April 10, 2008

Is The Pledge starting to crumble?
New Hampshire might just be ready to consider a different way to tax
By Alec O’Meara • aomeara@hippopress.com

Paul Henle doesn’t want to talk about answers.

The executive director ofthe Granite State Fair Tax Coalition, the man calling most loudly for a change in the way New Hampshire government does its business, doesn’t care what the solution is, so long as residents of New Hampshire acknowledge that the state’s current system, which relies heavily on local property taxes, needs changes. Don’t bother asking about what would happen next, or even if he personally sees a better way, because Henle, a quiet, soft-spoken man who gets a little nervous around interviewers, doesn’t have any answers. His lack of answers is the whole point, he’ll tell you, because he believes that state politicians don’t want to acknowledge that there is a problem in the first place.

All Henle and other Coalition members want is to kill The Pledge — that promise not to support any new taxes that once was and for some still is an ironclad requirement for New Hampshire politicians. (And surprising, a lot of voters from a lot of towns have agreed with them — see the box below.) Henle and those in the anit-Pledge movement want to open discussion on a move away from property taxes. To accomplish that, he’ll have to reverse a tradition that dates back some 50 years.

In the beginning (1952), there was The Pledge
The origins of “The Pledge” are believed to date back to the 1952 gubernatorial campaign of Hugh Gregg, said Fergus Cullen, chairman of the New Hampshire State Republican Party, though he added that it did not take on its current status until former governor Meldrim Thompson’s “Ax the Tax” campaign in the 1970s. Thompson served three terms, from 1973 to 1979. Thompson’s stance allowed him to win a Republican primary over incumbent Walter Peterson, and “The Pledge” has been a mainstay of state politics ever since, or so goes the popular story. Peterson himself disagrees with that version of history.

“He’d run against me three times and lost, and it was all out there then,” Peterson said. He does, however, agree that the idea of introducing a new kind of tax was a card that Republicans played against Democrats throughout the ’80s and into the ’90s.

“All a Republican had to do was go to the tax issue, and they’d win the election. It was that powerful,” he said.

Today, a physical document of The Pledge, more of an honorary document than anything else, exists and can be printed out from the Coalition of New Hampshire Taxpayers Web site, www.cnht.org. The site includes photos of a number of campaigning politicians having signed “The Pledge,” including 2006 Republican gubernatorial nominee Jim Coburn. Not pictured is current Governor John Lynch, though Lynch has said repeatedly that he does not support a sales or income tax for New Hampshire.

In March, when the issues of taxes, spending and funding local government were at the forefront of most towns’ agendas, Henle placed the issue of local taxation on the table in about a quarter of the communities in the state through a special warrant article. The article asked if the voters wanted their elected officials in Concord to renounce The Pledge and work to get away from using property taxes to earn revenue.

To the members of Granite State Fair Tax Coalition, the problem begins and ends with an over-reliance on a property tax. The Pledge, they say, is simply a crutch used by Concord to keep the property tax in place and not bother to look for another way.

Opponents generally blew off the article. The New Hampshire Republican State Committee said that town meeting wasn’t the proper place to debate state policy. GraniteGrok, an influential conservative activist blog, simply threw up a repost from the Coalition of the New Hampshire Taxpayers attacking the coalition itself, and left it at that.

But when residents came out to vote in March, 74 percent of the towns given the chance to speak up on the issue told elected officials to give up on The Pledge.

“I was unaware that it had been that successful,” said state Senator Lou D’Allesandro, a Democrat of Manchester, who had thought the success rate had been closer to 35 percent and in line with state polling on the matter.

Maybe The Pledge is in hotter water than anyone imagined.

It’s the economy, stupid
Radio talk show host and former gubernatorial candidate Arnie Arnesen has been talking about scrapping The Pledge for the better part of two decades. The concept of moving away from the state’s heavy reliance on property taxes is not new. Arnesen herself led a charge for a move to an income tax as part of her 1992 campaign for the state’s highest office. That the flaws of a property tax system are getting more attention these days isn’t really a surprise, she said. Just as it did in 1992, The Pledge is taking heat because the economy is heading south.

“The only time you see people reconsidering The Pledge is when the middle-class families are hurtin’ puppies,” Arnesen said. “New Hampshire is very much an ‘I got mine’ state, so the only time this gets brought up is when it starts impacting more people.”

To say Arnesen thinks little of The Pledge is an understatement. She calls the old New Hampshire tradition “a pledge to fail” and says that not openly discussing alternatives is foolish.

“It’s not conservative, it’s not liberal, it’s not Republican and it’s not Democratic. It’s just stupid,” she said.

Arnesen’s comments were similar to those of Irene Messier, a Republican from Manchester who has served in the state House for every term since 1981 save one.

“I’ve been against The Pledge since Meldrim Thompson came up with it,” she said. “It never made any sense to me, and a lot of my constituents are hurt by high property taxes, including me.” Messier applauded the work done by Henle’s coalition and the towns that voted in favor of the article.

“Smart towns,” she said. “They don’t listen to what’s going on in Concord. They’ve got a good tie to what is going on.”

The towns that voted in favor of the article aren’t following any single demographic. Historically wealthy towns, waterfront towns and poorer towns have all voted in favor of the article. The lack of trends suggests that the issue might be related to the economy, as Arnesen thinks, and not to any specific change in the individual towns themselves, such as an influx of new residents already familiar with an income or sales tax.

“Actually, I think that a lot of the people that come here are people still clinging to the fantasy that you can get all the services government provides without paying for it,” said State Senator Peter Burling. In the Senate, Burling is one of the few who openly support the idea of a move away from a heavy reliance on property taxes, though he is unsure what impact Henle’s efforts will have.

Arnesen and Henle agree that the key problem with the property tax system is that it is not based on a resident’s income or ability to pay. Unlike a sales tax, which is proportionate to what you spend, or an income tax, which is based on what you earn, a property tax is tied to what you already own, which is damaging to residents who are faced with sudden change in income.

“When you retire, your property tax doesn’t go down. When you get laid off, your property tax doesn’t go down,” Henle said. “That makes property tax, by definition, an unfair tax.”

What am I paying for, anyway?
In every community in the state, homeowners pay a property tax bill broken into four parts: the local municipal government, the school district, the county and the state’s education fund.

The municipal and school portions of the tax bill pay for the most local of government expenses. The municpal (town or city) tax helps pay for the budgets of local police, fire, public works, clerk’s office, parks and recreation and administrative expenses. The school district portion goes to exactly that, the local school district. In most communities, the local school portion is the largest total piece of the tax bill, with the City of Manchester a notable exception. In Manchester, $7.84 of the overall $16.85 tax rate (that’s a $16.57 tax on every $1,000 of assessed value for a piece of property, a number that includes the state and county taxes) goes to the city’s expenses, and $5.29 goes to schools.

The county portion of the bill pays for county-wide services such as the sheriff’s department. The state portion of the tax bill goes solely toward statewide education initiatives. The rest of state government is paid for through a host of other localized taxes, most notably a business profits tax and a rooms and meals tax.

A community’s tax bill is determined annually by a formula that adds the projected costs at all four levels of government and then divides by the total property valuation of the community. Since town and city taxes are set independently of one another by the state, there can be significant disparity between homes appraised at identical values in different communities.

Concord, Nashua and Manchester all fell near the median of payments made by state residents in 2007, with tax rates (the amount paid per $1,000 of a property’s value) of $19.63, $16.57 and $17.40 respectively. In any of these cities, a family with a home assessed at $250,000 would pay between $4,100 and $4,900 in taxes on that property annually. An identically priced home in Salem, however, where the tax rate is just $13.21, would pay just $3,302. In Keene, meanwhile, the 2007 tax rate is $25.79, meaning a homeowner would pay $6,322 over a year for a home valued at the exact same amount.

Henle points to these numbers as a chief reason the property tax system needs to go, as communities with low population and high property value have absurdly low tax rates. The community of Moultonboro, for instance, has a year-round population of approximately 6,000 but its total assessed value of $2.8 billion is on par with Keene thanks to dozens of miles of waterfront property. As a result, a $250,000 home in Moultonboro paid just $1,747 in taxes in 2007.

Jim Rubens, a former state senator from Hanover and candidate for governor, feels the idea of giving the state the power to regulate what a given community can raise and spend is draconian, and expects New Hampshire residents would not buy into such a plan.

“It’s just not something, I think, many communities would stand for,” he said.

Even Burling thinks the difference between what communities pay is a red herring when talking about property taxes, and says that Henle’s conclusion on the matter is “misguided.”

Diversified funds?
The item opponents cited as the greatest problem in the state’s tax system is seen as one of its greatest strengths by proponents.The property tax is more than 60 percent of the total tax burden (state plus local) for a resident. Looked at from the state level, however, property tax is no larger than any of the other existing state taxes.

The Department of Revenue Administration collected nearly $1.2 billion from other forms of taxation in 2007. These include the business profits tax, which is essentially an income tax levied on businesses in the state; the rooms and meals tax; a tobacco tax, and several others. No single tax represents a significant portion of the total state budget, which gives the state a level of stability at the highest level, said Steve Norton, executive director of the New Hampshire Center for Public Policy.

“If you look at most state budgets in the nation, they’ve got big pieces of the pie that are sales and income taxes. If you look at our state, no piece of the pie is larger than 10 to 15 percent. We have a much more diverse revenue stream,” Norton said.

But the state has operated at a deficit in recent years. A 2003 study initiated by the Center for Public Policy showed that in the early 1990s the state would have been operating at a deficit of as much as $200 million annually on an $800 million budget. What kept the state operating was the federal tobacco settlement and a federal grant, and an agreement with Medicaid.

“We got lucky,” Arnesen said. “It was a one-time buy-out and we can’t expect it to happen again, because they [the federal government] are dealing with their own problems now.”

Don’t bury The Pledge yet
Since his successful spring, Henle has not heard from any new members of the House or the Seante who have felt that the vote impacts their opinion. No members of either body have done what the article asked, namely to renounce The Pledge and begin a discussion on the tax issue. Henle said he isn’t surprised.

Gov. Lynch made opposition to an income and sales tax a cornerstone of his previous two campaigns, and Henle counts no members of the Senate among public supporters, but he does believe he is impacting the discussion.

And perhaps he is. D’Allesandro said he is in favor of fair discussion on the matter, though he has not yet seen proof of a shift in ideology in the state. More public discussion and support, as with the anti-Pledge measure, could accomplish that.

“I happen to think an income tax is the way to go, but I don’t think it will happen unless people change their minds,” said Tim Dunn, a state representative from Keene and one of Henle’s strongest supporters in the House. “What is the sense in talking about options when the governor has said repeatedly that he will veto them? Will it happen? I don’t know. I’d like to see it happen, but I don’t know.”

Christine Hamm, a state representative from Hopkinton and a Henle supporter, did say that she had been approached by one House member who was rethinking his position on property taxes, but she declined to give the person’s name.

“I see this as just one step,” she said. “I know that there are people talking about it.”

Will revenue shortfalls be the tipping point? In 1992 and again in 2001, a change in the state’s revenue structure sparked discussion of a broad-based tax. If, as Nolan suggests, revenues become hard to predict, a deficit could begin discussions anew. Hamm said that while there is a “built-in deficit” in the state’s revenue system, she doesn’t know if that is enough to get people to rethink taxes.

Burling points to a disconnect between what people expect for services and what they are willing to pay.

“I’m in favor of any discussion that brings reality to the forefront of the issue, but I think it will be a couple of years before we see what sort of impact the Fair Tax Coalition has had,” Burling said.

The reality of New Hampshire politics, Burling believes, is that Henle’s work has not put The Pledge in jeopardy, nor will it change the minds of politicians who have debated the issue publicly and privately for decades. It takes something more personal than an exchange of government philosophies to cause a sea change on the level Henle is looking for.

“People change their minds on this at 3 a.m., when they are up at night thinking about the work that needs to be done on their car, and then thinking about an $8,000 property tax bill,” Burling said. “That’s when people take another look at it.”