Revenue estimating is not an exact science as trends and nuances lead to different conclusions.
Usually, the revenue estimates become more refined the closer the state budget process approaches the end of the fiscal year when more up-to-date information is available.
When budget writers were drawing up their plans, from the governor at the beginning to the committee of conference members at the end, all expected state revenues to decrease from fiscal year 2019’s high point.
Based on the first two months of the 2020 fiscal year — with no budget in place just a continuing resolution — the downward trend may be a little sharper than budget writers calculated.
And that adds uncertainty to negotiations between Gov. Chris Sununu and Democratic legislative leaders trying to find a compromise before the current continuing resolution allowing agencies to spend at last fiscal year’s levels expires at the end of this month.
For the first two months of the new fiscal year, business tax revenues have been below what was collected for the first two months of fiscal 2019.
Granted, neither month is a particularly large month for business tax collections, but for July, revenues were down $5.9 million over last fiscal year. August’s returns were up $700,000 but taken together are down $5.4 million for the first two months of the new fiscal year, which is also how much total state revenues were lower than a year ago.
The business tax problem began before the start of the new fiscal year as NH Fiscal Policy Institute’s Phil Sletten notes in a recent report: Business revenues have been below the prior year’s collections since May about 12 percent.
According to the Department of Revenue Administration in the July state revenue report “total collections for the month of July for returns with payments were up while extension, estimate and tax notice payments were down compared to July of last year. This current level of activity represents trends closer to July 2018 and 2017 payments for returns, extensions, estimates and tax notices.”
As those following the budget negotiations know, perhaps the most contentious points are business tax rates.
Declining revenues complicate the negotiations between the governor and the legislative leadership. The Democrats say cutting rates when business tax revenue is declining will underfund essential services, while Sununu’s position is a tax increase with falling revenues is harmful to businesses.
Sununu has maintained keeping the rates of the business profits and enterprise taxes the same as last year is a tax increase because the last budget package included rate decreases Jan. 1 of this year, while Democrats say retaining last year’s rate stabilizes business taxes.
The spin from both sides has not changed and is not likely to either.
Business taxes account for about one-third of all state revenue so any significant change has an outsized effect on the budget.
In recent years, business taxes have produced more money than budget writers dreamed but have been all over the place in the last six or seven years.
Proponents of cutting business taxes say the lower rates spurred economic activity, increased jobs and increased revenues.
Both sides would agree a growing national economy helps New Hampshire’s revenue picture, but that is where it ends.
Rate reduction skeptics believe there are other factors at work, particularly the change in federal tax law two years ago that made it more advantageous for American businesses to bring the cash home they parked overseas to avoid taxes.
The cash’s return has been a gold mine for states like New Hampshire that view it as profits.
Another change was a provision passed in the early 2010s allowing businesses to increase the losses they could carry forward and also the length of time they could take the deductions. Most of those loss carry-forwards expired before the last two fiscal years.
Roller Coaster Ride
Looking at business tax revenues for the past seven years is like a roller coaster ride.
From fiscal 2013 until 2019 business taxes increased nearly 48 percent going from $551.8 million in 2013 to an unaudited $815.2 million in 2019, using figures from the state’s Comprehensive Annual Financial Reports and an unaudited report on last year’s revenues.
In 2014, business taxes were down a little at $549.6 million, and then up slightly in 2015 to $561.7 million.
The ride really begins in 2016 when revenues totaled $699.3 million, and then the first-rate reductions occurred and revenues fell to $637.8 million in 2017 before exploding in 2018 to $737.5 million and then $815.2 million last fiscal year.
“The rise in revenue during the last two State fiscal years appears to have been driven by the federal tax overhaul, rather than past New Hampshire business tax rate reductions, and policymakers should not rely on rate reductions to generate additional revenue,” according to the NHFPI report.
The surpluses in business tax revenues the last two fiscal years account for most of the approximately $160 million surplus at the end of fiscal 2019 budget writers used to help balance the current biennium budget although the budget plan was vetoed by Sununu.
Other levies that help fuel the growth in state revenues over the last couple of years are also a concern.
The real estate transfer tax has shown almost as much growth as business taxes over five or six fiscal years, but like business taxes it is beginning to slow down.
According to the July revenue report from Administrative Services, the tax produced $14.5 million, which was $1.1 million or 7.1 percent lower than a year ago.
The DRA reports the number of transactions was down 6.5 percent from last year as were the transactions’ value.
But August was a different story as the transfer tax produced $18 million, which was $500,000 more than a year ago, but the number of transactions continued to slip, down 1 percent.
However, transaction values were up 3.4 percent. That could indicate the upper end of the housing market is seeing more activity or that commercial or industrial properties are changing hands.
Other levies that produced more money than anticipated during the last few years were the interest and dividend and insurance taxes, and the lottery. For the first two months of the current fiscal year, the lottery and interest and dividend taxes are up slightly and insurance returns are down slightly.
Several other revenues appear to continue their downward trend including liquor, tobacco, and communications. For the first two months, liquor is up slightly, but tobacco and communications are below last year’s returns.
Apples to Oranges
How all of this fits into this fiscal year’s revenue plan is difficult to determine because, without a budget and its revenue estimates, no monthly revenue plan has been created.
So, it is impossible to know if revenues are on target, below or above, although all sides expect revenues to be less this fiscal year.
The legislature’s plan shows a revenue increase in 2021, while Sununu’s proposal released in February indicates revenues will be about the same in both years of the biennium.
In any event, the state’s revenue picture is out of focus for the next two years and bringing it into focus will not be easy.
Garry Rayno may be reached at email@example.com