New Hampshire thinks the unthinkable

Two old timers hanging out last week at a Dunkin' Donuts pretty much summed up the traditional New Hampshire view on taxes: They don't like 'em.

Not income taxes. Not sales taxes. Nothing that smacks of big government (defined as the State House in Concord, not to mention Washington).

Yes, suspicion runs deep for Amar Douidi, a retired police officer, and his buddy. The two residents of Manchester, N.H., are firm in their conviction that taxes - once in place - only go up, never down.

But gradually, forces from within and without the Granite State are chipping away at this antitax resolve - so much so that many residents here are starting to think the unthinkable. Now, lawmakers tomorrow face a decision that would make the steeliest Yankee go weak in the knees: whether to levy a statewide income tax.

Under such a move, New Hampshire would give up its ballyhooed status as one of only two states with no broad-based tax. Proponents say it's the only way to fairly fund the public schools - as the state has been ordered to do by its Supreme Court.

But opponents say an income tax would violate all that New Hampshire stands for - and would erase the competitive business advantage the state holds over its neighbors, such as nearby "Taxachusetts."

The decision has brought New Hampshirites to an identity crossroads: Which route will best enable them to maintain their cherished values?

"It really does all come back to 'Live Free or Die,' and for many people that has meant having maximum control over your own wealth," explains David Watters, a professor at the University of New Hampshire in Durham.

Already, the House passed a bill that would create a 4 percent tax on income, with the revenues to be spent on education. The measure passed by only four votes, but everyone agrees even that would have been impossible if not for the court's ruling that funding schools primarily through local property taxes is unconstitutional. The bill is expected to go to the Senate floor this week.

There have been rumbles of protest in the past - that relying so heavily on local property taxes isn't fair and that "sin taxes" on liquor and cigarettes can be stretched only so far. But "The Pledge," a vow taken by most political candidates to oppose broad-based taxes, has so far held those rumblings in check.

New Hampshire, however, is experiencing an economic boom that is bringing newcomers - some with different ideas about government - to its borders. Even though some of these outsiders fled high-tax states such as Massachusetts, there appears to be a new openness here toward the idea of an income tax.

"In the last 10 years or so there's been an incredible growth in the state, and it's pretty clear that not much of that growth has been taxed," Mr. Watters says. He notes, as do many advocates for the income tax, that the property tax especially burdens the elderly.

State Sen. Mark Fernald (D), who says he'd pay higher taxes under the income-tax plan, testified at a Senate hearing last week that he'd prefer a fair system to one that gives him a break at the expense of his elderly neighbors.

Traditionally, the state taxed property because property is what generated income, Senator Fernald reiterated after the hearing in Concord. In addition to land, New Hampshire "taxed cows, sheep, and milk machines." By deciding modern forms of income should be off limits, "we got far off course," he said, his smile matching the yellow happy-face button worn by supporters of the bill.

Those arguments have reached some citizens' ears. "I feel the working population as a whole should accept responsibility for education, not just the property owner," says Frank Davis, a longtime Concord resident who attended the hearings.

Lisa Bisson, manager of an antiques shop on Concord's Main Street, says she hasn't followed the debate closely but senses an income tax is inevitable. "There always seems to be a shortage of one thing or another, and if that's how everybody else gets theirs...."

Lawmakers have had more than a year since the court decision, which struck down a system that enables property-rich districts to tax at lower rates than poor ones and still devote more dollars to schools. But the bill that finally emerged from the House is coming up against Democratic Gov. Jeanne Shaheen's determination to veto it rather than break The Pledge.

Like the House bill, her alternative includes a statewide property tax in place of local property taxes, which many agree are burdensome. But in lieu of an income tax, her plan relies on other unpopular elements such as video gambling and a capital gains tax.

School districts worry that the deadlock could mean a steady flow of pink slips starting April 1, the court's deadline for devising a new financing system.

SUPPORTERS of the governor's plan say it is not perfect, but she is right to keep an income tax at bay. "The people I represent don't want [it]," says Sen. Lou D'Allesandro (D) of Manchester. His district is home to The Union Leader, the newspaper whose conservative editorial board has pressured politicians to take The Pledge since the early 1970s. And yes, it was one of his campaign promises. This pledge against a broad-based tax is "ingrained in the New Hampshire psyche," he says.

For Susan McLane, who served 25 years in the New Hampshire legislature, that skepticism about taxes and government bureaucracy is frustrating. "The 80 percent who would gain from [the income-tax bill] don't figure it out and don't believe it," she says.

The absence of sales and income taxes has drawn business to the state, prompting some politicians to call the tax structure the "New Hampshire advantage." But now, Watters says, many people are starting to realize that in today's high-tech economy, there's "economic incentive to improve the schools."

Sen. Clifton Below (D), a sponsor of the income-tax plan, urged senators last week to think of it as "the new New Hampshire advantage." If passed, he said, it would be the only income tax collected solely to fund education.