Charles M. Arlinghaus: State can turn crisis into opportunity

By CHARLES M. ARLINGHAUS

The recession and the budget crisis it has created in every state have created an opportunity for New Hampshire to respond in a way that can ensure jobs and opportunity as the recession ends.

In a Sept. 3 Wall Street Journal column, Indiana's governor, Mitch Daniels, described the recession's long-term impact on state government as a permanent reduction in revenues that requires what he calls "the coming reset in state government."

Daniels, a former federal budget director, figures that states are seeing not a slowdown, but something of a ratcheting down that will require the government itself to reduce its size and scope of activities rather than wait for growth to bring us back to the previous status quo.

He particularly worries about sales taxes that generally account for a third of state tax collections (and as much one-half in some states). The slump in retail sales and other activities means those numbers will be slow to return. Sales-type taxes will not suddenly rocket back to previous levels.

New Hampshire doesn't have a general sales tax. However, we do tax a number of sales, such as beer, tobacco, rental cars, rooms and meals (which includes campgrounds this year), insurance policies plus liquor and lottery sales. All told, our taxes on sales accounted for about 42 percent of general revenues last year. We rely much more heavily than most states on the taxation of sales.

To bolster Daniels' point about requiring a reset of state government, this recession is affecting government in a different way than the last one. Seven and eight years ago, we saw state revenue growth not decline, but just slow down, and that caused havoc. Not including the state property tax, which doesn't fluctuate, or federal Medicaid enhancement, general state revenues grew only 2 percent and 1 percent for fiscal years 2003 and 2004.

The pressure and general concern throughout Concord were quickly erased when 11 percent and 9 percent growth made up for the slowdown and then some.

This last year, we saw something quite different. Those same revenues, which had averaged growth rates above 5 percent, actually declined by about 8 percent. In 2009, they were just slightly higher than they had been in 2006.

Early indications are that they will be flat for another year or two, repeating the dismal growth of the early 1990s. This trend is being repeated across the country.

Government responses to this reset create two different scenarios for job-creation prospects. The predictable response by many in government is to look for ways to raise taxes to protect the size of government. We see this trend in many of our neighbor states as they look for ways to continue to grow government. In fact, our own government increased 41 different taxes and fees, some small some larger. However, our course is not yet set.

As states around us look to protect the size of government and increase taxes, they send a clear message to companies and entrepreneurs looking to relocate and create jobs. As the economy recovers, jobs will be created somewhere. What we do next can shine a spotlight on New Hampshire or close a door.

Too much of the discussion of taxes and state fiscal policy focuses on the safety and well-being of only the government sector. We have an opportunity to make sure that job creation takes place here and employs New Hampshire people.

New Hampshire's success has been dictated in the past by creating an environment that attracts jobs. The recession and a modest reset of government create one of those opportunities.

When states around the country were adopting sales and income taxes, we resisted and created opportunity by carving out a niche for job creation. We were different in ways that appealed to employers.

Forty years ago, we showed how nimble we were by quickly eliminating a dozen taxes that penalized capital. Our economy grew dramatically because we tore down a barrier to start-up businesses and the jobs they bring.

As states around the country lose their heads and raise taxes, they are focusing on a short-term goal at the expense of their long-term economic growth. Caught in the mistake are their citizens who want and need jobs.

Their mistakes can become our opportunity. As government resets itself, we must remember not to get so blinded by the details of the short-term crisis that we fail to keep an eye on the long-term growth of the state.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.