Don’t believe all the budget spin

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POLITICAL ANALYSIS



State (Republican) politicians were falling over each other last week to seize credit for revenue projections for the biennium showing a $283.8 million surplus.

That is only a revenue surplus from state taxes and fees, not an overall surplus which would include what the state spends.

The state revenue picture has been rosy once the major impact of the pandemic stabilized about six months in and businesses began operating again after the lockdown.

But as is often the case, there is a different story in the details than the political spin.

For example, the revenue surplus for the general and education funds (the ones everyone watches) was higher last fiscal year than it would be for the biennium’s projection.

The revenue surplus for fiscal year 2021 was $324 million with total revenue of $2.98 billion. This does not include the $1.25 billion the state received in CARES act money or any other federal money.

The year before the revenue total was $2.50 billion – or a $480 million difference.

But budget writers last year did something different, they devised revenue projections well below what the state took in during the 2021 fiscal year. There were some tax rate cuts but not a significant amount of money, particularly in the first year of the biennium.

Usually, revenues are expected to grow between 1 to 3 percent a year unless there is a recession or something like a pandemic.

Most legislative revenue estimators are told to land inside a range by the higher powers, but do not always follow the advice.

There were a couple of significant uncertainties as they pieced together the budget last year, whether the money businesses received under the payroll protection program was taxable — they passed a law to exempt it after some companies had already paid — and how much the rooms and meals activity — or hospitality industry — would bounce back.

And most did not believe the hot real estate market would continue at its accelerated pace.

They erred very much on the conservative side and very much in all three instances.

So instead of using $2.98 billion as the base, the budget writers settled on projected revenues for the current fiscal year at $2.80 million and for the 2023 fiscal year at $2.69 million or a collective decrease of $406.2 million if revenues were to continue at their 2021 fiscal year levels for the biennium.

That translates into $172.4 million more than the Administrative Services’ surplus projection all the politicians are touting.

While state revenues have been performing well, the surplus is largely dependent on just a few sources with the rest about on target or a little below.

The majority of the revenue surplus is due to business taxes and that has been the case even during the pandemic.

The state’s two business taxes did not tank as most everyone thought they would when the coronavirus hit, which is the main reason the revenues never were as bad as first predicted when the state and nation was locked down and all non-essential businesses closed.

The real shining star is the business profits tax, which is paid mostly by large national and multinational corporations.

Most of these businesses managed to survive the pandemic very well and many are now experiencing record profits.

For the fiscal year to date, the business profits tax revenue is $420.4 million, which is $107.3 million above what budget writers estimated it would return at this point in the fiscal year.

Conversely, the business enterprise tax is below estimates by $13.3 million producing $140 million.

While many small businesses do not pay the business profits tax, all businesses pay the business enterprise tax, except for the very smallest ones.

And one tax offsets the other so combining them produces a more accurate picture of business tax revenue.

Unlike what you may have heard, the state’s business taxes are not necessarily a good indicator of business activity in the state, the enterprise tax is more reflective of that, but combined they are a different picture.

According to a report issued by the New Hampshire Fiscal Policy Institute last week, business tax growth “arrived following a more rapid increase in economic activity in the wake of the Great Recession, beginning in about 2015, and after 2017 changes in federal tax law that triggered a repatriation of assets previously held by corporations overseas. The reliance of business tax revenues on a relatively small number (.1 percent of filers pay almost 50 percent of the tax) of large multi-state and multi-national entities for revenue suggests these trends in tax receipts are not necessarily reflective of changes in the state’s economy or business activity. Other revenue sources, such as the Meals and Rentals Tax or the Real Estate Transfer Tax, may be more directly reflective of specific sectors on New Hampshire’s economy than business tax receipts paid by corporations operating in multiple jurisdictions.”

And those two levies are mostly responsible for the surplus in revenue.

The rooms and meals tax for this fiscal year has produced $195.2 million, which is $41.6 million more than estimates or 27.1 percent, which is a greater percentage than the business tax surplus at 20.4 percent.

The returns are more in line with what the tax produced before the pandemic, when it was the most impacted general and education fund levy.

The real estate transfer tax has produced $151.6 million this fiscal year to date, which is $20 million more than estimates or 15.2 percent.

According to the estimates from the Department of Revenue Administration for the biennium, business tax revenues will be $147 million in surplus, rooms and meals $88 million, and real estate transfers $41 million for a total of $276 million of the $283.8 million.

Some of the state’s traditional tax indicators of business activity, like the communications tax, are not so indicative anymore because few people or businesses rely on landlines as they once did.

Last summer was touted as a record-breaker for many in the tourist industry due to the pent-up need to leave the house and everyone knows what has happened to the real estate market, with sales and prices exploding and they have not slowed down.

These three areas are also where the budget writers were the furthest off-target in making their predictions.

There may be a reason for that.

In budgeting 101, if you want to have a robust spending plan, you need a robust revenue stream, and if you want to put a lid on spending, you want to lowball the amount of money state taxes and fees bring in.

While in theory they should be separate exercises, in reality they are not.

If you reduce the amount of money coming into the state’s coffers, there is less money to be spent on things like fiscal capacity grants for poor school districts or caseworkers to protect children or additional money for child care or long term care services to help with staffing issues or mothers to return to work.

The essentially miserly state budget approved last June did not have to be that draconian.

While many in the majority praised the budget because they said it spent less than the previous one, it really did not, and many things more money could have done wonders for students paying tuition at state colleges or property taxpayers in property-poor communities for example or hiring staff to help people find the social services they are entitled to but are having trouble accessing.

The budget would have provided more needed services than it did and that is a shame, but the politicians are not saying that.


 

About this Author

garry-rayno

Garry Rayno

Political ReporterInDepthNH.org

Distant Dome by veteran journalist Garry Rayno explores a broader perspective on the State House and state happenings for InDepthNH.org. Over his three-decade career, Rayno covered the NH State House for the New Hampshire Union Leader and Foster’s Daily Democrat. During his career, his coverage spanned the news spectrum, from local planning, school and select boards, to national issues such as electric industry deregulation and Presidential primaries. 

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