How Does NH Do It?

To outsiders, NH's finances often appear like a grand act of fiscal sleight of hand. How does a state balance its books without relying on either a broad-based sales or income tax? In fact, NH is one of only two states (natural resource-rich Alaska being the other) that doesn't levy such taxes.

A recent report by the Federal Reserve Bank of Boston-How Does New Hampshire Do It?-examines the Granite State's unusual spending and revenue structure. The report concludes that NH's ability to survive without broad-based sales and income taxes is due to two factors: Less need for some public services such as welfare due to a low poverty rate  and second, NH has adopted policies limiting state services and has used creative Medicaid financing to bridge the financial gap with a lot of federal aid.

Although the report leaves a few stones unturned, it is a great conversation starter and raises a host of questions about NH's spending that should be a part of future discussions.

A Low Spending State?

New Hampshire prides itself on keeping spending low. And by one measure-per capita spending-we do. A 2008 ranking places NH the fourth best state for per capita spending. But that is just one dimension of the story. Given NH's low poverty rate, a primary driver of state spending-public welfare services-is less of a factor here. When spending is normalized by demand (the number of people in poverty), NH's per capita spending is around the national average.

Moreover, as Concord-based tax attorney William Ardinger has argued, per capita spending may not be the best measure of spending levels. State and local spending as the share of gross state product (GSP) in NH is much lower than the national average, but roughly consistent with Massachusetts' rate. Since 2000, state spending as a share of NH's GSP has increased from approximately 7 percent to 8 percent.

By some measures, it looks like NH spends more than the national average. Based on Census data, NH spent significantly more on prison operating costs than the national average in 2001 (the latest data available). Similarly, NH spends significantly more than the national average on Medicaid on a per enrollee basis. (Find more data on the Center's Web site.)

Is State Government Efficient?

Is it possible, at least in part, that the state provides cost effective solutions to problems of public good?

This question is tied in part to the question of whether NH has a small government. At least by one measure, the answer is no. In 2008, NH had about 15.1 state workers per 1,000 residents, a rate slightly higher than the national average of 14.2. Hawaii and Alaska had the highest rate of state employees per resident. The larger states-including California, Texas and New York-had lower rates, suggesting there are economies of scale at work.

As for outcomes, NH consistently ranks at the top of the country with respect to livability, including education levels, health and crime rates. But linking our success in national surveys to particular policies and services is difficult. With the death of performance-based budgeting efforts, attempts at quantitatively demonstrating the effect of additional investments or reductions have stalled. 

Can NH Still Import Tax Revenues?

According to the Tax Foundation, NH is one of the most effective states at exporting its tax burden to non-residents and out-of-state businesses. Only eight other states do a better job of exporting their so-called tax incidence.

For example, the state collected $1,689 in out-of-state tax receipts for every NH resident in 2009. This represented 44 percent of total tax receipts. In other words, non-residents pay slightly less than half of the tax burden in NH. The state collects out-of-state revenues through its tobacco and liquor sales, real estate transfers, the property tax (on second homes owned by out-of-staters), the business and profits tax, and the tax on meals and rooms. Many of these tax receipts are tied to the state's tourism industry.

While we know for certain that NH's reliance on federal Medicaid disproportionate care payments will soon come to an end, these other sources of non-resident tax revenue will likely continue to be strong.

What Does This Mean?

First of all, it appears the primary reason state spending is low is that NH is a livable, affluent state with a relatively well-educated population and a strong economy. As a result, demand for state services is comparatively lower than in most other states. Second, state budget writers are skilled at collecting revenue from out-of-state businesses and individuals to balance the state budget. Third, based on actual demand for services, in aggregate, we spend about as much as most other states.

Steve Norton is executive director of the NH Center for Public Policy Studies, an independent, nonprofit, non-partisan organization. It pursues data-driven research on public policy issues including the state budget, public school funding and health care finance. Norton may be reached at snorton at nhpolicy.org.