New Hampshire is one of a small minority of states without a sales tax.* So when Republican presidential candidate Herman Cain announced his 9-9-9 Plan — 9 percent corporate tax, 9 percent income tax, and a 9 percent national sales tax — residents of New Hampshire started feeling a bit nervous. While the Cain plan is a federal tax overhaul that he claims is low impact for most Americans, it would essentially force residents of New Hampshire to pay a brand-new tax.
So we wondered how the Cain plan could affect businesses and individuals in the Granite State. As the only New England state without a sales tax, New Hampshire is a major force in regional retail sales. So could 9-9-9, a plan designed to spur business and job growth, actually have a negative effect on businesses in New Hampshire?
That’s a tough question, for a number of reasons.
We do know from recent polling that New Hampshire voters tend to be anti-tax types. But as one pollster explained to me, although they’re legendarily well-educated voters, most people from New Hampshire aren’t really that focused on politics until after the World Series. So right now may actually be early to ask Granite Staters about 9-9-9.
And we tried contacting the Cain campaign, but they haven’t gotten back with us. (More on that next week.)
There was, however, one person who studies New Hampshire policy who was able to talk with us in-depth about 9-9-9. He’s Charlie Arlinghaus, President of the Josiah Bartlett Center for Public Policy, a free market (read: economically conservative) think tank.
Q: What’s your understanding of how the 9-9-9 plan works?
A: The 999 plan is an attempt to simplify taxes and eliminate deductions so that taxation is as simple and transparent as possible. And so the idea would be that every level of taxation, whether it’s corporate taxes or income taxes, or a consumption-based tax, which is a sales tax, would be 9 percent. And the goal is simplification and the goal is to eliminate as many loopholes as possible.
Q: Could you explain a little bit about how, if at all, this would affect taxes at the state level?
A: The Cain proposal is to change the way federal taxes, which everybody in the country pays in the same way, are paid. It would have no impact whatsoever on state taxes. So all of the state taxes we pay, cigarette taxes, room and meals tax, business taxes, at the state level, etc., would not change. We don’t have a state income tax, so we don’t pay a state income tax. We don’t have a state sales tax, we wouldn’t get a state sales tax. Although this would impose a federal sales tax, which we currently don’t have.
Q: I’m looking at the summary of this plan right now, and it describes the sales tax as being a “replacement tax,” meaning that it is replacing taxes that are already somehow embedded into selling prices. [In other words, it’s an invisible sales tax.] Am I reading a little bit of skepticism, on your end, about that?
A: The proponents always tell you this tax replaces that tax, and we’re changing this and we’re all going to come out better because of this…The difficulty with this in a state that doesn’t have a sales tax is we reap an advantage from people shopping here where they don’t pay a sales tax. It’s not based on a 6 percent vs. a 4 percent advantage, it’s based on, we don’t have one and the other states have one. And that would change, and it would certainly affect the retail sector of New Hampshire significantly — imposing a sales tax, when so much of our retail sector is based upon the fact that we have no sales tax, [while] other states have some sales tax. It’s a psychological advantage. If you eliminate that, where people have to just be concerned about the rate, well, it’s two points, four points, five points higher, you eliminate some of the psychological attraction of retail sales in New Hampshire.
Q: But do you have a full understanding…about this notion of a replacement tax, that taxes are already embedded into sales prices? Do you have any idea of what that could possibly mean?
A: Well, there are a lot of taxes and fees on the federal level that producers pay on some level or the business pays on some level, and every cost of doing business ends up in the price of the product. You know, the price you pay for a cup of coffee is not based entirely on how much beans cost, it’s based on everything. How much the coffee shop has to pay its consumers, what licensing fees it has to pay, etc. So the goal of Cain’s plan is to try to eliminate those, a myriad of taxes and fees and licensing regulations, etc., and to encompass them into one very visible sales tax.
Q: [How much of New Hampshire’s retail sales pie is made up of sales to out-of-staters?]
A: Because we don’t have a sales tax, it’s hard to know, but if you talk to a number of people in border towns, maybe in the central part of the state, it’s a lot less, but there’s a reason the Pheasant Lane mall in Nashua is built on the border, and that the parking lots are in Massachusetts, but all the shops are in New Hampshire.
Another conservative-minded think tank, the Maine Heritage Policy Center, has done some calculations. And they’ve determined that sales tax-free New Hampshire takes a giant slice out of Maine’s retail sales pie. In “The Great Tax Divide: Maine’s Retail Desert vs. New Hampshire’s Retail Oasis” published last spring, Chief Economist J. Scott Moody writes:
“Maine has one of the highest tax burdens in the country at 12.6 percent of personal income (6th highest) while New Hampshire has one of the lowest tax burdens at 8.7 percent of personal income (49th highest)…
The close geographic proximity of the two states leads to numerous arbitrage opportunities for Mainers to escape their significantly higher tax burden. The most obvious way is through direct cross-border shopping which previous MHPC studies have shown to be occurring up and down the Maine-New Hampshire border…
[P]er capita retail sales in the adjacent bordering counties in Maine (Oxford and York) and New Hampshire (Coos, Carroll, Strafford and Rockingham) have been diverging ever since Maine adopted the sales tax in 1951. By 2007, the retail gap was $8,660 per person ($19,976 versus $11,316). If Maine had the same level of retail activity as New Hampshire, retail sales would have been up to $2.2 billion higher—from $2.9 billion to $5.1 billion—and created thousands of retail jobs.”
*Delaware, Oregon, Alaska and Montana also do not have state sales taxes.