of medical cost inflation) but that proposal was ultimately dropped from the final bill.

Sustainability issues arise not only from inflation, however, but also from decreases in the popularity of smoking, and increases in the incentives to purchase cigarettes in low-tax areas. This latter component of the sustainability problem, in particular, has received a good bit of attention as of late.

With cigarette tax rates having increased substantially in many parts of the country, the rewards to smokers associated with shopping in low-tax areas have grown. A recent study by Howard Chernick entitled "Cigarette Tax Rates and Revenue" found that a 10% increase in the cigarette tax rate of one state can boost the revenue collections of a neighboring state by about 1%. Maryland provides one stark example of this phenomenon, where a recent tax hike has yielded significantly less than expected as a result of cross-border cigarette purchases and smuggling. The experience of New Hampshire, however, may suggest that this point has only limited applicability (see next story).

Here's the headline: "Tobacco Retailers Pressed to Sell More to Stop Tax Hike." Odd isn't it? New Hampshire retailers are in a panic, hoping to sell enough cigarettes to avoid a quarter cigarette tax increase from taking effect. Last year grocers lobbied hard against an increase in the state's cigarette tax, saying that they "could bring in the same revenues if given a chance to market the state's lower cigarette prices to neighboring states." Lawmakers heard their pleas and agreed to put the tax increase on hold to see if sufficient revenues were raised. In fact, a marketing campaign was said to be in the works.

You'd have to be living under a rock to not know that smoking can kill, but New Hampshire residents are being encouraged to purchase more cigarettes. Meanwhile, legislators cannot take action to improve health by discouraging smoking because they depend on this tax revenue to fund necessary services. This is what happens when states depend on excise taxes that don't grow with the economy and refuse to raise money in progressive ways. The government is placed in the odd position of encouraging whatever is being taxed, even if it's harmful.

With state budget shortfalls having recently become so prevalent, it has been interesting to watch how different states have chosen to address their budgetary woes. Fortunately, a collection of influential groups in Michigan, including the Michigan League for Human Services, is seeking to fill their state's budget gap with a combination of policy changes much better thought-out than the regressive band-aid fixes proposed in New Hampshire (cigarette tax hikes) or California (lottery revenues). The plan, proposed by the Michigan League for Human Services and backed by a slew of influential groups, proposes to raise roughly $400 million through a series of relatively small changes, each of which already gained approval at some point from either the Governor or the legislature in the 2005 or 2007 legislative session.

Among the proposed list of reforms is the elimination of numerous unjustified sales tax exemptions. Vending machine snacks, international phone calls, and purchases made at prison stores are among the items that would be subject to the sales tax under the proposal. Another major component of the proposal would decouple state business depreciation rules from the federal rules, as was advocated in an earlier Digest piece.

While certainly not a comprehensive list of what could be done, the proposal is notable for its eclectic approach that simultaneously aims to improve efficiency and boost state revenues. States considering unimaginative hikes in consumption tax rates or damaging cuts in public services would do well to instead follow the lead of this proposal and seriously examine what kind of needed tweaks to their tax systems could boost revenues.

Several weeks ago, we told you of a potentially interesting development in New Hampshire-- an effort by the Granite State Fair Tax Coalition to have voters in nearly a hundred towns call upon their elected officials to forego the so-called "Pledge." The Pledge is a vow many New Hampshire lawmakers have taken to oppose the creation of a broad-based income or sales tax.

The effort to have voters voice opposition to the Pledge has met considerable success. As the New York Times reported last week, resolutions sponsored by the Fair Tax Coalition passed in close to 70 percent of the towns in which they appeared. This hardly means that New Hampshire is about to leap past its New England neighbors in terms of tax fairness, but making sure that policymakers keep an open mind is an important first step.

Despite a school funding debate that is now a decade old, New Hampshire remains one of just two states in the nation that lacks both a sales tax and a broad-based income tax, instead relying principally on property taxes to support vital services. (The other state in that pairing, Alaska, can at least rely on revenues generated from its energy resources.

This absence of alternatives to the property tax is perpetuated by the so-called "pledge", a vow to oppose income and sales taxes to which numerous candidates for public office in the Granite State have committed themselves. In the weeks ahead, though, many New Hampshire voters will have an opportunity to instruct local officials to forego such misplaced promises. Due to the efforts of the Granite State Fair Tax Coalition, residents of 88 of New Hampshire's 221 cities and towns will have a chance at upcoming town meetings to approve resolutions calling on legislators to reject the "pledge" and to keep an open mind about all revenue raising options.

Conservative critics say that the resolutions are a veiled attempt to impose an income tax, while others maintain that a more direct approach would yield more tangible results. Still, it's hard to argue against something that simply suggests doing what anyone would do when confronting a major problem... keeping all of one's options open.

Click here to learn more about the Granite State Fair Tax Coalition.

While the coalition isn't advocating an income tax, some state lawmakers are discussing far-reaching tax reforms that would lead to a fairer and more sustainable tax system in the Granite State. Rep. Jessie Osborne explains her approach to a "tax swap" here.

Late last month, New Hampshire adopted legislation that could serve as a model for other states seeking to modernize their corporate income taxes. As part of their biennial budget process, Granite State lawmakers approved a change in the way they decide which multi-state companies are subject to the state's business enterprise tax, moving from a standard based on "physical presence" to one based on "economic presence." This change may sound esoteric, but it's important because the "physical presence" standard leads to all sort of strange outcomes, including advantages for huge out-of-state corporations that do business with state residents over the locally owned businesses that operate entirely within the state.

Changing this standard (also known as "nexus") to one based on economic presence will help New Hampshire ensure that corporations that take advantage of the economic market the state fosters - its transportation infrastructure, judicial system, and educated workforce - will pay their fair share in taxes, even if they don't have offices or factories in the state. In fact, as we previously noted in our Talking Taxes blog, the US Supreme Court earlier this year declined to hear two cases - Lanco and MBNA - in which New Jersey and West Virginia had subjected companies to business taxes because they had substantial economic presence in the state. For more information on the "physical presence" standard and how it can harm state residents, see the ITEP paper on this topic.

People who follow tax issues know that cigarette taxes are regressive, meaning they take a larger percentage of a poor person's income than a wealthy person's income. This is generally true of other consumption taxes such as sales taxes and gasoline taxes because poor people consume a larger percentage of their income than wealthy people, who have the luxury of saving and investing a large percentage of their income.

So cigarette taxes are not the best way to raise revenues from a fairness perspective. But there seem to be situations in which the only tax increases politicians will tolerate are the unfair ones. The state legislature in Delaware wanted revenue to address health and school construction, and just raised $48 million by increasing cigarette taxes from 55 cents to $1.15 a pack. Raising progressive taxes (for example, state income taxes) would be a fairer alternative, but tobacco taxes may be a second-best option when lawmakers refuse to increase other taxes.

New Hampshire just enacted a budget that includes a cigarette tax increase of 28 cents to $1.08 a pack as well as several other regressive fee hikes. While this is unfortunate, the budget also expands children's health insurance by as many as 10,000 kids, which might be hard to do in tax phobic New Hampshire. In Connecticut, the legislature recently approved a budget that raises the cigarette tax 49 cents to $2 per pack in a compromise between Republican Governor Jodi Rell and the Democratic-controlled Assembly. (Rell had earlier suggested increasing income taxes but quickly changed her mind about that.)

Now members of Congress are eyeing an increase in the federal tobacco tax from 39 cents to $1 a pack to fund an expansion of the State Children's Health Insurance Program (SCHIP). Some members of both parties on the Senate Finance Committee have come to a tentative agreement to raise $35 billion over 5 years (less than the $50 billion envisioned in the Senate budget passed several months ago). One can imagine many more progressive ways of raising federal revenues. But if the Senate lacks the leadership and courage to fight for more progressive funding sources, this may be the best chance to expand children's health care this year.

Policymakers in New England saw several budgetary showdowns this week. On Wednesday, members of the Connecticut General Assembly missed an end-of-session deadline for adopting their state's budget for the next two years. One of the most contentious issues in the debates surrounding the spending measure is, not surprisingly, taxes.

Both chambers of the Assembly recently approved bills that would make Connecticut's personal income tax more progressive and that would yield revenue needed to address structural budget shortfalls and to support new initiatives. While there are differences between the bills backed by the two chambers, conflict is much more likely with Governor Jodi Rell, who has already suggested that she would veto any such tax increase.

Interestingly, just four months ago, Rell herself proposed raising the state's top personal income tax rate. She now argues that anticipated budget surpluses are sufficient to meet the state's needs.

In New Hampshire, some substantial differences will likely have to be hammered out within the legislature. The House of Representatives previously passed a budget that relied on an increase in the state's real estate transfer tax and a 45-cent jump in the cigarette excise. The Senate this week was expected to vote on a version of the budget that abandons the transfer tax increase and that would push the cigarette excise up by just 28 cents.