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Tax Competition in New England
This content is provided by the Americans for Tax Reform Foundation
With the Supreme Court’s decision affirming that Obamacare, in part, is constitutional, the political debate will turn to this massive piece of legislation. Tax reform may take a backseat until the future of Obamacare is decided. However, tax reform should be a vital component of the next president and Congress’ agenda. America is losing out on vital economic growth because of its loop-hole riddled and excessively burdensome tax system. Without reform, our economy will fall behind, far behind.
Throughout the world, nations are doing what America should be doing: they are reforming their tax system, which includes drastically simplifying and lowering their corporate income tax. They know that this will attract more economic activity to their country and make the lives of their citizens better.
The necessity for reforms are based on the idea of tax competition. Countries, to ensure healthy economic growth, will compete to attract economic activity to their borders by making their tax system less burdensome.
Tax competition isn’t some grand theory either; it can be observed among the states here in America. New England is a great example of this.
Observing the New England states’ tax policy, New Hampshire is an outlier. It is the only one with no personal income tax or sales tax. The other states have relatively high taxes and high tax burdens.
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 the last 10 years compared to New Hampshire.
There is clearly a link between the two.
New Hampshire’s neighbors know this and have asked how they could model themselves after New Hampshire. It is a fair question because the other states are losing out on a lot of economic activity because of New Hampshire’s lower tax burden, especially on income and retail sales.
In one area that New England states are acting on is the income tax. In past decade, All New England states, except Connecticut, have either kept their income tax the same or lowered it, to get more in line with New Hampshire.
A similar trend (but not as strong) can be seen in Corporate Taxes:
New England states have seen that New Hampshire’s economic performance is not an accident. New Hampshire is winning because it does not penalize productive activity. Even Vermont, not a state you would expect to be business friendly, has lowered its corporate tax rate to be match New Hampshire. Now Maine, which has elected reform-minded legislators and a governor, is discussing lowering its income tax rate.
For tax reform, this example is good news for those who want to see government to get out of the way of business. The pressure placed on governments by neighboring ones will overcome even the most stubborn high-tax, big-government ideologies. If the economy is faltering because of terrible policies, politicians will need to lower the burden of government when people and businesses are suffering. The politicians at the federal level need to look around them. Like New Hampshire in New England, countries around the world are reducing their tax burdens and taking vital economic activity from America. The next president needs to make reform a priority or we will continue to slip behind.