Recession Magnifies Gripes Over N. Hampshire Taxes : Economy: Stiff property levies lead to election-year disenchantment in state with image as a tax haven.

A bastion of fiscal conservatism, a haven for the tax-weary, an experiment in the purest Republican principles--New Hampshire has been called all these things.

New Hampshirites take pride in their anti-tax stance. But this year, things are different. As presidential candidates stump the state seeking votes in the Feb. 18 primary, they’re hearing from people like Alan Smith.

“I’ll be blunt--this tax haven stuff is a crock,” Smith, 32, told Republican challenger Patrick J. Buchanan the other day. “The New Hampshire dream is no dream for me.”

Smith wondered how he could afford to pay his property taxes: $3,900 on a home he bought for $50,000 in 1985. When Buchanan told him that exceeded his own property tax bill in posh suburban Virginia--well, it didn’t make Smith feel better at all.

And therein lies much of New Hampshire’s problem. It has no income tax and no general sales tax, but it does have a stiff property tax and a business-profits tax. As the recession lingers, an uncomfortable truth becomes evident: Property taxes don’t go down, even if the ability to pay disappears.

Voters’ disenchantment with the current system could influence the presidential election because the tax situation magnifies the effects of the recession. Schools, businesses and taxpayers all are hurting. George Bush--and his New Hampshire campaign chairman, Gov. Judd Gregg--are defenders of the status quo, and could be punished for it.

“The unhappiness over taxes is going to be one more thing that makes people mad at incumbents when election time comes,” said Robert Craig, a professor at the University of New Hampshire.

In 1988, this state was riding high. Unemployment was minuscule at 2.4% and the real estate market was booming. At the end of December, the jobless rate had shot up to 7.8%. In 1989, the average selling price of a home exceeded $142,000; as of last year, it had plummeted below $112,000. In the last two years, the state has lost 50,000 jobs and 15,400 residents, and bankruptcies have soared. Statewide, 150,000 families are behind in their mortgage payments--including Democratic state chairman Chris Spiriou.

Now, proposals to impose broad-based taxes--easing reliance on property taxes, business taxes and 18 specific sales taxes--are attracting more support.

Ironically, New Hampshire has the nation’s lowest overall tax burden, and is, with Alaska, one of two states without a personal income or general sales tax.

But from Nashua to Northumberland, homeowners are griping about property tax bills that have soared as the recession has shrunk the tax base and forced cutbacks in local services. School officials and parents complain of huge funding disparities among districts, which depend on property tax receipts for 93% of their revenues.

And, in a state desperate for new business, many large corporations are up in arms over an 8% business profits tax which, because of a peculiar quirk, is shouldered by 5% of the state’s 60,000 concerns.

“The situation is crying out for change, and recession has really refocused attention,” said state Rep. Bert F. Teague, a banker, former Republican state chairman and tax-reform advocate.

Nothing is dearer to the state’s self-image than the idea that New Hampshirites are the original tax-hating, government-baiting Yankees. But through much of this century, New Hampshire’s political culture was a progressive Bull Moose Republicanism, similar to Vermont’s.

In the early 1970s, though, the state came in the sway of politicians like three-term Gov. Meldrim Thomson Jr., the dour alter ego of crusading conservative publisher William Loeb of the Manchester Union-Leader. Candidates for political office lined up to take Loeb’s “pledge” that they would never support a broad-based tax. The result was a political climate that helped put New Hampshire in the path of a flood-tide of emigrants from Massachusetts and other higher-tax states.

Today, about 60% of state legislators were born somewhere else. But no matter, all here are free to view themselves as scions of the anti-tax bloodline, and many do.

In the late 1970s and 1980s, New Hampshire’s tax climate helped pump up the economic expansion that for a while gave the state the fastest growth rate in the nation. Next to red-brick husks of grimy mills sprouted sleek high-tech factories. The state’s border was suddenly carpeted with row upon row of malls and factory outlets--cutified faux-Yankee emporiums where Ralph Lauren, Talbot’s and Rockport shoes promise, and sometimes deliver, discount prices.

“We’re in mall heaven here,” said state Rep. Deborah Arnesen, a Democratic candidate for governor and tax-reform crusader. “This isn’t a state--it’s a border.”

The state’s largest mall, Pheasant Lane in Nashua, was so eager to combine business-tax benefits, the lack of a sales tax and location that it put its retail space in New Hampshire and its parking lot in Massachusetts--whose business taxes exceed New Hampshire’s.

“New Hampshire promised you can have low taxes and jobs and growth too,” said Jack Menge, head of the Dartmouth College economics department and a former state representative.

In the ‘80s, this idea was intoxicating. But, like some other ideas of the ‘80s--such as junk bonds and debt-heavy corporate balance sheets--its appeal proved illusory.

When the stardust cleared, New Hampshire had built about twice as much residential and commercial space as it needed. Congress began to trim defense spending, which pinched local defense contractors. Impacted by the real estate problems, banks and savings and loans started going bust. Then came the national recession, which exposed sharp edges of the tax structure that had been masked by the long boom--and the debate over the tax structure was joined.

The disgruntled included Alan Smith, a gun-factory worker and a regular Republican voter.

He and his wife bought a four-bedroom home in the southwestern New Hampshire city of Claremont in 1985 at a bankruptcy auction for a little more than $50,000. They calculated then that they could easily cover their expenses with his salary, which last year was about $30,000.

But the recession hit hard in Claremont, and the town has been forced to raise property taxes again and again. Twenty-seven percent of town residents failed to pay their taxes by the deadline this year; the local newspaper is thick with classified ads for homes that will be auctioned because their owners couldn’t make payments.

Smith sold his boat and motorcycle and put his photography darkroom up for sale. His wife, Maria, started an afternoon nursery school in their home. But he wonders how long he will be able to keep ahead of the bills.

Perhaps most galling is that he doesn’t think his taxes buy much in the way of services. Because Claremont has no municipal trash pickup, he must pay a hauler $1 for each bag he takes away. “And when it snows,” Smith said, “we’re lucky if they run the plow once down the middle of our street.”

Smith, who grew up in Concord, says it grieves him to think how much better his parents had it when he was a child. But many of his friends have already given up their homes and moved, and now, “I really feel it’s time to think about looking elsewhere”--maybe North Carolina.

The same day Buchanan ran into Smith, he went to a candidate’s coffee klatch where he came across a Claremont lawyer, Thomas Connair.

Connair’s grievance: a school finance structure that because of its dependence on the property tax enables a wealthy locality to spend about $9,000 per pupil, and poorer ones around $4,000.

In Claremont, where Connair sends three children to school and sits on the school board, financing difficulties are chronic. The city’s high school has lost its accreditation with a regional agency because it can’t tend to various capital and maintenance projects. The gym’s balcony so badly needs repair that it is unusable; the gym’s floor is buckling. The elementary school his daughter attends has no cafeteria.

Connair says he doesn’t believe every district should pay the same for schools, but “it seems to me you’ve got to provide a basic level of education for everybody.”

He is on the steering committee of a group of five districts that have gone to court to challenge the state’s school finance arrangement as unconstitutional. Connair says the aim of the plaintiffs--whose effort is supported by about 40 state districts--is not necessarily to force some kind of broad-based tax system.

A Republican, he is personally skeptical of such an idea. But he knows something must be done.

“The taxing scheme is beginning to erode the community spirit that was always one of the hallmarks here,” he said.

Some of the state’s largest companies are no happier than parents or homeowners. Their gripe is the state business-profits tax, which has a loophole that essentially allows all privately owned firms to avoid the levy.

Because the law says only companies that report a profit must pay the 8% tax, private concerns simply distribute their earnings in the form of larger salaries. But publicly owned firms, which must report their earnings, are stuck paying the freight.

Almost nobody expects a broad-based tax to be enacted today. But many see signs that change is coming, perhaps by next year.

Historically, polls have shown that New Hampshire residents opposed broad-based taxes by whopping margins of 50 percentage points. But in 1990, with recession punishing the state, the margin narrowed to 10 percentage points, according to the University of New Hampshire’s opinion survey center. In fact, about 60% said they would support a general sales tax or a personal income tax if a portion of the proceeds went to relieve the property tax burden, said David W. Moore, director of the center.

Gov. Gregg insists that a state peopled by tax refugees will never go for a general sales or personal income tax. “I go to bed each night praying that my opponents will run against me on a platform of a broad-based tax,” he said.

His adversaries contend Gregg is deluded. “Gregg Sees Elvis,” says a button worn by some detractors.

His position is awkward because his children go to private school, and because he cut his property tax bill by using a provision that rewards landowners for keeping their acreage undeveloped.

Gregg maintains that a broad-based tax would not ease property taxes. “You cannot reduce taxes by raising taxes,” he said.

Last month, a state budget crisis that might have forced a tax restructuring was averted when the federal government came up with $234 million for Medicaid, the federal-state program that provides medical care for the poor. The money was provided under a loophole that says the federal government will reimburse states for taxes levied on Medicaid services.

But that loophole will close this year; in 1993, there will be no buffer from the forces of change. Automobile dealers, real estate firms and the state’s AFL-CIO want a personal income tax. The state’s foremost business lobby, the New Hampshire Business and Industry Assn., favors tax reform. The Farm Bureau Federation supports an income-tax law that would earmark a large share for property-tax relief.

“We’ve had more open talk recently about an income tax than we’ve ever had,” said Timothy Clark, managing editor of Yankee magazine in Dublin, N. H. Sooner or later, he predicted, “change is inevitable.”

New Hampshire by the Numbers

The nation’s first presidential primary state has battled a troubled economy over the last four years.

Declining Home Prices

Average selling price of a home in New Hampshire by quarter, in thousands of dollars

High: $142,629 (1989, 2nd quarter)

Low: $111,989 (1991, 4th quarter)

Shrinking Financial Institutions

1988 1989 1990 1991 Total Number of Banks and S&Ls; 99 98 89 68 Troubled Institutions 0 3 18 11 Failed Institutions 0 0 1 13

Source: Veribanc