How New Hampshire Functions Without Income or Sales Taxes

May 8, 2013 — Leave a comment

New Hampshire: “Live free or die.”

As the only state without a sales or income tax, New Hampshire appears to live up to its motto.  But the state still has a functioning government and department of revenue, so the question bodes: Is New Hampshire a model for a tax-free society or is it just disguised as one?

First, let’s see how New Hampshire stacks up to other states, 1st being the best, 50th being the worst.

In a CNBC measure of competitiveness, developed with input from business groups including the National Association of Manufacturers and the Council on Competitiveness, states received scores based on 10 broad categories relevant to living and doing business there.  Here’s How New Hampshire ranked:

Overall Cost of Business Workforce Quality of Life Economy Infra & Transp. Tech. & Innovation Education Business Friendliness Access to Capital Cost of Living
19 35 44 1 34 46 26 8 2 19 40

Overall, New Hampshire ranked slightly above average.  On the good side, they scored first for quality of life and second for business friendliness.  On the other hand, they are in the bottom 10 for cost of living and near last in infrastructure/transportation – both of which could be the result of a crippled revenue stream.

Now, about all of this no tax stuff.  If you thought New Hampshire had no taxes period, you’re mistaken.  In fact, other states actually have smaller tax burdens when considering income, property, sales and auto taxes together.  In a report on major tax burdens for the largest city in each state, Manchester, New Hampshire ranked 31st for a hypothetical family of three earning $50,000/year.  The cumulative tax rate for this family was estimated to be 8.8%, just a few ticks lower than the national median of 9.4%.

Below is a list of all New Hampshire taxes:

So it’s not that New Hampshire doesn’t have taxes, they’re just better at hiding it.  Their property tax, for example, is the third-highest in the country.

Here’s another piece to the puzzle:  One reason New Hampshire can afford it’s modestly low tax rates to begin with is because their citizens are some of the wealthiest in the country.  According to data from the US Census Bureau, the 2008-09 average median income in New Hampshire was the highest in the country at $68,187.  In 2010-11, that figure dropped to $67,308, but was just a couple hundred dollars behind Maryland’s top national average of $67,551.

With higher incomes, overall tax rates can be lower; however, note that the state’s revenue per capita is still modest, according to the National Tax Foundation.  In 2011, New Hampshire’s revenue per capita was $4,746 – the 40th lowest and below the national average of $5,323.

In sum, New Hampshire’s overall tax burden is relatively low, but because their population has above average income and auto and property taxes are high, taxes paid per capita are normal, allowing the government to function without collecting sales or income tax.

200px-Free_State_Project_Logo.svgOne more thing: New Hampshire relies heavily on tourism as a source of revenue.  While there is no uniform sales tax, the state does collect tax on certain items including restaurant food, gasoline and hotel rooms – all things that tourists spend a lot of money on.

The tax portrait of New Hampshire isn’t as libertarian as its made out to be, but that doesn’t stop its attraction to some of the most die-hard anti-tax people in the country.  As the Free State Project, an “enthusiastic legion of libertarian activists,”  says, “choose New Hampshire, where freedom happens first.”

If you want to learn more about New Hampshire’s libertarian culture and vision of a no-tax society, consider attending the annual Porcupine Fest this summer.  

JDKatz: Attorney's At Law

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

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