Are We Doomed to Be a Stagnant State?

Charlie Arlinghaus

January 31, 2014

As originally published in the New Hampshire Union Leader

New Hampshire is complacent. As a state we seem to have accepted stagnation as a way of life and are just trying to figure out how to adapt to it. The vision of New Hampshire as an island of prosperity is receding as policymakers increasingly decide they must adopt rather than fight economic mediocrity.

In the not too distant past, New Hampshire was a beacon of economic growth and opportunity. We spent decades as one of the fastest growing states in the country. More people and more jobs went hand in hand.

Part of the growth came from Boston sprawl, high cost of housing in North Shore suburbs, and the spread of the exurbs across the state line. But much of the growth and in-migration came from explosive job growth. The number of people employed in New Hampshire grew by 30% in the 1980s and another 17% in the 1990s.

We experienced recessions but we responded to them by assuming growth was still possible. The recession of the early 1980s was in many ways as bad as the most recent recession. New Hampshire’s budget crisis at the time was just as bad as it was recently.

But we were still a people at the time who thought of New Hampshire as different and competitive. Policy leaders decided job growth was essential. Our Business Profits Tax, then only a dozen years old had gotten out f hand and was the among the highest in the country. Then-governor John Sununu, himself a tax refugee from Massachusetts, signed a gradual reduction of the BPT. It was cut three times reducing the rate by 16%.

State economies don’t run counter to economic tides but they can slow them or enhance them. We led other states out of the recession and jobs grew by 25% in five years. There was a significant migration into the state, a large business tax cut, and a large job increase. Different policymakers will assign different factors as the cause. I suspect that the economy was ready to grow, the tax cuts sent a strong message to businesses pre-disposed to like New Hampshire’s then-reputation anyway and the jobs led to the migration.

The next recession in the early 1990s was in many ways the worst recession this state has ever faced. Jobs had actually declined three years in a row. The new governor, Steve Merrill, talked about jobs almost exclusively. He had a jobs plan and pursued significant workers compensation reform. But the centerpiece of his plan was to send a message about business taxes.

Merrill’s business tax reform was revenue neutral but coupled a new very small Business Enterprise Tax (one-quarter of 1%) with two pro-growth cuts in the BPT, a 12.5% rate decrease. Again New Hampshire took advantage of the coming recovery and led the region out of its worst recession. The next five years saw a 12% increase in jobs, the last time the state has seen job growth anywhere close to that rate.

Again, cutting the key business growth oriented tax led to the jobs being added landing disproportionately in New Hampshire.

Since that time, we’ve been in stagnation. Over the last thirteen years, jobs have risen a bit and fallen a bit but have averaged annual growth of just three-tenths of 1%. Our lost decade is now thirteen years and counting.

Some will blame the stagnation on a lack of migration into New Hampshire but I suspect that is a symptom rather than a cause.

It is also worth noting that at the beginning of this stagnation the state increased the Business Profits Tax twice, a 21.4% rate increase. Policymakers also tripled the smaller Business Enterprise Tax which may have had a lesser effect on decision making but certainly sent a psychological message.

Sometimes the stagnation of our last years is presented as a new reality which must be accepted and processed. But the truth is New Hampshire is still a nimble state and can easily begin adopting pro-growth initiatives.

Economic stagnation is not a new reality. It is the most important problem that no one is doing anything about.

Thirty years ago and twenty years ago, policy leaders made a job-attracting climate a priority and jobs and people followed. Fifteen years ago, we reversed course and did almost exactly the opposite. It had almost exactly the opposite effect.

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