With many in the Granite State still struggling to recover from the 2007-2009 national recession, the full range of public policies across New Hampshire should seek to remove existing barriers to economic security.
Yet, one key set of policies – New Hampshire’s state and local tax system – pushes in the opposite direction. It requires upper-income taxpayers to dedicate much smaller shares of their incomes to meeting their tax responsibilities than it demands of low- and moderate-income taxpayers. In fact, a new report shows that, on average, the wealthiest families in New Hampshire pay an effective state and local tax rate that is less than one-third of the rate faced by families just trying to make ends meet.
The report, entitled Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, was published by the Washington, DC-based Institute on Taxation & Economic Policy (ITEP), a non-profit, non-partisan research organization that works on federal, state, and local tax policy issues. Drawing upon data from the Internal Revenue Service, the US Census Bureau, and other sources, it examines how state and local tax systems affect families and individuals at different income levels. In particular, it estimates that:
- the individuals and families that comprised the poorest fifth of taxpayers in New Hampshire, on average, paid 8.6 percent of their incomes in state and local taxes in 2010. In other words, these taxpayers – whose average income was $14,100 – faced an effective state and local tax rate of 8.6 percent.
- taxpayers in the middle of the income distribution – individuals and families with incomes ranging from $41,000 to $67,000 – paid a somewhat smaller share of their incomes – 6.6 percent – in taxes that same year.
- the most affluent Granite Staters – that is, the very richest 1 percent of taxpayers – experienced an effective tax rate of just 2.4 percent on average. Taxpayers in this category had an average income of slightly more than $1.2 million in 2010.
The unfair distribution of taxes in New Hampshire can be attributed to two main factors: (1) the mix of taxes that are – and are not — levied in the state and (2) the specific design of those taxes that are in place.
For instance, New Hampshire, unlike most states, does not now impose a general sales tax; the adoption of such a tax, by itself, would likely make the state’s tax system even more inequitable. Such taxes tend to fall most heavily on low- and moderate-income residents, who typically spend most of their incomes. Conversely, if New Hampshire were to enact a broad-based income tax, its tax system would likely become more progressive.
While property taxes obviously play an important role in New Hampshire, the manner in which they are structured may exacerbate the regressive nature of the state’s overall tax system. Many states offer a basic “homestead” exemption that shields a certain amount of a home’s value from taxation; while all homeowners may receive the exemption, it is usually more meaningful to low- and moderate-income taxpayers, as that amount represents a larger share of their homes’ values or reduces their taxes more relative to their total incomes. New Hampshire uses this approach in only a limited fashion, permitting exemptions for specific categories of homeowners, such as veterans or disabled residents.
This is the fourth edition of ITEP’s Who Pays? report. Each of the prior editions, the earliest of which dates to 1996, arrived at similar conclusions about the regressive nature of New Hampshire’s state and local tax system.