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Testimony Regarding Constitutional Amendment CACR13

Chairman Prescott, Members of the Committee, thank you for the opportunity to appear before you this afternoon.  My name is Jeff McLynch and I am the Executive Director of the New Hampshire Fiscal Policy Institute (NHFPI), an independent, non-partisan organization dedicated to exploring, developing, and promoting public policies that foster economic opportunity and prosperity for all New Hampshire residents, with an emphasis on low- and moderate-income families and individuals.

I am here today to offer testimony on CACR 13, a measure that would amend the New Hampshire Constitution to prohibit any new tax on a person’s income, from whatever source it may be derived.  At first glance, the intent of the amendment seems straightforward enough:  it seeks to ban a broad-based personal income tax.  In reality, though, CACR 13 would go well beyond that apparent aim.

Most notably, CACR 13 would lead to a major expansion of the judicial branch’s role in setting tax policy in New Hampshire, shifting critical decisions from the State House to the Supreme Court.  Words and concepts such as “new,” “person,” or “income” may appear quite clear, but, should CACR 13 be adopted, the courts would likely be called upon to interpret them and their implications any time New Hampshire attempted a meaningful modification to its current tax system, thus setting the stage for decades of litigation.

As a result, CACR 13 would largely freeze that tax system — and its shortcomings – in place for years to come and would make it far more difficult for policymakers to alleviate the system’s dependence on certain forms of taxation, such as business and property taxes.  CACR 13 could even exacerbate those shortcomings over time, as it would likely mean that, should policymakers need to generate revenue to meet important public priorities, they would look first to increasing the rates of the state’s existing revenue sources, such as its tobacco or motor fuel levies.

To expand upon my first point, Marcus Hurn, Professor of Law at the University of New Hampshire School of Law and the author of several scholarly articles on the New Hampshire Constitution and the state’s taxing authority, has conducted an analysis of some of the problems associated with the adoption of CACR 13.  He asked that I share the results of that analysis with you today; I have attached a copy of Professor Hurn’s analysis of CACR13 to my prepared testimony.

In brief, Professor Hurn argues that, should CACR 13 be incorporated into the New Hampshire Constitution, it would “start a cascade of constitutional questions that could take years to settle” and “inescapably require the Supreme Court to develop whole new bodies of constitutional law and … to make judgment calls where clear or even workable definitions are probably impossible.”  Consequently, it would “require the Supreme Court continually to be much more involved in reviewing tax laws and proposals than it already is.”[i]  He notes, by way of precedent, that the last major change to New Hampshire’s Constitution regarding taxation — in 1903 – led to “at least 40 years of legal confusion and uncertainty” and prevented the state from devising a modern business tax until 1969.

Such difficulties arise, in his view, both from the interaction of the proposed amendment with the Constitution’s existing constraints on taxing authority and differences between the presumed meaning of certain words and concepts in the amendment and their potential legal definitions.

Take, for instance, the reference to a “person’s” income.  As Professor Hurn points out, from a legal standpoint, “corporations are persons,” but he goes on to observe that attempts to differentiate between natural persons and corporations could create additional difficulties, since the New Hampshire Constitution bars discrimination among persons in levying taxes.  Similarly, he notes that the New Hampshire Supreme Court has “never been required to define income,” one of the key concepts in the proposed amendment.  Thus, adoption of CACR 13 would force the Supreme Court to “develop a constitutional definition and to hold the Legislature to it.”

Much the same could be said about the term “new.”  In Professor Hurn’s view, the Supreme Court would have to decide, on a case by case basis, how much variation in a tax makes it “new.”  As a result, he asks, “Do we want to get an advisory opinion every time House or Senate thinks some change in the [Business Profits Tax] is desirable?”

Looking back over the past legislative session, it is easy to see how such concerns could come into play.  For instance, earlier this session, the Senate passed SB 168, which seeks to bring New Hampshire’s interest and dividend tax into conformity with federal law.  While the bill would result in larger tax liabilities for some taxpayers and smaller liabilities for others, a case could be made for adoption of the bill on the grounds that it would ease compliance and administration.  However, if CACR 13 were in place, New Hampshire would not be able to pursue this reform, no matter its merits, since it would likely amount to a new tax on a person’s income from whatever source derived, as it would tax sources of income not currently taxed under New Hampshire law.

Similarly, as the Members of the Committee know, last month, the House of Representatives considered legislation – HB 593 – to permit video lottery and table gaming in the state.  Under one version of that bill, New Hampshire would have required 40 percent of the “net machine income generated by video lottery machines” to be paid to the state and certain municipalities.  Those funds, in turn, would have been used to reduce the Business Profits and Business Enterprise Taxes.  It does not seem unreasonable to expect that, if CACR 13 were incorporated into the constitution, such a requirement might be subjected to a legal challenge.  If such a challenge were successful, it would deny New Hampshire one of the principal justifications for allowing casinos in the first place – to provide a new source of revenue for the state.

Under CACR 13, therefore, policymakers would find it far more difficult to enact meaningful reforms to the state’s tax system, even reforms that were intended to be revenue neutral or that did not contemplate a broad-based personal income tax.  In fact, the threat of prolonged litigation could deter policymakers from simply considering such reforms, let alone actively pursuing them.

As a result, CACR 13 would effectively freeze in place New Hampshire’s existing tax system.  NHFPI examined that system in its December 2010 report, An Overview of New Hampshire’s Tax System, and highlighted two chief shortcomings, both of which CACR 13 would sustain for years to come.

First and foremost, New Hampshire’s tax system helps to perpetuate the state’s long-standing structural budget deficit.  Structural budget deficits arise when the growth in state revenues fail to match the natural growth in state expenditures.  Indeed, a February 1992 study by KPMG Peat Marwick found that:

New Hampshire can be characterized as having a long-term structural deficit in the sense that for a given scope of programs and revenue system, expenditures grow automatically faster than revenues.[ii]

States can forestall the emergence of structural budget deficits by ensuring that their tax systems produce a stream of revenue that grows along with their economies.  Yet, in recent years, New Hampshire’s tax system has failed to meet that standard.   Data from the Office of the Legislative Budget Assistant indicate that, after adjusting for rate changes and inflation, General Fund tax revenue in New Hampshire grew by just 0.6 percent per year between FY 1994, when the Business Enterprise Tax took effect, and FY 2011.  In comparison, personal income in New Hampshire, a common proxy for the size of the state’s economy, rose by 2.4 percent per year on average, after adjusting for inflation, over the same period.

Second, New Hampshire’s current tax system is regressive.  It requires low- and moderate-income individuals and families to dedicate much larger shares of their incomes to meeting their tax responsibilities than it demands of upper-income taxpayers.  More specifically, an analysis conducted by the Institute on Taxation and Economic Policy found that, in 2007, the individuals and families that comprised the poorest fifth of taxpayers in New Hampshire, on average, paid 8.3 percent of their incomes in state and local taxes.[iii]  In other words, these taxpayers – whose average income was $14,100 – faced an effective state and local tax rate of 8.3 percent.  Meanwhile, taxpayers in the middle of the income distribution – individuals and families with incomes ranging from $40,000 to $65,000 – paid a somewhat smaller share of their incomes – 6.3 percent – in taxes that same year.  In stark contrast, the most well-off Granite Staters – those that constituted the very richest 1 percent of taxpayers – experienced an effective tax rate of just 2.0 percent on average.  Taxpayers in this category had an average income of close to $1.65 million in 2007.  In short, at a time when the typical New Hampshire household has seen its income decline in real terms, New Hampshire’s tax system impairs working families’ ability to make ends meet.

These two shortcomings arise in large measure because of the taxes on which New Hampshire currently relies.  For instance, levies on cigarettes, gasoline, or beer, hold a prominent place in New Hampshire’s tax system.  In fact, according to data from the US Census Bureau, these three excise taxes accounted for close to 7 percent of state and local tax revenue in FY 2009, the 10th highest concentration in the country that year.  (What’s more, they comprised nearly 16 percent of state tax revenue.)  Unfortunately, these sources of revenue not only fail to grow along with the New Hampshire economy, but also impose a much greater burden on low- and moderate-income families and individuals.  In comparison to other states, New Hampshire also tends to rely disproportionately on property taxes and on business taxes, such as the Business Profits Tax (BPT) or Business Enterprise Tax (BET).

If CACR 13 were to become part of the New Hampshire Constitution, the state would find it far more difficult to shift away from its dependence on business, excise, or property taxes.  In fact, adoption of CACR 13 would help to ensure that, in order to generate additional revenue in the future, New Hampshire policymakers would have to look first to raising rates on the taxes that are in place today, thus potentially exacerbating the shortcomings previously described.

Finally, it is worth noting that the move to create a constitutional prohibition against any new tax on income enjoys relatively low support among the general public.  The WMUR Granite State Poll conducted in February by the University of New Hampshire Survey Center asked over 500 New Hampshire adults whether they would vote for such an amendment to the constitution.  Just 39 percent of respondents indicated that they would, in fact, support such an amendment, while 41 percent stated that they would vote against it.

In sum, the public already appears to understand the point that I wish to convey today.  CACR 13 simply goes too far.

Once more, I thank you for the opportunity to testify and would be more than happy to answer any questions the Committee may have.


[i] Hurn, Marcus, Latent Hazards in the Current Language of CACR 13, April 2, 2012.

[ii] KPMG Peat Marwick, A Study of the New Hampshire State and Local Revenue Structure, February 13, 1992, p. ii.

[iii] Davis, Carl, et. al., Who Pays?  A Distributional Analysis of the Taxpayers in All 50 States, Institute on Taxation and Economic Policy (ITEP), December 2009, p. 74.  Given the disparate treatment of elderly taxpayers among the states, ITEP’s incidence analysis includes non-elderly taxpayers only.

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