The Circumstance is Our Own Making

The Circumstance is Our Own Making

July 11, 2011 Posted by Kyle Pomerleau - 1 Comment
How Does New Hampshire Do It? An Analysis of Spending and Revenues in the Absence of a Broad-based Income or Sales Tax

Image from New England Public Policy Center Research Report

Recently, the New England Public Policy Institute released a new report called, “How Does New Hampshire Do It? An Analysis of Spending and Revenues in the Absence of a Broad-based Income or Sales Tax.” This report looks at different factors and policies in New Hampshire that permits the state to have neither a sales tax nor a broad-based income tax. The author examines how New Hampshire spends its money and receives its revenue to present an overview of its fiscal model. The paper breaks down New Hampshire’s spending into two types: Spending that is need-based, or due to circumstances such as poverty rate; and policy choices such as fewer public hospitals.

As the author states, this paper does not seek to recommend policy or make any normative assumptions. However, in just “informing policymakers’ discussions,” the paper makes some blatant assumptions about the nature of public spending and the supposed need for it. It presumes that a certain level of poverty in a state dictates a need for a high level public welfare spending. This leads to another assumption that certain levels or types of public services are required at different poverty levels. These assumptions are paradoxical. The taxes that are required to sustain levels of welfare spending, such as Maine’s spending of almost 30% of the state’s general fund, have an impact on the economy’s performance. This has clear upward pressure on the poverty rate, reducing economic opportunities for Maine’s poorest citizens. The need for public spending creates its own need.

The paper assumes a benchmark of needed spending based on the New England regional states and their average poverty levels among certain populations. Essentially, the “need” for this spending is assumed from the spending that is already taking place, averaged across the region. The issue with this so-called measure of need is that it ignores the flexibility each state has in terms of welfare spending. States have a wide array of choices as to how and how much to spend on Medicaid and TANF cash assistance, and they do, indeed, exercise their choice. It just so happens that, besides New Hampshire, New England as a whole chooses to spend more than the U.S. average on welfare programs. If spending on welfare were based on the circumstance of poverty, as the paper supposes, there would be a correlation throughout the states:

Welfare Expenditures as a Percentage of State Expenditures

Welfare spending throughout the country does not correlate with poverty level. This high variation could be due a host of other factors, including prevailing legislative ideology, public opinion, or political climate. The high variability in states’ welfare spending in relation to poverty level does not support the assumption that the needed response to a higher poverty level is increased spending on public welfare. Montana, which has a poverty rate of 13.5% and similar characteristics as Maine, has chosen to spend less than half of what Maine has in relation to their general fund. At the same time Massachusetts, with a poverty rate less than Maine’s, chooses to spend 27.8% of its general fund on welfare.

In the case of poverty, rather than assuming the need for certain amounts or types of government spending, it would be more beneficial to look at policy choices and how they have an effect on poverty and concede that welfare spending, like other types of spending, is a choice. Policies that create taxes, more regulations and an overall more burdensome business environment are completely under the control of policymakers. There is no determined level of “need” for any of it and the scaring away of private business, investment and innovation to support that type of spending has consequences:

Percent of Population Below the Poverty Level

There is a strong negative correlation between the strength of a state’s private sector and its poverty rate. States that have chosen public policies that have attracted opportunity have a lower poverty rate on average. The New England Public Policy Institute’s paper assumes that poverty is a circumstance that dictated New Hampshire’s lower spending and is outside of its immediate control. However, it is clear that it is the lower spending and minimal taxation that has had a positive effect on its economy and is a consequence of New Hampshire’s economic policy. Maine’s private sector, which was once equal to New Hampshire’s, has suffered. Maine chose to enact a sales tax and an individual income tax; both policies to support more spending. This has led to Maine’s sad economic condition and higher poverty rate. (And if one has doubts based on geography, Rhode Island has a story to tell.)

Welfare programs are supposed to help alleviate poverty and help those who need it; not sustain a certain poverty level. The assumption that it is necessary to spend more on public assistance when there is higher poverty and then, in turn, raise taxes, thus harming the economy, negates the purpose of the program. These programs should move people from poverty to a good job while providing a temporary safety net. This would reduce poverty and is what we “need” to do. In fact, since the 1996 federal welfare reform, rolls have been decreasing throughout the country and the situation of the poor has gotten better. Just increasing welfare benefits and spending simply destroys opportunities for the poorest. It needs to be recognized that a thriving private-sector along with a temporary safety net for families is a much better tool for addressing poverty. Spending more money on programs that trap families in dependence and harm our economy is self-defeating, no matter what the intentions.