Why NH has no income tax

The state’s aversion to ‘broad-based’ taxes remains a mystery to many

Recently, a very nice young reporter from NH Public Radio asked to interview me for the “Word of Mouth” program, which was addressing the question, “Why doesn’t New Hampshire have an income tax?” Apparently, a new resident of New Hampshire called the station and asked that question, when confronted with underfunded schools in her community and other needs.

Then, at a recent meeting of a committee of a not-for-profit, a new board member asked a senior staff member why there was such trouble getting adequate funding for disability programs. The answer was, “New Hampshire has such an antiquated tax system with the property tax, that there is no money to meet needs in communities that have to be funded through the state.”

All of which raises the issue of why New Hampshire has no income or other broad-based tax.

Part of the answer lies in the nature of New Hampshire’s political system. Based on a system devised in the 1700s, the NH House is very large, the Senate is small, the Executive Council has a check on the governor and the governor has a two-year term. The governmental form reflects a fundamental distrust of central government and the desire to keep it weak.

This may be good 18th century thinking, but this is the 21st century, with all of the attendant needs, matching funds to take advantage of federal programs, statewide needs, etc.

The reporter, new to New Hampshire, asked me if the lack of an income tax and the presence of “the pledge” was the result of the right-wing publisher of the Manchester Union Leader, William Loeb. Loeb, who charitably could be described as “very conservative,” while not living in New Hampshire, liked to instruct the state on the dangers of government and the evil of taxation. His influence was greater then than newspaper’s influence is now.

In 1968, Walter Peterson was elected governor, and the first bill entered into the 1969 Legislature was one to create a “Citizens Task Force on Government Organization,” which, when implemented, studied all aspects of New Hampshire government, taxation and needed legislation.

Many things came out of the task force. There were reforms of government, departmental consolidations and modernization of methods.

New Hampshire had an antiquated tax system based on wealth, as wealth was defined in the 19th century. Manufacturing companies’ wealth was measured by the value of machines and inventory. Thus there was something called a “stock in trade tax,” which imposed a property tax on machine and inventory value. Agriculture, another major industry, measured wealth in the amount of land owned by farmers. Thus the property tax valued and taxed land holdings.

The Peterson task force’s first proposal was to replace the stock in trade tax with the business profits tax, an income tax on the profits earned by businesses. This was implemented in the 1971 legislative session.

The next step, addressing the property tax, was to be proposed and implemented in the next legislative term. Peterson, rounding a wave of popularity, but facing the resentment of those who did not want to have the tax system changed, declared his candidacy for a third term. Loeb backed Orford businessman Meldrim Thomson, Thomson defeated Peterson in the Republican primary and went on to win the general election in a three-way race.

Peterson had proposed a 3 percent income tax to reform the property tax system, with accommodations for local tax relief going along with the income tax proposal. With his defeat, that proposal was gone.

Thomson, whose slogan was “Ax the Tax,” took “the pledge,” and since that time, the pledge has been the first question to ask of any gubernatorial candidate. It used to be that almost all the Republicans took the pledge and Democrats did not, although lately, Democrats have taken it willingly.

Why there is an aversion to “broad-based” taxes is a mystery to many, since when taxes are paid by everyone, the burden of anyone is lessened and fairness is increased.

Nevertheless, the pledge remains part of our politics and the system remains constantly in tension between meeting needs and finding enough revenue in our cobbled-together system of fees and taxes.

Will this ever change? Maybe it will. And maybe it won’t.

Brad Cook, a shareholder in the Manchester law firm of Sheehan Phinney Bass & Green, heads its government relations and estate planning groups.