Margaret Shepard  | May 19, 2014

Border Wars: As competition grows, New Hampshire fights to keep advantage

Since Debra and Randy Barnes opened their small yet elegant eatery last month across Main Street from the New Hampshire State House, they’ve been worried about the activities of their state’s lawmakers.

The focus of the Barnes’ concern: not any legislation that could affect the business climate, but parking for customers of Wellington’s Marketplace. The 400-member House takes over downtown at least one day a week, making it hard for her customers to park nearby.

“Of course, I’m more worried about getting customers in the door, but the climate affects everybody,” explains Debra. While she isn’t always happy with state regulations, she sees them literally as the cost of doing business.

In fact, she says state officials lived up to New Hampshire’s business-friendly reputation when it came to setting up her business, which features a lunch menu, prepared foods, affordable but hard-to-find wines, high-end cheeses, and five kinds of European olives.

“Every time we’ve called with questions, everyone has been really helpful,” she says. “Maybe they just love cheese?”

These days, however, New Hampshire is checking its rearview mirror for the first time in years. While the Granite State has long claimed to have the best business climate in New England, its high-tax neighbors are finally trying to catch up.

“Live Free or Die” isn’t just the state’s motto. It’s also New Hampshire tax policy, as the only state without either a general sales or income tax. That allows businesses to offer higher take home salaries, and lets employees buy more with those paychecks. But with lawmakers in Massachusetts and Maine honing their own business-friendly reputation, New Hampshire officials are stepping up their game.

“We traditionally had a belief that we had the New Hampshire Advantage; that this was the best place to live, work, and play. And we believed in responsible business success and rewarded good behavior,” said State Senator Andy Sanborn (R-Bedford). “And I’m a little concerned that we’ve lost some of that today.”

In March, a Massachusetts think tank issued a report claiming that the Bay State has a lower business tax burden than its northern neighbors. The Massachusetts Budget and Policy Center found that while Massachusetts business taxes rates were relatively high, the tax burden was actually below the national average as a percentage of the state’s economy and of pre-tax profits.

“We’ve seen recent articles suggesting that even Massachusetts has lower business taxes than ours,” Sanborn continues. “I speak to my counterparts in the Maine Legislature, and they are trying every single day to pass legislation that makes them more business friendly.”

Jeff Rose, commissioner of New Hampshire’s Department of Resources and Economic Development, isn’t ready to concede the lead: “We have to preserve and protect the environment we have today, the lower individual cost of doing business in the state, and that’s largely due to our tax advantage.”

Massachusetts recently cut its Business Profits Tax from 8.5% to 8%, dropping below New Hampshire’s rate. New Hampshire State Senator Bob Odell (R-Lempster), who heads tax policy as chair of the Ways and Means Committee, admits the state’s high tax sticks out like a “sore thumb.”

“If somebody is charting business taxes, and they see that one, they say ‘Gosh, New Hampshire has a pretty high one,’” Odell says. But he hopes people look at the whole picture, noting that Massachusetts expanded the tax to cover business services.

Massachusetts has tried to cut into New Hampshire’s retail advantage by offering shoppers periodic Sales Tax Holidays to keep them south of the border.

“Every day is a Sales Tax Holiday in New Hampshire,” says Rose. “We don’t need a gimmick to celebrate just one particular day.”

While Massachusetts and other states try to lure business with tax incentives, such as film production tax credits, New Hampshire has been reluctant to use such “tax expenditures.”

“Whether it’s a film company getting a $25,000 tax credit or Toyota getting a $3 million tax credit, I don’t know if we’re going to be competitive in that market, or if we want to be,” Odell says.

Sanborn agrees that New Hampshire shouldn’t favor specific industries with special tax breaks, saying, “Everyone in the pool, or everyone out of the pool.”

Budget writers need to start with lower business tax rates, says Sanborn, who has proposed cutting the BPT for the next two-year budget cycle. “The only way we’re going to cut taxes going forward is to set a new baseline for the next budget period.”

Odell is skeptical about cutting the BPT, saying the business community worries that the Legislature could replace that revenue stream with something worse. “If we were to pass a recommendation to reduce taxes, we would be potentially creating a hole in the budget, so they’re sensitive about that.”

Odell and Sanborn agree that businesses look well beyond nominal tax rates when deciding where to start or expand. And that bigger picture still shows New Hampshire ahead of the local competition. It may have high business taxes and rely more on local property taxes, but the total tax burden is still the lowest in New England.

Yet Sanborn warns that taxes are just part of the cost of doing business, saying New Hampshire has the disadvantage of being one of the most expensive states for healthcare and electricity costs.

Sanborn chairs the Senate Commerce Committee, which this year has concerned a handful of bills opposed by the state’s business community — such as a 10% increase in payments under the Workers Compensation system, up to a 13% rise in unemployment payments, and “fee increases just to submit a form into our government.”

Thus, improvements to New Hampshire’s business climate may come from outside the tax code, as lawmakers tackle high health insurance premiums, electric rates, and Workers Compensation rates.

“I don’t want to suggest that we’re under attack, but our neighboring states have noticed that they’re a competition going on,” Sanborn says.

Rose argues the New Hampshire Advantage is alive, well, and up to the challenge.

“We’re a very business-friendly state,” he says. “We’re a state that’s navigable though state government, and a state that has a lower tax burden than other states around the country.”

New Hampshire doesn’t appear at any risk of losing the Barnes’ business, at least. When they decided to pursue their dream after seven years running rental properties, the Barnes considered opening Wellington’s Marketplace anywhere their home state.

“I’ve been to Massachusetts, I don’t need to live there,” Barnes chuckles.