Jeff McLynch- State Policy Director, Institute on Taxation and Economic Policy
McLynch says tax policy should be guided by four common principles.
Adequacy- Taxes ought to raise enough revenue to finance services decided by the Legislature. McLynch says taxes should be sustainable, so that they can grow with the economy and finance services in good economic times and bad.
Equity- Taxes should have horizontal equity, which means taxpayers in similar circumstances pay similar amounts of taxes, and vertical equity, the concept that the amount one pays in taxes should vary with one's ability to pay.
Neutrality- Officials who shape tax policy should not attempt to influence economic decision making.
Simplicity- Tax systems should be simple, both for taxpayers to understand and for tax administrators to enforce.
He argues that the current cyclical budget shortfall has gained the most attention, but that New Hampshire also has a structural budget shortfall which can not sustain state spending. He says state spending has fallen from 2.7% of gross state product in the late 1970's to 2.3% today. He says that figure has been relatively flat since the late 1980's.
General Fund revenues have doubled in the last decade, but he says a third of that increase has been from new taxes or federal funds, and not growth in the tax base.
McLynch says New Hampshire's tax on interest and dividends violates horizontal equity since one more of income is taxes, while wages are not.
New Hampshire's current tax structure conflicts with vertical equity, as he says tax payments don't correspond to a taxpayers ability to pay. He says New Hampshire tax structure is extremely regressive. He says the bottom fifth of income earners pay 7.9% of their income, 7.4% in the middle income brackets, while the top earners pay 2.1% of their income in state taxes.
McLynch says the lack of a broad-based state sales or income tax means the state has to rely more on business taxes, with the second highest rates by some measures. He says this lack of balance limits options to lawmakers in slow economic times. He says New Hampshire's habit of raising cigarette taxes four times in the last five years demonstrates the limited options available.
He says the failure of New Hampshire's tax system to provide equity exacerbates growing inequality in income growth, where lower income families have seen no real increase in wealth, while the top earners have seen a 33% increase in household income. He says the lack of growth should be main concern, but widening income inequality leads to higher crime and poorer public health.
McLynch says a sales tax would hurt tax equity, since lower income households would pay a higher percentage of their incomes. He recommends an income tax, based on either total federal income or adjusted gross income, at 4%. He says the Legislature should decide how to use the $750 million per year that an income tax would generate, but says up to $700 million could go towards property tax relief.