By Granite State Report
A research-backed blueprint for what it would look like, how it could work, and who would feel it—written for Granite State Report.
TL;DR
New Hampshire’s “no income tax, no sales tax” calling card isn’t free. We pay for it with the sixth‑highest effective residential property tax rate in the nation, heavy reliance on volatile business taxes, and a school‑funding system courts keep swatting at. A narrowly tailored flat‑rate personal income tax, paired with large exemptions and refundable credits, could (1) cut property taxes in a visible way, (2) fully fund constitutional education obligations, and (3) stabilize state finances—without triggering a constitutional knife fight. If lawmakers insist on progressive brackets, they should put a constitutional amendment on the ballot. Otherwise, the legally safer route is a flat rate + generous credits that achieves progressivity in practice and relief where it’s needed most.
Executive summary
- Property taxes are doing the heavy lifting. New Hampshire residents face one of the highest effective residential property tax rates in the U.S. (about 1.41% of home value in 2023, sixth‑highest). That’s not an accident—it’s policy design. We’ve chosen not to tax wages, then plugged the hole locally.
- Business taxes and fees dominate state‑level revenue. The Business Profits Tax (BPT) and Business Enterprise Tax (BET) are cornerstones, but the state has steadily cut their rates (BPT to 7.5%; BET to 0.55%), exchanging short‑term competitiveness optics for long‑term revenue erosion and volatility.
- Courts keep signaling the education funding status quo isn’t cutting it. Superior Court rulings in 2023 found the state’s base adequacy funding unconstitutionally low and identified problems with the Statewide Education Property Tax (SWEPT); subsequent developments preserved SWEPT’s structure, but the adequacy pressure remains—on the order of ~$500 million more per year, depending on the standard ultimately required.
- Our tax system is regressive. Lower‑income Granite Staters pay a larger share of income in combined state/local taxes than the wealthy—driven primarily by property taxes. A well‑designed income tax can make the system fairer.
- Legally, progressive brackets are risky under Article 5’s “proportional and reasonable” rule. New Hampshire advisory opinions have long warned that a graduated income tax likely needs a constitutional amendment. A flat rate alongside credits/exemptions is the safer statutory path.
- A pragmatic blueprint. Using IRS data, a conservative base case suggests that a 1% flat tax above a large exemption could raise roughly $700 million; 2% ≈ $1.4 billion; 3% ≈ $2.1 billion—revenues sufficient to (a) eliminate the SWEPT or (b) deliver visible municipal property‑tax rate cuts, while fully funding adequacy and targeted aid. (See “Revenue math.”)
The problem we’re actually trying to solve
- Property‑tax pressure. Homeowners and renters (via pass‑through) carry an outsized load. New Hampshire’s effective residential property tax rate ranked sixth‑highest in 2023; our structure intentionally leans on local property taxes rather than broad‑based state income or sales taxes. That’s the “New Hampshire Advantage” story in shorthand—but the punchline lands on your mortgage escrow.
- School funding litigation. In 2023, a Rockingham County judge concluded the state’s base adequacy grant was constitutionally insufficient—citing a per‑pupil benchmark around $7,356—implying hundreds of millions in additional annual state aid. Another case attacked SWEPT’s administration; later high‑court action left SWEPT intact, but the adequacy funding gap persists. Translation: the check is coming due, one way or another.
- Volatile state revenue mix. We rely heavily on BPT/BET (corporate/enterprise) collections. Those rise and fall with profits and rate tinkering; repeated rate cuts (BPT from 8.5% to 7.5%, BET from 0.75% to 0.55%) forfeited hundreds of millions in recurring revenue, according to independent analysis.
- Regressivity. New Hampshire’s overall system leans regressive: effective tax rates fall as income rises. That’s not ideology; it’s the arithmetic of property taxes on modest incomes. An income tax—carefully designed—can correct that tilt without detonating growth.
What the law will and won’t let you do (without a constitutional fight)
New Hampshire’s Constitution (Part II, Article 5) requires taxes to be “proportional and reasonable.” Our Supreme Court’s advisory opinions have read that to mean: be extremely cautious about graduated (progressive) rates. In 1955, the justices said a tax pegged to a percentage of federal liability—a backdoor progressive tax—was unconstitutional. In 1971, they clarified you can levy a personal income tax at a different rate from business profits taxes, but the uniformity problem still looms for brackets. The safe harbor: flat rates plus uniform credits/exemptions. If lawmakers want true progressive brackets, put a constitutional amendment before voters.
Bottom line:
- Permissible today (statute): A flat‑rate personal income tax, with large standard exemptions and refundable credits (e.g., an Earned Income Credit) that applies uniformly but delivers progressive effects.
- Likely requires amendment: Explicit graduated brackets or surcharges that cause taxpayers at the same income to face different rates.
Revenue math (static, conservative, transparent)
You deserve actual numbers, not vibes. Here’s a clean, cautious approach:
- Known baseline: IRS SOI data show Tax Year 2021 filers in NH reported $77.8 billion in total Adjusted Gross Income (AGI) across 674,178 returns. 2022 averages were similar (mean AGI about $111,000), suggesting no wild swing in total AGI. We’ll use 2021 as our conservative base.
- Design assumption: Align to federal AGI for simplicity. Exempt the first $12,000 per return (you can scale that up for joint returns; for simplicity, we use a per‑return figure to illustrate). That’s $8.09 billion off the top (674,178 × $12,000).
- Taxable base (illustrative): $77.8b − $8.09b ≈ $69.71b.
- Static yields (no behavior changes, no special carve‑outs yet): • 1% flat rate ⇒ ~$697 million • 2% flat rate ⇒ ~$1.39 billion • 3% flat rate ⇒ ~$2.09 billion
Sensitivity checks you should expect:
- If NH excludes Social Security benefits from the base (as many states do), you shave a few percentage points off taxable AGI; think of it as tens of millions per percentage point of tax rate.
- If you bolster a refundable low‑income credit, your net shrinks (by design) but your distribution improves markedly.
- If you adopt a larger standard exemption (e.g., $20,000 per return), the base drops by ~$13.5b, reducing 1% yields by ~$135 million.
Even after these sensible policy tweaks, 1–2% comfortably finances full adequacy, a visible property‑tax cut, and a rainy‑day reserve—with room to phase in. (See “What we fund, exactly.”)
A blueprint that works and holds up in court
1) Rate & base (statute‑safe):
- Flat rate: 1.75% in year one, moving to 2.0% in year two after systems stabilize.
- Base: Federal AGI, minus a large NH standard exemption (e.g., $15,000 per return), minus all Social Security benefits.
- Credits:
- NH Earned Income Credit (EIC): 20% of the federal EITC, refundable.
- Expanded Property‑Tax Circuit Breaker: Scale the existing Low- and Moderate‑Income Homeowners Relief program from a $1.1 million sideshow into a statewide, automatic, tax‑filing‑based refundable credit keyed to property tax relative to income. No paperwork chase.
2) What we fund, exactly:
- K–12 adequacy at the court‑signaled level (roughly $7,356 per pupil base, with targeted add‑ons)—call it $500–$600 million recurring, depending on final standards.
- Property‑tax relief in two visible moves:
- Eliminate (or sharply reduce) the SWEPT and replace it with state‑level income‑tax revenue.
- Send unrestricted municipal aid by formula (population + equalized valuation) with a hard requirement: use for tax rate reduction unless voters earmark for capital needs.
- Stabilization reserve: Sequester 10% of receipts in a volatility reserve to smooth recessions, shielding local budgets from sudden swings.
3) Administration:
- Create a lean Income Tax Division inside DRA; withholding via employers (same rails as federal).
- Resident credit for taxes paid to other states (e.g., NH residents working in Massachusetts) to avoid double taxation—a standard feature of state income tax systems.
- E‑file integration: one‑page Form 1‑NH attached to federal e‑file; piggyback on verified W‑2/1099 data.
4) Politics & pacing:
- Phase‑in the rate and property‑tax offset together. Year 1 rate at 1.75% with SWEPT reduced and municipal aid checks landing before fall tax bills. Year 2 to 2.0% once systems are proven.
- If the Legislature wants progressive brackets, draft the constitutional amendment in parallel (clean language authorizing graduated personal income taxation), put it to voters, and—if it passes—transition the structure accordingly.
What it looks like for a typical filer
- Single renter, $48,000 wages: NH exemption $15,000 ⇒ taxable $33,000. At 1.75%: $578. NH EIC (say $200). Net: $378. Renters benefit indirectly via municipal aid lowering local levies and via school funding stabilizing class sizes and special‑ed supports.
- Homeowner couple, $110,000 combined wages: Exemption $15,000 (per return) ⇒ taxable $95,000. At 1.75%: $1,663. Circuit‑breaker credit if property tax is a high share of income; SWEPT elimination + municipal aid reduces their tax rate, offsetting part/all of their NH income‑tax liability depending on town.
- Retired couple, Social Security + pension: Social Security excluded; pension income included (as in most states). The large exemption plus credits leaves many middle‑income retirees owing little or nothing. (New Hampshire already repealed the Interest & Dividends Tax effective 2025; this proposal does not bring it back.)
Education, property taxes, and fairness: why this matters
New Hampshire funds a smaller share of K‑12 from the state level than nearly anywhere, pushing the cost to local property tax payers and producing wide town‑to‑town disparities. Research and litigation have converged on the same conclusion: the current aid level doesn’t meet constitutional duties. An income‑based revenue stream lets the state do the state’s job—fund baseline education—while local taxpayers keep control over true enrichment. That reduces the “zip‑code premium” baked into property bills.
And yes, New Hampshire’s overall tax system is regressive. By design, a flat property tax swallows a larger chunk of lower incomes. A flat‑rate income tax with refundable credits flips that dynamic without tripping Article 5. That’s not ideology; it’s engineering.
Where the money is (and isn’t)
- BPT/BET are already shouldering more than a third of unrestricted state revenue, a peculiar reliance among states. Diverse economies and corporate‑profit cycles make that risky. Tax‑base diversification isn’t a sin; it’s good governance.
- Our repealed Interest & Dividends Tax took the last sliver of personal‑income‑type revenue off the table in 2025. If we’re going to move any burden off property taxpayers, wages need to be in play. That’s the only base broad enough to matter.
What about competitiveness, growth, and migration?
Two points you can hang your hat on:
- Costs already drive decisions. Employers, residents, and would‑be residents stare first at housing costs, property taxes, schools, and infrastructure. Underfunding those in the name of a slogan is a growth strategy only on paper. The proposed design lowers property taxes and stabilizes schools, which are the real location factors.
- A flat rate with big exemptions is modest. At ~2% on income above a large exemption—then offset locally—you’re not scaring off talent. And by using credits to protect low‑ and middle‑income households, you improve after‑tax affordability for the majority. (A truly graduated tax might provoke a constitutional fight; if lawmakers insist, go to the voters honestly with an amendment.)
Implementation timeline (brutally practical)
- Session + 6 months: Enact statute, fund the DRA build‑out, finalize withholding guidance for employers, stand up e‑file schema tied to federal 1040.
- Month 9: Begin withholding (mid‑tax year start is fine if paired with immediate property‑tax relief).
- Month 12: First municipal aid/SWEPT offset checks land before fall tax bills.
- Year 2: Rate steps to 2.0%, credits fully implemented, turn on NH EIC in tax filing season.
You don’t need two biennia and a moonshot IT rebuild. This is off‑the‑shelf tax administration. (We already process BPT/BET, Meals & Rooms, and property tax data; the pipes exist.)
What Granite Staters would see on Day 1
- Your town sets a lower rate. Either because SWEPT is gone or because the state sent a clear, formula‑driven aid check that must be used for rate relief unless voters opt for capital.
- Schools stop lurching. Adequacy is funded; special‑ed spikes don’t blow up the local budget.
- Filing is simple. One page (Form 1‑NH) with most inputs imported from the federal return. Withholding means most people owe little at filing.
- Fairer bills. Low‑ and moderate‑income households see higher credits; homeowners in high‑rate towns see meaningful property‑tax relief.
What if you want a progressive tax, not a flat one?
Then prove it to voters. Draft a specific constitutional amendment authorizing graduated personal income taxation (and only that), with ironclad property‑tax relief triggers in the implementing statute (e.g., automatic SWEPT elimination and a statutory cap on the statewide education levy). Until that passes, flat + credits is the legally durable route.
Briefings (to ground the debate)
School Funding & Property Taxes 101 (NH School Funding Fairness Project)
The State of Housing in New Hampshire (NHFPI webinar)
Claremont Decision discussions (legal context and history)
Frequently asked (usually loaded) questions
“Isn’t the ‘New Hampshire Advantage’ built on no income tax?”
It’s built on low overall burdens for most households and businesses, predictable rules, good schools, and housing people can afford. The current model front‑loads funding onto property owners and volatile business taxes; we’re paying a premium in the wrong places. The proposal lowers property taxes and stabilizes education while keeping the rate low and flat.
“Won’t people leave?”
People move for jobs, housing, schools, and family. A flat ~2% above a large exemption, offset by property‑tax cuts, is not a migration event. If anything, stabilizing schools and lowering property taxes in high‑rate towns improves the value proposition. (If lawmakers still want “progressive brackets,” go to voters with a constitutional amendment and be explicit about the offset.)
“Isn’t this a blank check to Concord?”
No. Write hard guardrails into statute: (1) automatic property‑tax offsets, (2) dedicated adequacy funding formula, (3) volatility reserve, and (4) supermajority to increase the flat rate for five years. The revenue becomes a tool, not a trough.
Sources, data, and legal cites
- Property tax burden and rankings: Tax Foundation effective residential property tax rates by state (NH ≈ 1.41%, rank 6, 2023 data).
- Business tax rates and trend: NH DRA transparency page (BPT 7.5% for periods ending on/after 12/31/23; BET 0.55%).
- Revenue forgone from rate cuts: NH Fiscal Policy Institute analysis of BPT/BET reductions (2016–2024).
- Education funding rulings and adequacy figure: NH Bulletin and NH Journal coverage of Superior Court decisions (Ruoff) and $7,356 per‑pupil benchmark; later high‑court action regarding SWEPT.
- How NH funds public services (state vs local reliance): Reaching Higher NH fact sheet; Tax Foundation notes on states relying on property taxes in lieu of broad‑based income taxes.
- Distributional fairness: ITEP Who Pays? 7th edition—New Hampshire page and chart book.
- Interest & Dividends tax repeal timing and rate history: NH DRA FAQ.
- Personal income context: NHES/BEA personal income totals (2022).
- IRS income base: IRS SOI Historic Table 2 (state AGI by year); NHFPI breakdown of returns/AGI (TY2021); FRED series on mean AGI (2022).
- Flat tax context: Tax Foundation on the rise of state flat taxes (and implications).
- SWEPT basics: NH DRA explainer.
The call: swap slogans for math
Here’s the no‑nonsense way forward for lawmakers:
- Pass a flat‑rate income tax on federal AGI, with big exemptions, Social Security exclusion, and refundable credits (EIC + circuit breaker).
- Zero out or sharply reduce SWEPT and cut municipal property‑tax rates using a formula grant.
- Fully fund adequacy with targeted aid; stop litigating the inevitable.
- Lock in guardrails (offset triggers, volatility reserve, supermajority to raise the rate).
- If you want progressive brackets, write a clear constitutional amendment and let voters decide.
This isn’t about changing who we are; it’s about paying for what we already expect in a way that’s fair, legal, and growth‑positive. Keep the rate low, make the credits strong, and send every town a property‑tax cut that shows up on the bill. Then watch how fast “no income tax” turns into “lower property tax, better schools, steadier budgets.”
NH Income Tax Household Calculator
NH Income Tax Revenue Simulator
References:
- New Hampshire DRA — Business Taxes (BPT/BET) & rates; transparency pages.
- NH Fiscal Policy Institute — revenue trend briefs and distributional snapshots.
- Tax Foundation — property tax rates by state (2023) and NH overview.
- ITEP — Who Pays? 7th edition (NH page) and chart book.
- NH Bulletin / NH Journal / NHPR — ConVal and SWEPT litigation coverage.
- DRA — Statewide Education Property Tax (SWEPT) explainer.
- NHES (BEA) — Personal Income totals for NH (2022).
- IRS — SOI Historic Table 2; FRED — Mean AGI series (NH).
- Tax Foundation — flat tax reforms across states.
- DRA — Interest & Dividends Tax FAQ (phase‑out to repeal).
- Reaching Higher NH — school‑funding fact sheet.
