March 9 , 2016

Broadband Boondoggle is Risky Proposition

Charles M. Arlinghaus


Changing state law to allow towns to borrow money to run their own internet companies is not about bringing service to the remarkably small number of consumers without access to broadband. It is a mistake that would expose property taxpayers to the same financial problems that plague government-owned networks across the country.


Today, in New Hampshire, there is a small list of purposes for which towns are allowed to borrow money. This government-limiting statute makes clear that long term debt is to be used sparingly and for core functions like government buildings and snowplows.


There is no legitimate government purpose in borrowing millions of dollars to be paid by taxpayers simply to compete with existing companies. However in the very few spots that don’t have access, town government is currently authorized to build infrastructure if they choose.


A proposed law would change that limited purpose. It would allow municipalities to build broadband for any purpose — not limiting it to those without access. The only possible excuse for the change is to allow government officials to use your money to build their own government-run company to compete with current providers.


Today, 93% of the state has access to broadband even under the new higher speed definition of broadband. Further, more than 98% of the state has access to mobile broadband. The number of those without service will decline as the federal Connect America Fund spends $25 million in New Hampshire to increase access.


For the last decade local government officials across the country have racked up huge debts running mediocre systems with high overhead and few subscribers. Locally, we are very familiar with the taxpayer-nightmare in Burlington, Vermont. The government-knows-best plan was a disaster from the beginning and ended its run in virtual bankruptcy settling a $33 million debt to the banks for $10 million and leaving taxpayers holding an additional $17 million default bag.


The best-named silliness is Utah’s UTOPIA. This plan, appropriately named after a fantasy world, saddled taxpayers in 11 Utah towns with $350 million in debt. To bail out the failed network, towns wanted to assess users and non-users a $240 per year tax — they fail, you pay.


I doubt any local official would be quite so blind as the local officials in Vermont, Connecticut, North Carolina, Utah, Tennessee, Louisiana and dozens of other communities across the country. But opening up that possibility creates an incentive for the official to think about empire building with no risk except to the taxpayer.


When a private company risks its capital, the potential for success is weighed against the possibility of going bankrupt, losing everything without recourse to your and my property taxes. The largest broadband companies in America spend between $35 and $50 billion each year to improve, expand, and upgrade their infrastructure.


High tech networks are continually updated at a rate towns can’t hope to compete with. The capital resources and incentives of a private company with national reach are probably greater than one town in one state.


Remember that the proposed change would allow towns to borrow money to build competing networks. They already have the power to borrow to serve the 7% of the population that has no service.


The question policymakers face is simple: does it make sense to allow government to borrow money which you and I have to pay back with our property taxes simply so they can attempt to compete with a business that invests hundreds of millions of dollars in our state to build state of the art networks in a high tech industry?


If we truly want to increase service coverage from 93% to closer to 99%, there are simpler, low-risk things we can do instead of repeating the mistakes of so many debt-ridden communities across the country.


Leave in the language allowing towns to serve unserved areas. Work with providers to target the $25 million the federal government wants to send here to ensure it goes to help someone instead of being wasted like the ridiculous “fast roads” project.


If a municipality has a proposal that current language doesn’t quite allow then the state can look at it and easily pass enabling legislation if it makes sense. What doesn’t make sense is to allow towns carte blanche to build their own doomed-to-fail internet companies on the backs of property taxpayers.






Charlie Arlinghaus

August 26, 2015

As originally published in the New Hampshire Union Leader

The best discussion of our understanding of modern tax policy comes from the classic television show Seinfeld. Everyone’s favorite economist, Kramer, encourages Jerry to defraud a company because big companies don’t need to worry. “Jerry, all these big companies, they write off everything.” Jerry claims that Kramer doesn’t even know what that means. Kramer’s defense: “But they do and they’re the ones writing it off.”

These mystical write-offs emerge in political rhetoric as giant subsidies to big corporations, illusory money floating through the corporate air. In an election, politicians want to eliminate them all. The right accuses the left of passing out subsidies like candy. The left accuses the right of hypocrisy, especially toward the dreaded evil Big Oil.

Subsidies and write-offs, however, are not the same thing. The difference lies in the way taxation works. The primary method of business taxation is through a corporate income tax. Companies are taxed on their income or profits rather than gross revenue.

A company makes a product and sells it for $100, but the cost of materials, labor, the store to sell it in, etc. was $90. The company profit was $10 and they pay tax on the $10. But companies and their expenses are quite complicated, so there are rules and regulations deciding what the company can count as an expense and therefore “write-off” against their final cost.

Traditionally, we refer to something as a subsidy when the government actually makes a payment to a company to support a specific task. Government grants or loan guarantees subsidize the cost of doing business and usually specific businesses or tasks — something that can be thought of as the government picking winners and losers. They pay for some favored tasks or products but not for others.

The rise in more direct subsidies for renewable energy projects has created impetus on the right and left to talk imprecisely about subsidies. Renewable projects have been more likely to benefit from direct subsidies like loan guarantees, grants or above-market subsidized power purchase agreements.
Politicians of the right will announce they want to eliminate all subsidies, renewable as well as oil and gas. Politicians of the left claim the right opposes only renewables and won’t touch huge oil subsidies.
Activists are led to believe the government doles out billions of dollars to oil companies who certainly don’t need the help.


We should, without question, eliminate all the subsidies regardless of energy type in the tax code. Don’t eliminate some but not others, get rid of everything and use the savings to lower rates for everyone.

Some special credits and research allowances qualify as small subsidies and should be eliminated, but other proposals would simply treat expenses differently for some companies and not others. For example, to create the illusion of large oil and gas subsidies, opponents act as if treating them the same as other businesses is a distortion and suggest making an exception of them so the government can collect more money.

The “section 199 deduction” is available for domestic producers of products, music, roads, almost anything. Good or bad policy, it is not an oil subsidy. Already oil producers have had it reduced — just for them — to 2/3 of the rate of other companies. That’s the direct opposite of a subsidy. The President and others have proposed eliminating it entirely for oil and leaving it for all others. Eliminating it for all or keeping it for all are both defensible options. Punishing only one sector is punitive gamesmanship but par for the political course.

Most expenses are deducted from revenue immediately, like cost of materials, labor and rent. Some large capital expenses are depreciated — deducted in pieces over time like a mortgage. For minerals and other natural resources, depreciation takes the form of a depletion allowance — deducting a percentage of revenue as an expense. Again, any changes — like the sensible provision allowing all business expenses to be deducted immediately rather than over elongated periods — should be made for all business and no one sector singled out. In fact, allowing immediate expensing would not only encourage investment, but also eliminate judgment calls about what is or isn’t the appropriate period of depreciation.

Too often tax changes are made to single out one unpopular sector. Tax neutrality — and a neutral government should be our goal — demands that tax rates and rules apply to all sectors equally without credit or exception. Subsidies involve special treatment instead of allowing companies to benefit by the same rules.

Charlie Arlinghaus

July 15, 2015

As originally published in the New Hampshire Union Leader

Today is the Ides of July — or Quintilis if you aren’t fond of Julius Caesar –and a good time to remind us all what we do and don’t know about taxes — that perennial political football. Tax myths abound and all too often color political debate. But a look at tax data tells us more about our economy and system than the insipid polemics that disease what passes for public discourse.

The individual income tax provides about half of all revenue for the federal government. In 2015, the individual income tax will provide $1.48 trillion, about 46% of all federal revenue. By contrast, corporate income taxes provide 10% of federal revenue, $341 billion in 2015.

Corporate taxes are also much more volatile. in the recession they plummeted to less than half their previous value and have increased by 147% since 2009. Individual taxes fell during the recession by just 22% and have climbed by 61%.

Individual income taxes are also much more progressive than you think. A huge percentage of Americans pay no income taxes at all — though of course they do pay other taxes like payroll taxes. in the tax year 2010, the most recent for which we have this calculation, 41% of tax returns had no liability or negative liability, up from 25% of returns just 10 years prior.

Remember though that those people aren’t outside the system altogether. They still pay payroll taxes if they work at all and other federal excise taxes.

By the way, this calculation has nothing to do with whether or not you got a refund — a refund is just the difference between your liability and pre-payments withheld.

The income tax is also much more progressive then you think. The much reviled top 1% of earners paid 38% of income taxes even though they only made 22% of all income. The progressivity follows at every level. For example, the top 10% of taxpayers made 48% of income but paid 70% of taxes. In contrast, the bottom 50% made 11% of income and paid just 2.8% of taxes.

By the way, to be in the top 25% of taxpayers in 2012 you needed a family income of $73,300 while a $125,200 would put you and your family in the top 10%.

The system is not just relatively progressive but getting more so. Ten years prior, the top 1% paid 33% of taxes not 38% and the top 10% of earners paid 64% not 70%. Go back even further, before the Reagan reforms of the 1980s and you find that thirty years ago the top 1% paid 19% (now it’s 38%) and the top 10% paid 45% (now it’s 70%). Much more progressive indeed!

In New Hampshire, we filed 680,000 federal income tax returns with total taxable income of $32.3 billion. That led to New Hampshire residents paying $6.1 billion in federal income taxes in 2012. In that same year businesses, residents, and non-residents paid a combined $3.1 billion in state and local property taxes in New Hampshire.

The businesses we work for paid an additional $554 million in the state’s combines business tax in the comparable fiscal year. The business taxes were paid by the firms that employ approximately 95% of us.

Most nominal businesses aren’t really businesses. About 77% of them are called non-employers — for most of them an accounting or tax filing tool to account for some sideline self-employment income.

The 4900 firms (3.7% of the nominal total) that have at least 20 employees account for 80% of the jobs. Just13,500 employers have at least 5 employees make up 95% of the jobs.

And that’s the average number of companies that have paid the Business Profits Tax over the last few years (15, 865 last year). So the companies paying the state’s business taxes account for 95% of the non-government jobs in New Hampshire.

Over the last twenty years, business taxes are becoming worse and worse. Since 1995, they have risen from just 14% of the state’s operating budget to 25% this year. We don’t rely on our largest revenue source to the same extent the federal government does but we’re getting there.

You needn’t fear the Ides of July like old Julius was troubled by March but the next time someone pontificates on taxes you might want to look behind the numbers.


Josh Elliott-Traficante

June 2014

As reported in the Nashua Telegraph, a Legislative audit of the Division of Economic Development, within the Department of Resources and Economic Development found that in 2011 and 2012, $875,750 was improperly given out as tax credits, while an additional $121,000 worth of tax credits were not given to business that were eligible to receive them. This mismanagement accounts for nearly half of all the tax credits granted by the Division. The specific programs in question are the Economic Revitalization Zone (ERZ)[i] tax credit and the Coös County Job Creation (CCJC) tax credit, both administered by the Department of Resources and Economic Development (DRED).

The ERZ tax credit is awarded to businesses that make capital improvements and create new jobs in specifically designated areas. Each year a total of $825,000 worth of credits are available. If there are more applications for credits then there are available, each applicant gets a proportional share. The Coös County Job Creation tax credit is designed to encourage full time, year round jobs in said county.  The applying company is eligible for up to $1000 per job created, and there is no cap on the total number of credits issued each year.

The audit found irregularities a total of 23 of the 29 applications for ERZ tax credits. 19 were found to not have qualified to receive the credits, while a further 4 should have received more. Of the infractions detailed:

  • 4 were awarded to businesses located outside of Economic Revitalization Zones, totaling $237,400.
  • 4 were awarded for employees who were not hired in the applicable year, totaling $81,000
  • 4 were awarded due to basic calculation errors, totaling $17,400
  • 3 were awarded based on incomplete paperwork, totaling $305,100
  • 3 were awarded the limit of $200,000, when the limit should have been $240,000
  • 1 application missed the deadline, but was awarded $188,200 in credits for the following tax year, in violation of the law.

For the 28 applications for the Coös County Job Creation tax credit, 7 were found to not be qualified to receive credits.[ii]

  • 1 was awarded $11,800 for employees retained during a takeover, which is not permitted
  • 6 were awarded for part time employees totaling $6,500. The credit explicitly requires employees to be full time.
  • 2 were awarded $1,500 for employees making below the minimum wage, in violation of the terms of the credit.

According to the auditors, one employee was responsible for reviewing and approving all of the applications.

From the report, it appears that these issues are due to a lack of oversight and competence rather than corruption. The auditors noted several problem areas, including a lack of controls over the application and award process, as well as a lack of safeguards to ensure compliance after the credit has been issued. For example, if a business was received a credit, but ended up cutting jobs, or moving out of state, there is no recourse for the state to get that money back.

The final recommendations include developing administrative rules for regulations, standards and forms relative to the tax credits and implementing policies that ensure adequate controls over calculating and awarding tax credits, consistent application of the same criteria, reviews, and obtaining supporting documentation to calculate tax credit awards.

The Division, to their credit, agreed with the recommendations and is taking steps to correct the problems with the tax credit programs highlighted by the audit.

Click here to read the report in its entirety.

[i] The list of all ERZs in the state, by municipality

[ii] Note: Some applications had multiple infractions.

Charlie Arlinghaus

June 4, 2014

As originally published in the New Hampshire Union Leader

The brokered deal on the Medicaid Enhancement Tax and lawsuit is a partial solution to an imperfect situation that will require difficult choices but it may still be the right choice to make. The complexity of the tax and the schemes surrounding it make evaluating and understanding the tax, the choices, and the possibilities difficult but let’s give it a try.

The Medicaid Enhancement Tax (or MET) was a convoluted scheme developed in 1991 to borrow from the hospitals and leverage money from the federal government at no cost to the hospitals. In the first decades it wasn’t a real tax, it had no cost to hospitals, and was something they could hardly refuse to go along with. It took almost 20 years but the folly of trusting a money hungry government finally hit them like a 2×4 to the face.

The no-cost favor hospitals did the government had created a structure to collect hundreds of millions of dollars. In 2009, the government took some money off the top. In 2011, hospitals were hit with a de facto tax increase of $250 million. When your taxes go up that much, you take action.

The hospitals stopped being cooperative doormats, hired good lawyers, and – despite the famous lyrical prediction to the contrary – fought the law and the law lost.

That put the government in an odd spot. If they took no action, about $370 million for the current budget would either not be collected or refunded while only $50 million of spending would go away.

Your perspective on what should happen next might depend on your thoughts about the lawsuit. If you believed the state’s appeal of the decision would be successful, you might not think any action necessary but few believed such a thing. Most people – and this includes me – believe that the tax would remain unconstitutional and there would be a $320 million budget hole.

This put hospitals in the driver’s seat. They were willing to negotiate a settlement that included more money for the state but insisted in exchange on some reversal of the earlier $250 million tax hike. There is no possible settlement that will not create a spending problem of some sort.

Theoretically, the tax was always collected to fund uncompensated care (largely free charity care that hospitals provide low income patients) and for Medicaid underpayment. Remember that Medicaid is not the government paying for health care. It is the government paying about a third to a half of what private insurance pays the same provider for the same service and expecting the provider to eat the rest of the cost. In theory, the MET is to help cover some of those underpayments.

The current proposed plan mandates that a minimum portion of the tax collected to fund uncompensated care actually does so and that those payments are made proportional to charity and Medicaid care actually provided. Even after we made a fake tax a real tax, some money went to such payments but that amount will probably rise by $125 million – half of which would be paid by the federal government.

There is a substantial difference between how much we will collect and how much we will return to hospitals. The remainder must be used – as it is used now voluntarily – to support regular Medicaid provider payments which we have to make either way. That additional amount can be thought of as the portion of the scheme that is a real tax. That amount is likely to be around $80-100 million less in the next budget than it is today. That’s a big hole but it’s after the election so politicians are happy.

The precise language of the law is being tweaked to eliminate drafting errors and some inconsistencies so it is a bit of a moving target. To make matters worse, there is not yet a fiscal note attached to the bill that is publicly available. I remain convinced that no legislation should be passed that does not include a fiscal note – the official financial analysis – that is available to the public for a week before the vote.

All that having been said, something has to be done or the state will have a huge financial hole. If lawmakers are confident the State would win an appeal to the Supreme Court, they might vote against this incomplete agreement. However, I think the state would lose an appeal and so do most lawyers I know. In the battle between a crap shoot and a beat up used car, the jalopy wins.

Charlie Arlinghaus

March 12, 2014

As originally published in the New Hampshire Union Leader

Every legislative session there are 3 or 4 issues which dominate the media’s attention but some of the most important long term decisions pass by with little notice. You’d be forgiven for thinking the gas tax, gambling, and Medicaid expansion are the only three issues before the legislature. These are important but you’ll forgive me if I take a moment to talk about the state budget.

Too often legislatures focus o the budget one year and completely ignore it the next year. The budget passed last year was balanced in its own way but had a few problems that the legislature wants to correct. The most important correction is a simple but controversial partial correction to the state’s rainy day fund.

Recall that our budget is balanced on the basis of a two-year estimate of revenues. Estimating 24 months of revenues in an uncertain economy is necessarily imprecise. Lawmakers, typically but perhaps not always, try to estimate cautiously which tends to leave a small remainder at the end of the two year cycle. By a state law honored more in the breach than in the observance, that residual is supposed to be set aside for a rainy day.

No one wants to create a slush fund with the remainders so the fund has a cap on its total amount (larger amounts should obviously be returned to the payer) and relatively strict rules about when withdrawals can be made.

The last two year budget ended with $72.2 million that should, by law, have been transferred to the rainy day fund. Instead, lawmakers spent it. That is, they spent most of it. At the time spending decisions were made, rather than balancing projected revenue and spending, they took about $50 million extra to enhance their spending thoughts instead and “temporarily” suspended the law that requires it be put in the rainy day fund.

In the final accounting, it turned out that there was more money than they thought. What to do with the extra $15.3 million? Predictably, one group has spending eyes. A second group, the Republican leadership of both houses, wants to deposit it into the rainy day fund. It’s about time.

Suspended state law would have required a $72 million deposit. Republicans want to deposit just the $15.3 million the compromise state budget hasn’t already spent. Oddly, that’s too much for the governor. Rather than be satisfied that she’s managed to tap into $57 million she’s not supposed to have, she wants to spend most of the extra as well. Ridiculous.

The $15.3 million should merely be an opening good faith deposit. The first of two fiscal years of this budget will see about $25 million in revenue above the budget – depending on business tax receipts the next two months.  That money should also be set aside, by law, to get us to half of what should have been deposited.

This is not merely a side issue unrelated to important things. Rather, it is a test of whether or not the legislature can discipline itself. We have state laws that create structures to impose modicums of discipline. Those laws turn from discipline to cynical mockeries of the taxpayer if they are merely suspended every budget season.

Some lawmakers are under the mistaken impression that we are still laboring under the supposedly dramatic cuts of the 2011 passed budget. The state’s operating budget (general and education funds plus a handful of relabeled funds) that year was a merely a reversal of the prior increase. That prior increase was not supported by tax dollars but by a one-time windfall (borrowing and a bailout).  The pre-bailout amount of $2.336 billion became $2.327 in the dramatic cut year.

That cut itself was almost entirely erased in the current budget. The pre-cut operating budget was $2.465 billion. After a brief decline, operating spending came back up to $2.457 in year two of the current budget. This time, however, the spending is supported largely by tax revenues  not by hundreds of millions of dollars of one-time windfalls. The money that should have been put in the rainy day fund amounts to 1.2% of the two-year budget (compared to 9.8% one-time cash in the borrowing and bailout budget).

Future budgets are dictated by current discipline. We can save ourselves a lot of trouble tomorrow by exercising discipline today. Until the proposed Rainy Day Fund deposit is $72 million, all calls to spend it instead should be resisted. Proposing $15.3 million is a pittance and ought not be controversial.

Charlie Arlinghaus

August 14, 2013

As originally published in the New Hampshire Union Leader

Because the numbers are so large, most people don’t bother to look at federal taxes and end up making assumptions that are at odds with the actual numbers. Federal taxes and the federal budget are very different from political rhetoric and muck of media reporting.

Every year the federal government adds to its historical analysis of who paid income taxes and how much they paid. Based on the rhetoric that floats around during the budget crisis that seems to return every few months, you might get the wrong idea. Interestingly, the federal income tax — the largest share of federal revenues — is remarkably progressive and has been getting more so for the last 30 years.

While the only certainties in life are said to be death and taxes, the federal income tax is an exception. Everyone may hate taxes but we don’t all pay them. Almost half of Americans, about 47 percent, don’t pay any income taxes. I don’t mean they get a refund of some of their pre-payments. Their annual tax income tax bill is either zero or negative (meaning their refunds exceed payments). That number varies by year and is a little higher in the early years of the recession but even in good times it was 40 percent.

One analyst, by the way, remarked that perhaps the 45 percent of people in polls who are happy with the tax system aren’t actually crazy as we might think but rather just the people who have nothing to be annoyed by because they don’t get a bill.

Everyone knows that richer people pay more in taxes because they have more money. If you make ten times what I make then I suspect you pay ten times in taxes. But is it proportional or do the wealthy manage to avoid their fair share as some think?

According to the 2010 data, the top 1 percent of all tax filers made 19 percent of the total income in the country. Their share of taxes, though, was much higher at 37 percent — almost twice as much as their income share would lead you to think. In contrast, the bottom 50 percent earned almost 12 percent of all the income but paid just 2.4 percent of the taxes. Instead of twice their income share, they paid one-fifth. Very progressive indeed as is every income split in between those bookends.

But do rich people pay less of a share than they used to? In fact, the change over 30 years has been remarkable. In 1983, the top 1 percent of earners paid 20 percent of federal income taxes and the bottom 50 percent paid 7 percent.

So, over the course of 30 years, the richest 1 percent has gone from paying three times the share of the poorest 50 percent to paying more than 15 times as great a share (and if you look at the year by year data it has been a steady progression over that time).

For those keeping track, the bottom 50 percent in 2010 was incomes under $34,300. The top 1 percent consisted of people earning more than $369,000.

The other great federal tax myth is that current levels of taxation aren’t anywhere close to balancing the budget. We can’t support the current government without big changes or so we are told.

Actually revenues grow every year — some years more than others and some less but, barring another huge recession, they will rise each year. According to the Congressional Budget Office, even with the current anemic growth assumptions, taxes will grow by an average of 5.8 percent each year over the next decade.

That could balance the budget without reducing spending. In fact, the lag for revenues to reach current spending levels is only three years. In other words, if we froze spending at the current dollar level, natural revenue growth would provide a surplus in three years.

Politicians in Washington can’t possibly freeze spending (though, of course their colleagues at the state level actually reduced spending in states across the country). But, let’s say they decided (an unnatural act for politicians) that come hell or high water the budget had to be balanced in ten years. Would huge spending cuts be required?

Not at all. Mild restraint would be required. Spending could grow at 3.7 percent and we would achieve balance in ten years. Why is that so problematic? Current spending projections anticipate spending to grow by 5.4 percent. Apparently, growing but by a little bit less is a Herculean task that we have no realistic hope of ever expecting the Lilliputians we send to Washington to accomplish.

Josh Elliott-Traficante

August 8, 2013

Last week the City of Manchester saw its general obligation bond rating downgraded from Aa1 to Aa2; in layman’s terms it went from the second highest to the third highest ranking category affecting $193 million in outstanding general obligation (GO) debt. The bond rating agency Moody’s also downgraded the school facility revenue bonds to Aa3, affecting $77.3 million in outstanding bonds.

The long term outlook for the city’s debt was also changed from negative to stable, indicating that further downgrades are unlikely.

Many have blamed the recently enacted tax cap for the downgrade and Moody’s opinion does mention it, noting that “(t)he rating also incorporates the city’s currently satisfactory financial position, which has been pressured by the recent implementation of a local tax cap.”

But is the tax cap really to blame for the downgrade? The key to the rating downgrade is the size of the city’s reserve fund, which dropped below 20% of revenues due to the recession and the sluggish recovery’s impact on tax collections. While a tax cap can limit the ability of the city to rebuild those reserves, the real culprit is the Recreation Fund.

The Recreation Fund, which consists of McIntyre Ski Area (which has been leased to a private group since 2009), a pair of ice arenas, and a golf course, have been operating in deficit for several years, requiring the transfer of a total of $5.8 million from the city’s general fund, with the understanding that it be repaid. The Recreation Fund currently carries this amount on its balance sheet as ‘due to other funds’. Given the nature of the debt, Moody’s considers it very unlikely that the city will recoup this money from the Recreation Fund and therefore factored in the write off for the full amount against the General Fund reserves.

Of this write off, Moody’s notes, “while the liability to the General Fund is limited given the size of the fund, the adjustment to the fund balance nonetheless brings reserves to levels below the current rating category.”

This means that the downgrade would have happened with or without a tax cap in place. The write off of the Recreation Fund deficit, which reduced the city’s Reserve Fund below the threshold for holding onto the Aa1 rating, is solely to blame. Had the tax cap not been in place there is a possibility that the outlook may have been rated positive rather than stable, but that would purely be speculation. Of the factors that could increase the city’s rating, two are directly related to the pressures placed on the city by the Recreation Fund, with the third being sustained economic growth.

Furthering the point, the last rating given by Fitch, another bond rating agency, less than a year ago mentioned the tax cap as likely to limit budget flexibility but concluded that “the impact of the cap on the city’s creditworthiness is presently neutral”

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.

Charlie Arlinghaus

April 24, 2013

As originally published in the New Hampshire Union Leader

Other states have always been annoyed by states like New Hampshire without a sales tax. Tax competition is distressing to the uncompetitive. But few tax grabs are as ill considered, unfair, and anti-competitive as the federal government’s attempt to impose a massive new internet sales tax. New Hampshire in particular needs to be careful. The new tax will lead to the elimination of the sales tax competitive advantage that is the foundation of our retail economy.

Under the American tax system, states may apply taxes to entities with a physical presence (or “nexus”) in the state. It would of course be ridiculous to expect an orange grower in Florida to apply your state’s sales tax on fruit you buy on vacation or to exempt you if you came from a state with no sales tax. So, in general, one state’s tax collector has no authority to reach across state lines and regulate you from beyond the borders.

For decades, mail-order catalogs annoyed state tax collectors. Because they weren’t located in a state, they didn’t pay taxes to that state just because a local placed an order – similar to the roadside stand in Florida selling oranges. After many skirmishes, the Supreme Court sided with the retailer and ruled that taxing a company with no state presence was a violation of the interstate commerce clause.

If mail order companies annoyed tax collectors, the internet made it even worse. My buying a shirt or book online and not paying sales tax apparently threatens the foundations of democracy.

By the way, how much of a threat to regular stores do you think the internet is? It’s less than you think. Total retail sales in 2012 were $4.3 trillion. The e-commerce share of sales was 5.2% of that total.

Nonetheless Congress is trying to pass a law to force every internet retailer to collect sales taxes for every jurisdiction in America. That’s not 50 different tax schemes, there are 9,646 different tax schemes. For example, in Chicago you would pay sales taxes on a purchase to four different entities – five different ones on certain purchases.

If you are a giant retailer like, this is less of a problem for you so you support the law – it won’t put you out of business but will be a nightmare for your smaller competitors. If you are a small home-based retailer that does a little business through eBay you’ll just go out of business. Thank you Congress.

So far Congress is only punishing the 5% e-commerce people. For the 95% of sales that go to “brick-and-mortar” stores, this tax scheme is considered burdensome so they don’t have to collect any tax but their state’s tax (I’m not sure what the pinheads in Congress think it is about using the internet that makes a regulatory burden suddenly fine but then logic is not Washington’s strong suit).

Don’t expect the state tax collectors to be content with leaving the physical stores alone. Massachusetts has been trying for decades to force New Hampshire retailers to collect sales and use tax on Massachusetts residents. The internet sales tax bill gives them both a mechanism and a precedent. If we can force mail-order and internet companies to collect taxes for more than 9000 jurisdictions, then how hard will it be for Massachusetts to force tire stores or appliance stores to collect their sales tax. The day is not long off when Massachusetts brings action under the new scheme to force our state liquor store to collect and remit Massachusetts taxes on all those cross border sales.

Sen. Ayotte and Sen. Shaheen are both opposed to the bill but the New Hampshire legislature is technically helping to fund the effort to tax us. The legislature pays dues to the National Conference of State Legislatures ($126,761 annually to NCSL and others in the current budget draft). The NCSL is pushing this bill as some sort of state tax relief (I’m not making that up) and promises to “continue to advocate vigorously for” the new tax.

When the federal government interferes in state tax policy, it is never to help you pay less. Somehow “reform” always involves you paying more and the politicians having more to control.

Should every retail business in America, large or small, have to collect taxes for all 9,646 different tax jurisdictions? Garage sales, flea markets, the guy selling old records on eBay, an out-of-print book I bought by mail from England?

Congress should stick to destroying the federal government. They’re good at that. But I wish they’d leave state tax policy alone.