New Hampshire mutters forbidden words: 'Income tax'

One of the most rock-ribbed bastions of fiscal conservatism in the United States may be weakening. Breaking a longstanding political taboo, the New Hampshire House of Representatives recently went on record in support of an income tax.

While passage of such a levy this year seems unlikely unless the state's current financial squeeze gets a lot tighter, the 218-to-103 straw vote in the 400-member House indicates a softening of opposition to any kind of a broad-based levy in New Hampshire, the only state in the nation with neither a personal income tax nor a general sales tax.

At this point there is nothing to suggest the state Senate would go along with either a sales or income tax were one to make it through the House. And even if both New Hampshire legislative branches passed such a measure, Democratic Gov. Hugh J. Gallen has made it clear he would not sign it.

Like Meldrim Thomson Jr., the archconservative, three-term governor he unseated 2 1/2 years ago, Mr. Gallen has "taken the pledge" to veto any income or sales tax measure that reaches his desk. Having so committed himself both in 1978 and again in 1980, when he was reelected, the governor could hardly shift his position without jeopardizing, perhaps substantially, his third-term prospects.

Within hours of the April 18 House straw vote in favor of an income tax, Governor Gallen reaffirmed his continued opposition to such a levy, even in the face of the state's current $30 million annual operating deficit.

As an alternative to any new taxes, the governor recommended raising additional revenue through changes in the business profits tax.

But this, and several other proposals from other sources, such as hiking the meals tax and corporate income tax on a temporary basis, failed to make it through the House. Instead, that branch came up with a 1 percent payroll tax to help fund a $1.6 billion budget to run New Hampshire for the two fiscal years commencing July 1.

The payroll levy, which would be paid by employers rather than their workers, is projected to raise $104 million during the coming two years, thus perhaps heading off another state deficit.

Governor Gallen has indicated he could support such a tax. It is questionable, however, whether if will make it through the Senate, which has its own revenue package.

While not a broad-based personal income tax, the payroll levy would be a step in that direction, since self-employed professionals would pay. Specifically exempt from the House-approved measure would be municipal, county, and state payrolls.

The levy, which cleared the Republican-controlled House 173 to 159, was sponsored by House minority leader Christopher Spiro (D) of Manchester.

Critics of the budget-tax measure contend it will not meet some of the state's needs, such as $500,000 owned the federal government in the settlement of a case involving unemployment compensation funds.

While providing a potential revenue surplus which could be used in part to give state workers a pay raise, the House-approved budget and payroll tax provides an estimated $14 million less than may be needed to continue social services at their current level.

This means that local governments will either have to come up with additional money to fund those services or cutbacks may have to be made, explains John Andrews, executive director of the New Hampshire Municipal Association.

In the absence of either a personal-income or sales tax, New Hampshire has been forced to rely increasingly on other levies, such as the corporate income tax and various specialized taxes on meals and rooms. Another source of money for the state treasury is the sale of liquor through state-owned stores.

New Hampshire is among the lowest states in the amount of aid it provides cities and towns. Thus, the municipalities rely to a great extent on local property taxes to meet operating expenses.

At a time of substantial population growth, especially in the southern parts of New Hampshire -- growth induced in part by the absence of income and sales taxes -- both real estate values and tax rates are climbing.

Property taxes currently produce close to 60 percent of combined state and local revenues in New Hampshire. This is nearly double the 31.6 percent national average for all 50 states.

Income tax foes argue that passage of such a revenue producer would tend to slow New Hampshire's economic growth by discouraging both businesses and people from locating in the state.

Were the state not facing what is generally viewed as the most serious fiscal crisis in decades, there is little doubt the straw vote on an income tax would have failed, perhaps overwhelmingly. As it was, almost 80 House members failed to vote on the issue.