The Interest & Dividends Tax is a New Hampshire disadvantage
Eight U.S. states have no income tax.
New Hampshire is not one of them.
The Interest & Dividends tax lingers. A tax on passive income is still a tax on income, and this one has given New Hampshire an asterisk by its name when listed among the nation’s low-tax states.
At midnight on Dec. 31, 2020, Tennessee’s tax in interest and dividends ended, making it the eighth state with no tax on income. Six months later, New Hampshire legislators passed a budget that included a five-year phase out of our Interest & Dividends Tax.
But with policymakers in other states chasing the New Hampshire Advantage ever more aggressively, there is interest in eliminating the I&D Tax by the end of 2023 rather than 2026.
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming are the only states that don’t tax income. (Washington passed a capital gains tax in 2021 but it’s been blocked by a court pending a challenge to its constitutionality.)
Florida, Tennessee and Texas all want to become known as the freest state in the nation. Florida Gov. Ron DeSantis already refers to the Sunshine State as the “Free State of Florida.”
New Hampshire is losing its reputation as a refuge from burdensome taxation.
In the Tax Foundation’s State and Local Tax Burdens ranking, Tennessee ranks third, Texas sixth and Florida 11th. New Hampshire is down to 16th place.
Florida ranks higher than New Hampshire in the Tax Foundation’s Business Tax Climate Index. It places fourth. New Hampshire is sixth.
Florida last year passed New Hampshire to claim the top spot in the Fraser Institute’s Economic Freedom in North America report.
The New Hampshire Advantage is real. By creating a low-tax, relatively low-regulation refuge in the Northeastern United States, New Hampshire policymakers have delivered profound benefits for Granite Staters.
From 1977-2019, New Hampshire’s economy grew by an astounding 335%. Massachusetts had the second highest economic growth in New England at 234%, a full hundred percentage points below New Hampshire. The U.S. economy grew by 203% in those same years.
This growth has given Granite Staters the highest median household income in northern New England, 25% higher than Vermont’s and 35% higher than Maine’s.
Over those years, however, officials in other states have watched and learned. They’re chasing — and often passing — New Hampshire.
After the eight states with no income tax are the nine states with a flat income tax. New Hampshire is in this group, which used to be very small but is growing rapidly.
Five other states have passed legislation to move to a flat income tax. Others, including North Carolina, are phasing out their income taxes on the way to joining the elite group of states with no tax on income.
Policymakers in these states are intentionally trying to keep their people, employers and entrepreneurs — and attract those in other states — by narrowing the gap between their tax burden and the burdens in states like New Hampshire.
In other words, they are trying to put an end to the New Hampshire Advantage by creating a tax and regulatory environment more favorable than ours.
Having the Interest & Dividends Tax on the books is hurting New Hampshire in this increasingly competitive landscape. Investors, retirees and many entrepreneurs know that they gain nothing financially by moving to New Hampshire because we tax their investment income.
Even AARP has pointed out to its members that New Hampshire is a less desirable place to retire than Florida, Tennessee, Texas or any of the other truly income-tax-free states because we tax investment income.
“Nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — have no income taxes. New Hampshire, however, taxes interest and dividends, according to the Tax Foundation,” AARP’s website warned its members in a post last year.
Turbotax warned its users in December that New Hampshire taxes passive income. After listing the states with no income tax, it noted that “New Hampshire limits its tax to interest and dividend income, not income from wages.”
Maintaining the Interest & Dividends tax creates a small but real drag on both economic and population growth.
“Over the past decade, states which forgo income taxes have seen their populations grow at twice the national rate, and gross state product grew 56 percent faster in states without an income tax than it did in those with one over that period,” the Tax Foundation noted in 2021.
As long as this tax remains on the books, it discourages relocation to New Hampshire by individuals who could use their assets to invest in local start-ups, commercial and residential real estate development, and local non-profits.
It also chases away wealthier Granite Staters and retirees. When financially successful Granite Staters move to Florida and Tennessee to avoid the Interest & Dividends Tax, New Hampshire loses.
The most commonly made objection to ending the Interest & Dividends Tax is that it would reduce state revenues. But i’s unclear how much revenue the state would lose.
Revenue from the I&D Tax has varied over the last decade. The tax brought in $93 million in fiscal year 2013, and fluctuated between a low of $79.8 million and a high of $96.9 million through fiscal year 2017. Since fiscal year 2018, the tax has generated more than $100 million in revenue annually, spiking to a record $157.5 million in fiscal year 2022.
The 2022 revenue was driven by unusually large stock market gains that year.
Assuming annual revenues in the $100 million to $125 million range, the question is whether the state could weather the loss of those funds without making severe budget cuts. The answer is obviously yes.
For the last decade, state General Fund and Education Trust Fund revenues have exceeded budgeted amounts in every year save one. Revenues were $435.5 million above plan in FY 2022, $323.7 million above plan in FY 2021, $173 million above plan in FY 2019, $133 million above plan in FY 2018, $96 million above plan in FY 2017, $166 million above plan in FY 2016, $47 million above plan in FY 2015, $3.8 million above plan in FY 2014, and $45.7 million above plan in FY 2013.
In the last decade, revenues were below plan only during the pandemic year of 2020, when the sharp decline in business activity caused business tax and rooms and meals tax revenue to plunge.
New Hampshire’s growing economy has already generated enough surplus state revenue to replace the I&D Tax receipts.
And eliminating the I&D Tax would end a strong disincentive for higher-wealth individuals to live in New Hampshire. Making the state more attractive to investors and entrepreneurs would have positive economic effects, which would be felt in state revenues over time.
Accelerating the repeal of the I&D Tax would make New Hampshire more attractive to retirees, investors and entrepreneurs by the end of this year. If the state can afford to eliminate the tax now, why wait three years to enjoy the benefits of making New Hampshire more economically competitive?