How the property tax is making NH’s state’s rental unit shortage even worse

RENTAL PROPERTIES

Commitment to “the pledge” that “I will not support broad-based taxes … sales and income taxes!” has been a cornerstone of political success in New Hampshire for half a century. Its logic rests on the correct proposition that taxes distort economic decisions.

Sales and income taxes affect consumer decisions about where to shop, benefiting New Hampshire retailers, where to live and where to work.

The pledge frames tax policy in a negative statement: “I will not … ” But that begs the question, “What tax regime do those committed to the pledge support?” Look no further than New Hampshire’s current state and local tax structure for the answer: lots of small taxes but fundamentally a reliance on property taxes. How heavy is our reliance on property taxes? The Lincoln Institute of Land Policy, in their 2020 volume State-by-State-Property Tax at a Glance, reports that 2017 per capita property taxes in New Hampshire were $3,310, the secondhighest figure among the states, over twice the national average.

That doesn’t make our current tax regime bad. It merely reflects both our reliance on property taxes and the near total absence of sales and income taxes.

Just as the logic of the pledge is built on its economic effects, so too should we understand the economic effects of our reliance on property taxes.

Consider the effect of our devotion to property taxes on just one segment of the housing market: rental units. From the perspective of renters, property taxes might be viewed as a sales tax. Much like a retailer, landlords collect rents from their renters/customers and remit property taxes to the tax authorities. The difference between retail sales and rentals, in this regard, is that the sales tax amount is visible on a retail receipt but invisible to the renter. Still, both taxes are paid.

If they are fully, but indirectly, paid by the renter, do we know what the “sales tax rate” on rent is? No. I must admit that when I started thinking about this, I didn’t have a clue what the effective “sales tax rate” on rent was in New Hampshire.

To develop a proper estimate of the actual figure would require significant data-gathering and research.

Instead, as a first step, I asked two landlords owning three rental units for figures on rent received and property taxes paid for their units. Assuming the property taxes are shifted forward from the landlord to the renter, the average effective “sales tax rate” on rent for those three rental units was 44%.

For comparison, I also collected data on six rental properties in Maine. For those properties, the average effective “sales tax rate” on rent was 10%.

A part of property taxes is no doubt shifted backwards to landlords, reducing their profitability. But even if only 50% of the “sales tax” on rent is shifted to renters, the average effective “sales tax rate” on rent for the three New Hampshire rental units noted falls to 18%, still a surprisingly high figure, and one that is much higher than any conceivable state tax rate on either sales or income.

Applying the logic of the pledge, it’s appropriate, in fact necessary, to ask, “What is the likely economic effect of such aggressive ‘sales tax rates’ on rent?” Certainly, such taxes raise the cost of renting, causing renter households to trade off quality for rent. To the extent that some portion of the tax is shifted backward to landlords, their economic returns are depressed, reducing the supply of rental units.

One of the frequently raised issues in New Hampshire is a shortage of rental units. Vacancy rate data confirm that issue. According to the Census Bureau, the vacancy rate for rental housing in New Hampshire in the third quarter of 2020 was 1.9%, the lowest figure among the 50 states. The national average was 6.4%, over three times higher. Only five other states had rental vacancy rates below 4%.

Clearly, something is causing New Hampshire’s persistently tight rental housing market. It’s not like there is a shortage of land. It’s hard to believe that construction materials, maintenance and utilities are that much more expensive in New Hampshire. And every quintile of New Hampshire’s income distribution enjoys higher average income than the same national quintiles.

What’s so different in New Hampshire?

Answer: a tax regime that imposes a heavy burden on property.

I wonder: If the pledge focused on taxes that are paid rather than those that are not, like sales and incomes taxes, would it be as appealing? Would a commitment “to support heavily taxing rental housing units, in fact all property” be a cornerstone of political success? Eric Herr of Hill, an economist who has served as president of Autodesk, chair of the New Hampshire Charitable Foundation and of the Center for Public Policy Studies, is a former staff member of the President’s Council of Economic Advisors. This article is being shared by partners in the Granite State News Collaborative. For more information, visit collaborativenh.org.