New Hampshire may be a small state in New England, but it offers a big lesson for America.
That lesson is this: The best way to keep your freedom is never to lose it in the first place, and once you’ve ensured that, to whittle down the remaining barriers to liberty and opportunity.
Look at what happened in Connecticut. Formerly a haven for tax refugees from New York, the Constitution State adopted an income tax in 1991, and now it is one of the highest-taxed states in the country.
By the same token, when formerly pro-big government states elect conservative governments, they often try to make changes – then find out how difficult it is to do. For example, Kansas saw government growth for decades, particularly in the mid-1990s and mid-2000s. In the last decade, when the Kansas legislature tried to turn things around by putting income taxes on a path to zero, it ran into a political buzzsaw of opposition, comprising all the interest groups who’ve benefited from government largesse. (Leaders could also have done more to better structure tax cuts and cut spending up front to avoid deficits.)
It remains to be seen what will happen in North Carolina, where the legislature has enacted a gradual phaseout of the business income tax. For many years, North Carolina was a relatively high-tax state, and it’s been difficult even for committed lawmakers to make more than a small dent in that burden.
Meanwhile, New Hampshire scores at the top of freedom indices not just because of its recent reforms, but because its leadership has resisted efforts to adopt big sources of new revenue. A broad-based income or sales tax is politically taboo in New Hampshire, and the absence of these taxes has kept the temptation of easy revenue out of the hands of legislators.
That’s not to say New Hampshire has faced no danger. The state very nearly adopted an income or sales tax in 2001, in the wake of state supreme court decisions that forced the state to provide more funding to local public schools. The tax increases that happened then, coupled with new government regulations in the late 2000s, knocked New Hampshire out of its first-place spot in the Cato Institute’s freedom ranking.
But since 2014, the Granite State has come roaring back. This year, for the first time, New Hampshire has not only scored first, but also put clear water between itself and every other state.
So what has New Hampshire been doing right?
First, the state has gradually and responsibly cut growth-impeding taxes, such as business taxes and the interest and dividends tax, which is being phased out. Since these tax cuts began in 2015, New Hampshire’s economic growth rate has powered ahead of its closely connected neighbor, Massachusetts.
Second, the state has mostly kept school funding local, which tends to make educational decisions more fiscally responsible. Property owners have more direct leverage and choice over their local property taxes than they do state taxes.
Third, the state is trying to solve its housing shortage, which it shares with most other Northeastern states. Local zoning has strangled housing construction, and the state has stepped in with a law requiring towns to allow “accessory dwelling units” (in-law apartments), expedited local permitting, and a housing appeals board to provide quick resolution of zoning disputes.
Fourth, the legislature has expanded personal freedom for its citizens, most notably with Education Freedom Accounts. The state’s per-student adequacy grant to local districts is now available for parents to cover educational expenses outside the public school system.
Finally, the state has been getting rid of cronyist regulations in order to increase competition and opportunities in the marketplace. Some small barriers to starting businesses have been repealed, and the governor signed universal licensing reciprocity this year.
The consequences of all this reform have been economic growth and a growing number of people who want to make New Hampshire their home. New Hampshire is outpacing every other state in the region.
It has the highest real personal income growth rate in New England since the Great Recession of 2008. All three southern New England states have been losing workers and taxpayers to the rest of the country, while New Hampshire has been gaining. New Hampshire’s population also recently passed Maine’s for the first time in 200 years.
The Cato Institute study shows that increases in growth follow increases in economic freedom, and Americans are moving from states with less economic and personal freedom to states with more. Free-market reforms can pay off, but states must make them sustainable for the long term. One of the most important lessons is that an ounce of prevention is worth a pound of cure: Never give government tools it will be tempted to abuse in the first place.
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