Tax Caps and Towns: A Race to the Bottom?

Half a dozen communities across the state have passed some version of tax or spending caps over the years.

They’re attempts to reign in local government spending.

The local laws typically tie budget increases to the rate of inflation and if an exception is needed, a super majority of voters has to approve it.

Economist Brian Gottlob has been watching and studying the effects of tax caps.

His own town of Dover instituted one a couple of years ago.

But he was surprised when he got a call commissioning him to do a formal study.

The call came from a couple of liberal groups opposed to tax caps.
“And I wouldn’t have taken this but it astounded me that I was hired by these people. These are people who probably hate almost everything I write (laughs), but the fact is that I had looked at it a little bit before anybody hired me and I said, you know, maybe I’m a fiscal conservative but I think you can do this differently.”

Gottlob decided to look at the effect Tax Caps have had on the City of Franklin.

Why Franklin?

“Because the virtues of tax caps have been extolled largely on the basis of the experience of Franklin. The other reason is that they’ve had it in place for nearly two decades.”

Far longer than any other community.

And what Gottlob found, he’s chosen to call a “race to the bottom.”

“A race to the bottom occurs when tax caps, expenditure caps affect certain services, schools tend to bear the brunt of caps along with services that …tend to be services that appeal to higher skilled, more highly educated, individuals and families they tend to be things like cultural, civic amenities infrastructure investments.…

Those are the things that tend to get cut when money is tight.

And when those civic amenities disappear , people who want those things move out, or never move in.

For example, between 1990 and 2000, the percentage of people 25 and older with a bachelor’s degree or higher increased only 1.5% in Franklin to nearly 14%.

Comparable communities saw a median increase of college educated residents of 7%, to a total of nearly 40%.

And that says Gottlob has an effect on business.

“They’ll want access to a higher skilled, more highly educated workforce at least businesses that tend to be growing more in this economy and they’ll also want access to those same people in order to sell to them.”

But says Gottlob those are typically the same people who want the social amenities that have been cut.

And again, the data show that Franklin lost nearly 25% of its private sector employment between 1999 and 2007, more than any other comparably sized town.

As businesses move out, the non-residential tax base desolves, putting more tax pressure on homeowners, which decreases spending more.

And says Gottlob, the cycle could be self perpetuating in Franklin.

“one of the things that it’s done is that over the years they increasingly vote it in by a larger margins and I think that’s occurred because what happens is that people who want a different level of services leave that community and people who are most interested in living in a community that restricts its expenditures and has a cap will stay or locate there.”

So you end up with a more homogenous population.

Gottlob says there could be several factors behind Franklin’s economic problems.

It’s a 19th century mill town, by-passed by 1-93.

But he adds that lots of New Hampshire towns found themselves in that situation.

“the question is what leads communities to reinvent their economic and industrial base and I would argue largely it’s the relative attractiveness of those communities to skilled, well educated populations that have more options in terms of economic opportunities and certainly where they live. “

The report concludes that the research nationally and in New Hampshire suggests that tax and spending caps can reduce local government spending.

But, says Gottlob, that benefit may come at a high cost.

That conclusion is probably not the end of this debate.

The Dover-based economist says he’s received a great deal of criticism—some of it personal—from people who support tax caps.

But Gottlob says his is the first report to look at hard data which is all publicly available.

“You know I fully expect that someone will take a shot a doing a different set of analyses. I hope they do."

For NHPR News, I’m Mark Bevis.