Tax competition between states isn’t theory and can be readily observed among states. New England is a awesome example of how tax policy hurts economies, New Hampshire is unique example. It's total revenue per person is on par with it's surrounding states yet is the only state with no personal income tax or sales tax.
At the same time, New Hampshire is also an outlier in economic performance. It ranks the lowest in the percent of population that is considered to be low income, the highest private sector share of personal income and highest household median income. The other states, especially Maine and Vermont, have had dismal economic performance in recent years compared to New Hampshire.
New Hampshire’s neighbors know this and have passed a few laws to model themselves after New Hampshire. In one area that New England states are acting on is the income tax. In past decade, All New England states, except Connecticut which actually implemented an income tax for the first time, have either kept their income tax the same or lowered it likely to get more in line with New Hampshire.
The sales tax can create or destroy economic activity too. At the statewide level, businesses sometimes locate just outside the borders of high sales tax areas to avoid being subjected to their rates. A stark example of this occurs in New England, where even though I-91 runs up the Vermont side of the Connecticut River, many more retail establishments choose to locate on the New Hampshire side to avoid sales taxes. One study shows that per capita sales in border counties in sales tax-free New Hampshire have tripled since the late 1950s, while per capita sales in border counties in Vermont have remained stagnant or gone down.
So here is the rub. Property taxes in Maine are more than double that of Virginia Beach and nearly double that of Boston. Income taxes are significantly more here as well. My question is are the schools in Maine that much better than say Virginia Beach? Are the roads better? Are the public services better? Does it really cost that much more to live up North than down South? There are 39 states with lower over all taxes than Maine. New Hampshire seems like it would be the lowest, having no income or sales tax, but there are 29 states with lower overall taxes than them.
That's my point. New Hampshire has figured out how to raise needed revenue without hurting their economy. New Hampshire has found a way for everyone to pay their fair share not just the rich and the results are starting to compound. I would suggest that they eliminate the state corporate income tax and create a sales tax but that's my opinion based on years of studying tax structures and what works and what doesn't.
I will most likely die before I see meaning full tax reform. But when I first heard the idea of a National Retail Sales tax (piggy backed on the 46 states who currently have one) replacing the income tax I knew it was an idea that just made fundamental common sense. An idea who's time has come!
*Please visit taxfoundation.org
