#

Political strategists see it as the third rail of New Hampshire politics, but some Granite State Democrats just can’t seem to let it go: A state income tax.

In a recent interview with the Keene Sentinel, Peterborough Democrats Jonah Wheeler and Rep. Peter Leishman both said they could support a broad-based income tax to shift the burden of education funding away from property taxes. 

“Wheeler said that to further boost public-education funding, he believes a new source of revenue is needed in the form of an income tax, which he said would simultaneously take the burden off property taxpayers,” according to the paper. “Leishman said he would support that kind of legislation and has voted in favor of it in the past.”

They aren’t alone.

During an October 2022 podcast interview, Claremont Republican-turned-Democrat state Senate candidate Charlene Lovett said she was “open to looking at” a shift to an income tax as well. During the interview, she discussed her Citizens Count survey declaration that she is  “undecided” on the idea of a broad-based income tax and the backlash that answer inspired.

But rather than taking a clear anti-income tax stance, she said it is an option that should be discussed.

“We’ve gotta deal with the fact we have an over-reliance on property taxes and it’s hurting people,” Lovett said in the podcast. “I think we have to look at that.” 

Lovett said her openness to considering an income tax is based on hearing from people financially burdened by property taxes during her years as mayor of Claremont. It has the highest property tax rate in the state.

While Lovett is trying to thread a political needle on the income tax, other Democrats are more open about embracing broad-based taxes — or at least on ruling them out.

Rep. Debra Altschiller (D-Stratham), who is running for the District 24 Senate seat being vacated by Tom Sherman, is one of many Democrats who voted against last year’s House constitutional amendment to ban income taxes. Joining Altschiller in that vote were Reps. Steve Shurtleff (D-Concord) and Matt Wilhelm (D-Manchester), currently locked in a battle for their party’s leadership.

Neither Shurtleff nor Wilhelm responded to an NH Journal question about whether they plan to support an income tax if they become House Speaker or House Minority Leader.

The amendment to ban income taxes garnered a majority vote but died because it failed to get the necessary three-fifths majority.

Rep. Eric Gallager (D-Concord) has long been vocal about his support for taxing Granite Stater’s income, but he seems to understand the political reality for Democrats.

“I can call for one because I’m in a safe D seat running unopposed,” Gallager said recently on Twitter. “But if I ever ran for governor I’d have to stop, which is one of the major reasons why I don’t ever think I’ll do so.”

Gallager’s sense of his political future aside, no Democratic gubernatorial candidate in recent memory has supported an income tax. Current Democratic standard bearer Sherman (D-Rye) has been vocal in rejecting income taxes and sales taxes in his faltering campaign against Gov. Chris Sununu.

“I will veto an income tax or sales tax if it comes across my desk,” Sherman told the Pulse of NH.

But Sherman did back a mandatory paid family medical leave plan passed by the Democratic legislature in 2019, which was paid for by a mandatory payment based on wages. Republicans argue that is an income tax (it is actually a payroll tax), but Democrats still continue to trip over the issue.

During a recent candidate forum in the District 1 Senate race, Rep. Edith Tucker (D-Randolph) tried to explain her vote for the paid leave plan and its funding mechanism.

“It’s not an income tax,” she insisted. “It’s a tax taken for a particular purpose from your paycheck.”

Granite State voters may not see the distinction.

When Sen. Maggie Hassan attacked Gen. Don Bolduc for supporting the “FAIR Tax” during the NHPR U.S. Senate debate, nobody else in the room appeared to know what she was talking about — including Bolduc.

Days later, it was still not clear if Bolduc had ever embraced the obscure plan to eliminate the IRS, or is even familiar with its details. What is clear is that Team Hassan has worked hard to make it an issue in the waning days of the campaign — a fact that raises questions about the Democrats’ strategy.

Before last week, virtually nobody following the Hassan v. Bolduc campaign had heard the phrase “FAIR Tax.” When Hassan repeatedly declared, seemingly at random, that Bolduc backs a 23 percent national sales tax, he said he did not know what she was talking about. She pointed to his answer to a question on a Facebook Live event hosted by WMUR’s Adam Sexton a few days earlier.

The FAIR Tax slogan is “Abolish the IRS!” It would entirely replace all income and payroll taxes with a national consumption (or sales) tax. The premise is that wealthy taxpayers wouldn’t be able to use loopholes to evade paying their fair share and it would catch the revenue lost to the under-the-table economy.

Good idea? Bad? Whatever it is, it is not a topic that has been debated or discussed by either candidate — until Hassan brought it up during the debate.

No reference appears anywhere on the Bolduc campaign website. There was not a single media report of Bolduc ever talking about it at any of the more than 60 town halls he has held. A Google search for any previous mentions of “Don Bolduc” and “Fair Tax” came up empty.

So, where did it come from?

During the WMUR/Facebook Live event, Sexton read a question from an “Ann Heffernon.”

“Can you please ask Don Bolduc to speak more about his FAIR Tax plan?” Heffernon wrote.

In his answer, Bolduc did not endorse, or even mention, the FAIR Tax proposal or a sales tax of any kind. Instead, he said, “I want a fair tax so that everybody pays their fair share based on the income they make.”

Obviously referencing a tax “based off income” doesn’t sound like the FAIR Tax, and it is not part of his campaign. So, why was a viewer asking about “his Fair Tax plan?”

Perhaps because Ann Heffernon is a long-time leader in the Cheshire County Democratic Party. In fact, she was named the county’s Democrat of the Year in 2017.

NHDP Chair Ray Buckley and “Democrat of the Year” Ann Heffernon.

According to the Keene Sentinel, “She’s been active for decades and has served as [county Democratic Party] chair, vice chair, secretary, and treasurer of the organization. She’s coordinated events (including a women’s rally at Keene State College last fall), canvassed, conducted trainings, ran offices, gave rides, made food — anything that needs to be done.”

It is not difficult to deduce how this extremely specific question on an obscure topic made its way to Facebook.

Campaigns planting questions is nothing new. It’s standard operating politics for everything from talk radio interviews to town halls to make sure your candidates’ fans are the ones asking the questions. But planting a Facebook Live question to set up a radio debate attack on an issue literally nobody in New Hampshire is talking about?

Why?

To many longtime political pros, it was just another sign the Hassan campaign is still struggling. Running against an underfunded, inexperienced candidate who gives them a gaffe-a-day to work with, Hassan’s polls continue to fall. She took a double-digit lead and $50 million and turned it into a neck-and-neck race.

“Don Bolduc can’t win this race, but Maggie Hassan can lose it,” veteran GOP operative Karl Rove told The Wall Street Journal on Monday.

The Hassan campaign denies it invented this controversy, and it uses a 20-second clip of Bolduc at an October 14 Salem town hall in which he said, “We need either a fair tax or a flat tax,” and complains about the complexity of the tax code. Hardly a pillar of his campaign.

So once again — why? The tax issue is hardly a winner for Hassan.

In 2017, she voted to kill the Tax Cuts and Jobs Act (TCJA) which gave the average household earning between $50,000 – $75,000 a 19.4 percent tax cut, according to Americans for Tax Reform.  These Granite State households saw their average federal income tax liability drop from $6,030.80 in 2017 to $5,050.35 in 2019. Hassan voted against it.

The TCJA also increased the Child Tax Credit nationwide by $573.4 billion over a decade. She voted against that, too.

The New Hampshire GOP calls the Hassan campaign’s FAIR tax stunt both desperate and dirty.

“This is what desperation looks like,” said state party executive director Elliot Gault. “Gen. Bolduc is winning, all our candidates are rising in the polls, and we’re in the final days. Democrats have to turn to dirty tricks because they can’t beat our candidates on the issues.”

“Dirty trick” may be a bit over the top. But with Democrats bouncing from attack to attack — their new ad targets Bolduc’s comments on a “microchip” conspiracy theory — and Hassan’s lead fading in poll after poll, “desperate” sounds right on target.

When neighboring “Taxachusetts” was considering a hike in its already high income tax in 2013, many people in the Granite State welcomed the proposal.

“Welcome to New Hampshire!,” said Senate Majority Leader Jeb Bradley at the time. “We should be putting up billboards. We have long marketed New Hampshire’s attractiveness as a place to do business for precisely this reason.”

But recent research suggests that raising taxes and spending in one state can have substantial negative effects on people in neighboring states.

While border counties within a state that raises taxes are obviously affected by the change, about half the effect spills over to counties on the other side of the border, found Sam Peltzman, a researcher at the University of Chicago, in a study released last year.

Research suggests areas that rely on interstate business suffered in the wake of a 1 percent rise in a state’s taxes and spending. (Credit: University of Chicago)

Peltzman examined economies in neighboring states from 1975 to 2012. He measured employment levels, wages, and the number of businesses established after tax and spending policies were implemented. The results suggested that the economy of a border county shrank when its state’s taxes and spending increased, and local economies on the other side of the border were also impacted.

“The results in this paper tend to add weight to the view that larger state and local government is purchased at the cost of a smaller private sector,” Peltzman wrote in his study.

So why are two state’s economies, like Massachusetts and New Hampshire, so intertwined? Well, for many people who live in border cities and towns in the Granite State — Nashua, Londonderry, and Salem, to name a few — they commute everyday to the Bay State for work.

When Massachusetts was considering a bump in the income tax, many residents who lived in or near Nashua said they would feel the effects of it when they took home a smaller paycheck. If they take home a smaller paycheck, they have less money to put back into the economies of the towns where they live.

Even New Hampshire businesses near the border can feel the impact of tax changes in the state south of the border.

Massachusetts changed its sales tax to include a “tech tax,” a 6.25 percent sales tax on computer and software technology services, which went into effect in 2013. It was a short-lived tax, quickly being repealed by former Gov. Deval Patrick, but even New Hampshire businesses with a physical presence in Massachusetts that provided Bay State customers with services covered by the tax had to pay it. A “physical presence” could mean having one sales representative with a home office in Massachusetts, according to some interpretations of the law.

In 2014, the Bay State also made some changes to its corporate income tax that impacted some New Hampshire businesses. It applied to any service-based business that has Massachusetts customers, like law firms, medical providers, and consultants, or businesses that sell some intangible products used in Massachusetts like the licensing of software.

These companies now have to pay an 8 percent tax on the revenue derived from those Massachusetts clients. Before, a New Hampshire company’s revenues collected from Massachusetts would be used to calculate the business profits tax (BPT) owed to New Hampshire. But now, businesses are double taxed. A company still must count all of its revenue for New Hampshire’s BPT, but the revenue collected in Massachusetts needs to be counted and taxed by the Bay State.

It can be a complicated system and, sometimes, New Hampshire businesses don’t even know when they would need to pay Massachusetts taxes. In turn, some companies think twice about doing business or hiring out of state for fear of having to pay more money to another government, which could affect their bottom line.

“State tax structures can create cross-border issues in a number of ways, including positive economic development in bordering communities that are able to draw businesses and individuals into the state as well negative impacts from tax policy decisions that create adverse tax climates causing individuals and businesses to leave the state for a preferential neighboring state,” said Kathryn Michaelis, an attorney in the tax practice group at the Rath, Young and Pignatelli law firm in Concord.

It’s not all doom and gloom for New Hampshire residents and businesses paying Massachusetts taxes. Many Massachusetts residents cross the border because New Hampshire has historically one of the lowest tax rates on cigarettes in the region, a lower gas tax, no tax on liquor sales, and no sales tax. This strategy allows the state to net revenue on the sales, despite the absence of a tax, which makes it appealing to other businesses and consumers, and pumps economic activity into the cities and towns on the border.

At one point, Massachusetts tried to capitalize on the cross-border purchases by challenging in court that they should collect taxes from a store that sells tires to Massachusetts residents in New Hampshire. A court disagreed.

But New Hampshire still struggles economically on several fronts, including high electricity costs, expensive property taxes, and a high cost of doing business in the state. Both Massachusetts and New Hampshire employees get paid more than average American workers, driving up employers’ labor costs.

“While a favorable tax climate may draw in businesses to a bordering community, the state and local officials must always be careful to not offer tax incentives or subsidies or restructure the tax system in such a way that it creates too much of a cost burden on the locality or state in the long-run,” Michaelis told NH Journal. “Each state and local jurisdiction needs to find balance in retaining and recruiting business while ensuring that its revenue remains steady to support government services.”

New Hampshire worked hard in the 1980s and 1990s to have the “New Hampshire Advantage” where students would graduate school, go to college, and eventually return to raise families and work. People from Massachusetts, New York, and New Jersey moved to the state and businesses would have access to this cluster of highly educated and skilled workforce.

By the 2000s, positive net migration stopped, college graduates moved away, and New Hampshire’s business climate was not as diverse. Now, politicians are trying to figure out how to deal with a workplace shortage and make New Hampshire an attractive place for businesses.

One way the Republican-controlled State House sees on getting their advantage back is through right-to-work laws, which would prohibit public and private sector unions from charging non-members fees for negotiating on their behalf. If passed, New Hampshire would become the only state in the Northeast to have a right-to-work law.

The cross-border economic relationship is not unique to Massachusetts and New Hampshire. Illinois and Indiana have a similar relationship, with my many people leaving Illinois due to its high taxes. The same is true for New Jersey and Delaware, where a high gas tax in the Garden State could benefit Delaware, yet both have high property taxes. What tax policy is passed in one state could spill over into its neighboring states.

Carl Davis, research director for the Institute on Taxation and Economic Policy, said it can be difficult to isolate the taxes and determine if economic growth or hinderance is a result of an increase or decrease in taxes.

“It’s not cut and dry,” he told NH Journal. “It’s hard to look back and see if a state raised taxes because they have a poor economy or because of their taxes, their economy is doing well. There are always trade-offs.”

But for New Hampshire and Massachusetts, the economies and tax policies of the two states seem to be fairly linked for its residents, businesses, and communities.

Follow Kyle on Twitter.

Sign up for NH Journal’s must-read morning political newsletter.