Are New Hampshire’s low tax policies helping it attract economic development? The jumping-off point for this post, and a related post from last week, is data on the movement of businesses and jobs between Massachusetts and New Hampshire. The image perpetuated by area media more or less fits the mold of a piece in The Boston Globe that characterizes New Hampshire as the beneficiary of jobs and companies leaving Massachusetts. As the writer notes, New Hampshire is a business-friendly, no-frills place, and its super-lenient tax code is a constant temptation for Massachusetts establishments weighed-down by a bloated, spendthrift state.
But various studies and data point to a more complex relationship between New Hampshire, Massachusetts, businesses and taxes. And from that information, we’ve found five points on economic development that are often lost in the broader story.
- Yes, Massachusetts is losing more businesses to New Hampshire than to any other state, but not as many as you might think
A study by the Massachusetts-based Pioneer Institute think tank found that over 17 years, nearly 1,500 of the state’s businesses moved to New Hampshire. And when you count all the businesses leaving Massachusetts for other states, it averages out to more than one business leaving the state every day…for 17 years. But Pioneer Research Director Steve Poftak says in reality, those numbers are very small, “When you look at the overall numbers, in any given year in Massachusetts, 600,000 jobs, 17 percent of the total jobs in the state, are created or destroyed. In the worst year firms [leaving] the state only accounted for 2 percent of that.” In other words, New Hampshire’s competitive economic policies aren’t triggering a Mass migration of businesses to the Granite State.
- New Hampshire loses more people — and businesses — to Massachusetts than to any other state
According to Census data compiled and provided to NHPR by the New Hampshire Center for Public Policy Studies, Massachusetts has claimed 78,459 New Hampshirites over the past decade —despite its heavier personal tax burden. Of course, given the close proximity to the Bay State, and by extension, the Boston metro, it’s probably not surprising that New Hampshire is losing people. But it might be surprising to some that according to the Pioneer Institute, from 1990-2007, 679 Granite State businesses also pulled up stakes and headed south. That wipes out about 47 percent of New Hampshire’s business gains from Massachusetts relocation, making for a less impressive net gain of 758 Bay State businesses over 17 years.
- Taxes Aren’t Everything
At first glance, this seems like economic development heresy. But despite its comparably sweet business tax environment, New Hampshire doesn’t always win the business expansion war with Massachusetts, either. Take Anaheim, California based Cristek Interconnects. Cristek designs and manufactures electronic components for the military aerospace industry. When it came time to expand to the East Coast, Founder and President Cristi Cristich says it came down to Nashua, N.H., and Lowell, Mass., “I was very surprised about the decision working out to be Massachusetts. Because I really thought it’d be Nashua.” Although Cristich points out the Bay State’s sales tax exemption on manufacturing equipment, “If it was only the choice of the tax break, we would’ve located in New Hampshire. It was a combination of factors. It is still more expensive to operate in Massachusetts than New Hampshire, for sure.” So what were those factors in Cristich’s decision? The biggest issue for her was that Lowell has a much larger HUBZone, and a larger HUBZone labor pool than Nashua. “HUBZone”is a federal designation, meaning “Historically Underutilized Business Zone.”In other words, these are poor areas where there aren’t enough jobs.Lowell’s HUBZone is much larger than Nashua’s. So, for a government contractor like Cristek, it’s just good business. As Cristich explains, HUBZone-certified businesses are among those that get preference in the government bidding process, “The defense industry has contracting goals, subcontracting goals to deal with a certain amount of small business, a certain amount of woman-owned business, a certain amount of veteran business, and HUBZone is another designation that they have goals that they strive to reach in their subcontracting goals.” And Cristek isn’t the only defense contractor that’s expanded to the Lowell-Lawrence area, or relocated there from New Hampshire. According to the Massachusetts Executive Office of Housing and Economic Development, the companies vary in size, and include Goodrich ISR, Suntron, and Cobham Defense Systems.
- New Hampshire does actually have an income tax
But the key difference between New Hampshire and other states is that the tax burden doesn’t fall on the workers, but to the businesses that employ them. It’s called the Business Enterprise Tax, and it’s levied on wages, salaries and dividends. (State agencies and non-profits are exempt.) Last spring, the Federal Reserve Bank of Boston published a report by the New England Public Policy Center on New Hampshire’s unusual approach to business and taxation. The BET was instituted in part because a few establishments were paying the bulk of the Business Profits Tax. Report author Jennifer Weiner found that although the BET is supposed to be a revenue-neutral fair tax, and it’s a lower rate than a standard income tax, the state has raised it. From FY 1997-2007*, New Hampshire raised the BET–and the Profits tax–at least once. (During that time, the state also raised taxes on meals and rooms, tobacco, real estate transfer and communications.) And it’s been worth it. In FY 2007, Weiner reported the BET raked in slightly less for the general fund than liquor and tobacco taxes. But combined, the BET and BPT accounted for more than a quarter of education and general fund revenues.
- We’re not #1
Although there’s no sales or broad-based income tax, the best tax climate for businesses, according to the Tax Foundation, is actually South Dakota. That state has no individual income tax or corporate tax. New Hampshire ranks at a respectable No.7. And at No. 32, Massachusetts isn’t nearly as close to the bottom of the biz-friendly barrel as Connecticut (No. 47), Rhode Island (No. 42) or Vermont (No. 38). In other words, “Taxachusetts”…not so much. Just more so than New Hampshire.
*There’s a methodological reason the Boston Fed paper author used FY 2007. It was a Census year for state governments, and it wrapped-up immediately before the recession, so it’s probably more emblematic of typical taxation and spending behavior in New Hampshire than the past few years.
(Editor’s Note: An earlier version of this story incorrectly reported that New Hampshire raised both the BET and BPT annually. The state has actually raised each of those taxes at least once from FY1997-2007. We regret the error.)