NH’s economy and those new Mass. taxes

Charlie Arlinghaus

July 31, 2013

As originally published in the New Hampshire Union Leader

Massachusetts is simply not doing enough to help the New Hampshire economy. The news is full this week of stories about tax increases south of the border that should benefit us. But the changes are likely to have only a muted impact on the economy up here. In the past, we’ve been able to count on Massachusetts to drive more jobs and business our way. We may have to work harder in the future.

For decades, New Hampshire’s economy has benefited from a competitive advantage that drives jobs and people into our state. Tax advantages over Massachusetts (and the smaller economies of Maine and Vermont) have helped encourage businesses to locate in a state with no income tax, retail business to move to a state with no sales tax, and in general have created an idea in business development circles of New Hampshire as the low-tax island in the high-tax Northeast.

As other states adopted taxes on income or sales, New Hampshire resisted. In 1970, we abolished a dozen taxes on capital and replaced them with a Business Profits Tax. Much of our tax policy focused on the competitive advantage we had and tried to maintain over our neighbors. The phrase “New Hampshire Advantage” is used so often in legislative debate that its meaning is becoming obscured.

The advantage we seek to maintain is one related to reputation and behavior. We want people to buy, invest and locate in New Hampshire. The changes to tax law governing limited liability companies were fought and ultimately repealed four years ago fundamentally because they reduced or perhaps eliminated the incentive for entrepreneurial, startup companies to locate here as opposed to Cambridge.

But our neighbors can also be our best friends. Raising income or business taxes, for example, sends existing Massachusetts businesses looking around to see if there are friendlier fields nearby.

The changes taking effect in Massachusetts will spur some sales increases here, but they are actually much less damaging to Massachusetts and helpful to us than they might be. Gov. Deval Patrick wanted to raise income taxes, which would have done much more for us.

Raising cigarette taxes in Massachusetts by $1 per pack will probably increase cross-border sales. Tobacco sales are almost unaffected by 10 cents here and there. The 10-cent reduction in New Hampshire’s tax last year had no impact on sales (as some of us warned). When cigarettes cost $5 per pack, raising the price by a dime doesn’t get anyone to stop smoking, and lowering it by a dime doesn’t get anyone to drive here.

But a $1 increase probably will get more than a few north-of-Boston smokers to pop across the border to stock up. Every time Massachusetts increases cigarette taxes, New Hampshire cross border sales go up, as do some additional ancillary sales (liquor, for example). This will have a modest effect on tax revenues, but a very limited effect on jobs and business growth.

The other notable tax increase is a three-cent hike in the Massachusetts gas tax. The new tax is also indexed for inflation, so it will rise automatically without a vote. That’s a clever way to raise taxes without political fingerprints (so we need to avoid doing that here).

The gas tax will have almost no cross-border impact. Prices for gasoline are much less uniform than for most goods. They bounce up and down a great deal. No one’s going to drive very far to save 3 cents a gallon on gas that costs something like $3.70 when they aren’t quite sure if it’s factored into the price (near-border gas is often priced with the neighboring state in mind, regardless of tax). After all, at current prices the average driver is actually using 15 cents of gas for every mile he drives.

Patrick might be helping New Hampshire more with his new software service sales tax. The tax bill imposes a confusing new tax that has been called “the most sweeping software service tax in the nation.” Businesses are on the verge of revolt. An enterprising neighbor state that was friendly to software firms might take advantage of this stupidity and make sure companies realize that fertile fields exist just a hop, skip and a jump to the north.

Deval Patrick may not be doing as much to help us as some of his predecessors have, but I think he’s probably given us at least one nugget to work on.