New Hampshire has long been portrayed as a low tax state, due in large measure to the absence of broad-based sales and income taxes. Census Bureau data released over the summer generally affirm that portrayal, revealing that, relative to the size of its economy, New Hampshire has nearly the lowest level of combined state and local taxes in the nation. Based on the Census Bureau’s 2008 Annual Survey of State and Local Government Finances, state and local taxes in New Hampshire amounted to 8.7 percent of personal income in Fiscal Year 2008 (FY08). Only South Dakota, where state and local taxes equaled 8.1 percent of personal income, had a lower level of taxation overall that year. Indeed, as the figure at right indicates, state and local taxes in New Hampshire remain substantially below the national average. In FY08, state and local taxes nationwide totaled 10.9 percent of personal income – or more than 2 percentage points above the New Hampshire mark. To put this difference in perspective, state and local taxes in New Hampshire would have had to have been almost $1.3 billion higher in FY08 in order to put them at the same level as the country as a whole.
Of note, the gap in tax levels between New Hampshire and the country as a whole appears to have grown modestly in recent years, as the figure below suggests. Between FY 2004 and FY 2008 – the five most recent fiscal years for which Census Bureau data are available – state and local taxes as a share of personal income rose slightly in New Hampshire, from 8.6 percent to 8.7 percent. Over the same period, state and local taxes for the United States in the aggregate climbed from 10.5 percent to 10.9 percent of personal income. While these differences may seem fairly narrow, their impact on state and local budgets can be significant. For example, had state and local taxes in New Hampshire climbed by four-tenths of a percentage point of personal income during this five year span – rather than by roughly one-tenth of a percentage point – total tax collections across the Granite State would have been nearly $230 million higher in FY 2008.
This gap in tax levels reflects, in part, the relatively slower rate at which taxes in New Hampshire have grown in recent years. Based on the Census Bureau data, between FY 2004 and FY 2008, total state and local taxes in New Hampshire grew at a real average annual rate of 1.8 percent. For the United States in the aggregate, the comparable figure was 3.7 percent; for New England, it was 2.7 percent. However, because they consist solely of total collections, the Census Bureau data offer little insight into the reasons behind these differing growth rates. Tax levels may vary in a given jurisdiction from one year to the next due to legislative changes or because of underlying economic trends. Accordingly, tax levels for the entirety of the United States may have risen somewhat more swiftly than in New Hampshire during this period because other states took steps to generate additional tax revenue or because the economic bases and activities on which New Hampshire levies its taxes expanded less rapidly than in other states.
To be sure, the Census Bureau data exhibit other limitations as well. For instance, as FY 2008 is the most recent year available, they do not yet reflect the full impact of the national recession – or of states’ and localities’ responses to it – on state and local tax collections. Moreover, while they allow for aggregate comparisons among states, they do not permit any real examination of the differences in the taxes owed among individuals and businesses in any given state.
Despite these limitations, the Census Bureau data leave little doubt that state and local taxes in New Hampshire remain quite low in comparison to other states. Moreover, they suggest that the gap in tax levels is so large that any changes in tax policy that have been adopted here since FY 2008 – or that may be adopted to help address future budget deficits – are unlikely to alter dramatically New Hampshire’s relative standing among the states.
About the Measures Used in this Issue Brief
This Issue Brief expresses tax levels as combined state and local taxes as a percent – or share – of personal income. It does so for two principal reasons. First, it combines state and local taxes since the responsibility for taxation by different levels of government varies greatly across the country. Consequently, focusing solely on state taxes or strictly upon local taxes would lead to distorted comparisons among states. Second, it measures taxes relative to personal income, a statistic published by the United States Bureau of Economic Analysis and a common proxy for the size of a state’s economy, in order to assess the aggregate economic resources a given state devotes to taxation and, by extension, to public services. Other measures, such as those calculated on a per capita basis, fail to convey the relationship between taxes and a state’s aggregate ability to pay them.