Study highlights adverse effects of tax caps

With several municipalities, including Manchester — the state's largest — embroiled in legal proceedings and political debates about enacting property tax caps, a study released yesterday concludes that in Franklin, which adopted a tax cap in 1989, the measure has limited spending and reduced taxes but stunted demographic and economic growth. Well educated, higher income people do not want to live in communities that skimp on amenities like schools and parks concluded economist Brian Gottlob.

Laconia voters adopted a similar cap in 2005.

Gottlob, of PolEcon Research of Dover, conducted the study — entitled "Are Local Government Tax and Expenditure Limitations a Race to the Bottom?" — on behalf of "Keep Manchester Moving" and "Stand Up for Claremont", organizations campaigning against the introducing a tax cap in those cities. Although opponents of tax caps commissioned and financed his work, Gottlob, speaking during a conference call with reporters yesterday, insisted that he approached the study without any ideological or political bias, but instead sought to measure the impact of the tax cap on key fiscal, demographic and economic indicators.

"The last thing I want to do is say to Franklin or any other community is that 'you shouldn't have a tax cap,'" he said. "But, I would tell them not to expect much change in their economic fortunes."

Gottlob said that he chose Franklin from among the half dozen municipalities with tax caps (Derry, Nashua, Laconia, Dover and Rochester) because it alone offers a sufficient history from which to assess its effects. "On the basis of employment and business growth, growth in commercial and industrial property valuations, population growth growth and the addition of a skilled, well-educated workforce," he found, "the City of Franklin performs much worse than the City of Manchester and nearly all comparable communities in New Hampshire."

Ken Merrifield, the mayor of Franklin and ardent champion of the tax cap, declined to comment on Gottlob's study at this point, saying that he had not yet had an opportunity to read it.

The tax cap has reduced expenditures in Franklin, where the per capita local property tax burden of $1,152 is the lowest of any municipality with at least 8,000 residents. While expenditures for public safety services in Franklin match the median of municipalities of 8,000 or more, spending for schools, streets, libraries and capital projects and improvements falls short of it.

School spending, Gottlob suggests, accounts for the largest share of lower property taxes in Franklin, where the per capita school spending mark of $411 represents just 37-percent of the median of $1,106 for municipalities of 8,000 or more. Only six municipalities receive more state aid per pupil than Franklin, which spends less per pupil than all but three.

Gottlob notes that because tax caps limit increases in the amount raised by property taxes to gains in the Consumer Price Index (CPI), which is a poor measure of the cost of providing public services, they tend to reduce expenditures more than intended. Since the Gross Domestic Product Price Deflator, which measures the cost of state and local government services, has outpaced the CPI for the past decade, applying the CPI leads to reductions in real or inflation adjusted expenditures. Gootllob suggested that tax caps could be improved by replacing the CPI with the GDP Price Deflator.

Gottlob concludes that the demographic and economic impacts of Franklin's tax cap have been severe. Of the 40 largest municipalities, only Keene, Claremont and Berlin experienced slower population growth between 1990 and 2007 than Franklin, where population growth measured 4.1-percent, a fifth of the median rate of 18.7-percent of the 40 cities and towns. Moreover, from 1990 to 2000 the number of residents with at least a bachelor's degree rose 7-percent in the largest municipalities, but only 1.5-percent in Franklin, where the share of residents with a higher degree was 13.6-percent, less than half the median of 30.8-percent of the largest cities and towns.

Meanwhile, Gottlob reports that between 1999 and 2007 private sector employment in Franklin dropped 25-percent, the steepest decline of any city other than Berlin. Likewise, since 2000 only in Berlin and Lebanon have has the commercial and industrial tax base grown less than in Franklin. Ironically, Gottlob remarks that the relative shrinkage of the commercial and industrial tax base in Franklin has led to the fifth greatest shift of the property tax burden from businesses to residents among the largest municipalities. Although taxpayers in Franklin enjoy a very low per capita property tax burden, homeowners bear a greater share of the tax burden than in many municipalities without tax caps.

The study does not incorporate data on the growth of personal or household income or the appreciation of residential property values, which would provide an indication of the economic fortunes of individuals and families. However, Gottlob ventured that in light of the loss of employment opportunities and rate of population growth, measures of income and wealth would also compare unfavorably with other municipalities.

Reflecting on the experience of Franklin, Gottlob suggests that tax caps may touch off a "race to the bottom" by curbing expenditures on amenities and services, for which the demand increases as income rises — school, libraries, parks, cultural resources and so on. By skimping on these expenditures, a municipality becomes relatively less attractive to those with higher levels of occupational skill and educational achievement as well as to the firms seeking to hire them as employees and serve them as consumers. Without a robust business community, the commercial tax base grows more slowly, adding to the pressure on residential taxpayers, who may call for tighter limits on spending. "The end result," Gottlob writes, " is a downward spiraling, self-reinforing cycle (or 'race to the bottom)."

When his conclusion was questioned, Gottlob conceded that while a tax cap may not directly cause the demographic and economic consequences he measured, it can hinder a municipality's capacity to seize opportunities and "share some of the positive trends underway in other communities. It can preclude some of the positive trends," he said. For example, he asked if Manchester could have developed the airport, Verizon Center and minor league baseball park, all of which have boosted the city's economy, if the budget were limited by a tax cap.

According to Gottlob's data, population has grown twice as fast in Laconia than in Franklin, private sector employment has declined less than twice as much and the commercial tax base has expanded nearly twice as fast while the per capita property tax burden of $1,872 is nearly two-thirds higher. He said that Laconia, which adopted its tax cap in 2005, lacked the history to support findings akin to those for Franklin. However, after remarking on the city's favorable location and waterfront setting, he offered that "I'm not sure Laconia will be able to take advantage of its opportunities (with a cap)."