Public officials and observers of the Granite State often like to talk about the state’s “New Hampshire Advantage,” which generally boils down to a vision of a relatively small state government and robust economic growth compared to its peers in the region.
But believing that this advantage exists and seeing hard data to back it up are two different things. That’s why the Granite Institute, a nonprofit research and education organization, has launched the “New Hampshire Advantage Index,” which aims to calculate whether such an edge exists and how each of the state’s neighbors stack up.
The inaugural index, published this week, indicates that the advantage is real, but that it has seen a slight erosion in recent years and is at risk of becoming even smaller if legislative steps aren’t taken, according to the study’s author, Granite Institute CEO J. Scott Moody.
The way the index is calculated, two states at an even level would each have a score a zero. The higher the index, the better New Hampshire is doing. The institute’s analysis shows that the Granite State has a positive index against all six states included in the index – Connecticut, Maine, Massachusetts, Rhode Island, New York and Vermont – and retroactive calculations dating to 1983 show that the Granite State has held this advantage over those six states for at least 35 years.
To calculate New Hampshire’s score against each of these states, the index draws from five sub-components:
- the size of the private sector
- taxes on individuals
- taxes on consumption
- taxes on businesses
- taxes on wealth
For the index, the larger private sector and the lower the taxes, the better. When the data for the six neighbors plus New Hampshire was crunched in each of the five categories, it resulted in a New Hampshire Advantage index of 51.2.
The index itself becomes most useful when compared to individual states or from year to year. For instance, in the Granite Institute’s calculations of past decades, the low point for the index was 1989, when it dropped as low as 34. The high point was in 2005-06, when it was 55.3 for both years.
For 2018, New Hampshire’s state-by-state index is highest against Vermont, at 66.2, and lowest against Massachusetts, at just 33. The historical extremes include a low of just 9 against Connecticut in 1983, and a high of 73.3 against Rhode Island in 2005.
For all the years the report looked at, New Hampshire never dropped into a disadvantageous position against the other six states. But while the overall trend has seen the Advantage Index growing since 1983, it has stalled and even declined a little bit in the past decade.
Moody told Watchdog.org that the origins of this advantage date to a time decades ago when many states were instituting income taxes and other revenue streams to grow government services. That New Hampshire didn’t do so, he said, was attributable in part to the unique structure of the state’s government.
“The New Hampshire Advantage is a result of the virtues of political gridlock,” he said. “New Hampshire didn’t do anything special except that it did nothing. … This gridlock is partially a result of New Hampshire's unique political institutions – a 400-member House of Representatives (one for every 3,000 people), a surviving Executive Council (essentially regional governors), and two-year terms for everyone (including the governor). As a result, the will of the people is always on the minds of New Hampshire’s politicians.”
He also cited the state’s “Live Free or Die” ethos, pointing out that Republicans and Democrats in the state often sign pledges vowing not to enact broad-based tax increases.
As for the stagnation of the index in the last decade or so, Moody’s report notes that neighboring states have in some respects tightened their tax code to try to reach parity with New Hampshire, while the Granite State hasn’t taken steps to increase its advantage and has allowed state government to grow – especially with the Medicaid expansion – creating pressure on the private sector.
To Moody, proposals that have been floated to eliminate the state’s interest and dividends tax might boost the index if implemented correctly, but he has an alternative idea.
“If it is done as a tax cut, then [eliminated interest and dividends taxes] would have a significant positive impact on the index,” Moody said. “If, however, it is done in a ‘revenue-neutral’ fashion and other taxes are raised to pay for it, then it would not have a significant impact.
“Instead, policymakers should consider our Business Flat Tax plan which would eliminate the Business Profit Tax and harmonize the interest and dividend tax with a flat 2 percent rate on an expanded Business Enterprise Tax. I have estimated that this plan would boost the Index by a whopping 34 percent and it would propel the Index to its highest level ever achieved over the 1983-2018 time-period.”
Negative pressures such as the Medicaid expansion and the graying of New Hampshire’s population threaten to erode the index even further, Moody said. He pointed to an analysis showing that the state’s costs for providing long-term care to the elderly were likely to more than triple over the next 30-plus years, from $282 million today to more than $1 billion in 2050.
“Unless we begin preparing today, I would expect a growing push to enact a broad-based income or sales tax to pay for this explosion in the costs for long-term care,” he said. “Needless to say, this would put the New Hampshire Advantage into reverse.”