Q: How do New Hampshire's finances compare now to the last couple of years?

A: New Hampshire is leading New England out of the economic recession. It has a number of factors that are extremely positive. My overall philosophy was to try and cut taxes and to cut regulations at a time when the states around us were going to have to raise taxes, in order to deal with their economic deficit, as we all pulled out of the recession. [This was] probably the worst recession since World War II and it has had a positive outcome on New Hampshire's economy.

We also have very strong economic growth. Our unemployment has gone from 8.8% at a high down to 4.6%, so we feel very confident that we have an economic engine along with the kind of financial management and debt structure that's going to mean continued growth.

Q: As you said, the other states in the area raised taxes and New Hampshire cut them. Why?

A: I thought that it was sound economic policy for us to cut taxes, particularly our largest tax, the business profits tax. We cut it to the lowest point in 14 years.

We cut our real estate transfer tax because we wanted to stimulate real estate growth in a housing market that was pretty flat, and we cut the telecommunications tax so that we could be a high-tech state and take advantage of the information highway.

We completely eliminated the corporate franchise tax and the savings bank tax, and the result was we have actually gained revenues rather than lost revenues because we increased the size of the pie.

Q: Has the legislature been a willing player in all this?

A: I think because I was a brand-new governor, the legislature was willing to give me an opportunity. I do think they were more skeptical than the business community in the state.

I insisted on financial management, getting our debt structure in place, and letting the revenues grow, and with that growth in revenues above expenditures and spending, we have taken that money and given it back to the cities and towns.

Q: The state is rated double-A right now. Is that a fair assessment of where the state's finances are?

A: No, it is not a fair assessment, but let me explain why.

New Hampshire does not have an income tax or a sales tax. I think a cursory analysis would suggest that therefore it must be an uncomplicated state. It is a very complicated state, and its tax structure is based on the size of the legislature and the two-year term for governor.

We are a business-oriented state, where the leadership is constantly reassessing its position and explaining its position to both the people and the legislature. That's very good -- very hard on public officials but very good for the business community.

I think, however, that there is a philosophical belief that a state really isn't an adult state until it has a broad-based tax.

I fear that ratings agencies may be making a moral judgment rather than an analytical financial judgment in coming to the conclusions that they have about New Hampshire. I'm absolutely philosophically opposed to an income tax or a sales tax, not for political reasons but because I think we have an economic structure that shows greater prosperity and opportunity to have the marketplace create more jobs and to do the things that we ought to be doing as a state, and meeting our obligations.

Q: Can you blame the rating agencies for being a little hesitant in upgrading?

A: I'm going to say yes in a nice way.

I don't blame a rating agency for bringing scrutiny to any state that has gone through economic recession in the last five years or so, and certainly all of New England experienced that. But I do think that in my discussions with the rating agencies, personally, when I was down the last time, they were looking to a state like Connecticut, which has just passed an income tax.

The problem with Connecticut's economy is that in the new recession which is going to occur based on health care and insurance cuts and defense cuts, I fear that Connecticut will take a disproportionately high share of those cuts. I don't know whether the analysts will consider that as negatively as they would consider something in New Hampshire.

I think the rating agencies, instead of saying New Hampshire is truly leading the region out of economic recession, will now start saying we'd better be careful that New Hampshire is not in the beginning of a boom and bust cycle. So my dilemma with the rating agencies is largely that the good news is bad and the bad news is bad.

Q: Does the two-year term leave you campaigning more than you are comfortable with?

A: This is the first time since I've been governor that I was glad that my wife was not in the room because she would give you an answer to the two-year term that is very personal. We have a 1-year-old baby, and the ability to stop campaigning has really been taken from us.

The two-year term is very hard on political officials, but very good for the people of New Hampshire because I can't make a promise under the four-year political cycle, exact all the pain in the first year, and then let them forget about it for the next three years.

Q: Did the rating agencies tell you what it would take to raise the rating?

A: We'd do it if they did.

You can get a sense as to whether or not they are pleased or whether or not they are skeptical or whether or not they are really resistant to being convinced, which is what I was trying to allude to in the first set of your questions. And believe me, I didn't come down here to say, 'Oh, woe is me, New Hampshire is being tread upon.' I don't mean that at all.

We recognize that we are a state that does things differently than other states, but we simply believe that we can prove that it works. We have no sales tax. We also have the number-one sales per capita in the United States, so it's not that we are holding on to an anachronism without a result. We're holding on to a system that works very well for us.

Q: The rating agencies have a completely different constituency than you, I would think.

A: They do. But I think we are impressed that they are saying the outlook is positive. One of the rating agencies just wrote that New Hampshire is outperforming the rest of New England and most of the rest of the nation and will do so for the next decade.

That's the kind of thing that we take very seriously in New Hampshire. Naturally, we would like an improved rating and we think that we are going to achieve it, and when we do, we know it won't be because we wowed them. We will have really convinced them.

Can I give you a colloquial response? Which state in New England, to prove our point, has attracted the highest percentage of population who have moved into the state and chosen to live there?

Now the average person in New York would say, well, it's got to be Connecticut. If it's not Connecticut, it's got to be Massachusetts or Rhode Island. The answer is New Hampshire. Forty-six percent of the people in New Hampshire have moved into the state and stayed, so we are not the traditional kind of Currier and Ives print that people sometimes see us as.

We're very proud that we are a state where people look at the numbers, make the analysis and say, "I'm going to move my business to New Hampshire."

Q: So you know the rating agencies like taxes and you don't have many taxes.

A: That's right. That's very well put. I wouldn't have dared to say it that way, but you're right, they do like taxes.

They feel a certain comfort level with taxes. They feel that in a slightly declining economic environment, another tax gives them comfort. It doesn't give me comfort at all as a governor.

Q: A variation of that debate is, I guess, being waged right now in New Jersey.

A: That's exactly right.

The Whitman-Florio race was in a funny way like my 1992 race, which was Florio saying, it isn't that I love these taxes, it's that they're required to take a realistic view of what we ought to be doing as a state. And Whitman really got elected on a theory and now she's making the theory work.

If she didn't make the theory work, she would have been perceived as George Bush was perceived in New Hampshire in 1992, which was a very difficult time for New Hampshire voters. They liked George Bush, they trusted George Bush, they thought he had a wonderful resume -- and they wouldn't vote for him. Just an amazing phenomenon for New Hampshire, and they wouldn't vote for him because they felt he had become disconnected to the economic reality of the state.


For years, people have said that the only two certain things in life and death and taxes.

Gov. Stephen Merrill of New Hampshire, however, is refusing to buy into at least half of the axiom.

Since taking office in January 1993, Merrill has been cutting through taxes in the state like a warm knife through butter. He lowered the state's business profits tax, telecommunications tax, and real estate transfer tax, and climinated the savings bank and corporate franchise taxes.

Merrill, a conservative Republican, ran a campaign based on lowering taxes and spending, arguing that the only way New Hampshire could recover from the national recession in the early 1990s was to lower taxes to spur growth.

The strategy is starting to pay off.

Standard & Poor's Corp., for example, recently said that of all the New England states, New Hampshire appears to be coming out of the recession more quickly than the rest.

But Merrill wants more than a nice mention He said that New Hampshire deserves an upgrade in the wake of the reform of the state's tax structure and its improving economy. The state is rated double-A by standard & Poor's, Moody's Investors Service, and Fitch Investors Services.

In a recent interview with New England bureau chief Patrick M. Fitzgibbons and New York staff reporter Charles Gasparino, Merrill discussed his economic strategy, arguing that the state's lack of a sales tax should not preclude it from a higher rating.

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