All of our reportsare available on the web:

www.nhpolicy.orgwww.nhpolicy.org

New Hampshire Center New Hampshire Center for Public Policy Studiesfor Public Policy Studies

Board of Directors

Donna Sytek, Chair

John B. Andrews

John D. Crosier

William H. Dunlap

Shelia T. Francoeur

Chuck Morse

Todd Selig

Stuart Smith

Brian Walsh

Kimon S. Zachos

Martin Gross

Staff

Steve Norton

Dennis Delay

Ryan Tappin

“…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

State Revenues and the Economy:

Revenue Structure Informational Session 10/21/09

Dennis Delay

“…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

General and ETF Fund Revenue by Source FY 20082008 NH Unrestricted Fund Revenue Sources

Business Profits Tax17%

Business Enterprise Tax10%

Statewide Property Tax16%

Tobacco Tax7%

Other Revenues4%

Interest and Dividends Tax5%

Estate and Legacy Tax0%

Dog & Horse Racing Revenue

0%

Liquor Revenue6%

Transfer from Lottery3%

Meals and Rooms Tax9%

Beer Tax1%

Board and Care1%

Insurance Taxes4%

Court Fines & Fees1%

Securities Revenue2%

Communications Taxes4%

Real Estate Transfer Tax5%

Net "Medicaid Enhancement"

5%Total:

$2,367 million

Topics for Presentation

Competing Goals of Taxation Revenue and the Structural Deficit

Competing goals of taxation.

1. Taxpayer equity or fairness

2. Taxpayer neutrality

3. Revenue adequacy

4. Low cost administration and compliance

Equity or fairness: Horizontal equity – if you have $50K and I have

$50K are we each taxed the same? Vertical equity – treating taxpayers differently,

but fairly – should someone with ten times my income pay ten times more (proportional), 20 times as much (progressive) or 5 times as much (regressive)?

People have very different ideas of what is fair!

Taxpayer Neutrality: Tax systems should not distort economic

behavior. Broad base, low rate taxes follow this example (BET And Statewide property tax are good examples).

High tax rates on narrow bases create incentives to avoid and evade taxes, and/or create “deadweight loss”.

Sometimes we want to change behavior and create high rates on a narrow base: (like the tobacco tax).

Actual 2008 Revenues for the following Taxes in $ Millions ($mill) Current ($mill)

2008 Rate BaseBusiness Profits Tax $385.4 8.50% $4,534Business Enterprise Tax $232.7 0.75% $31,027Statewide Property Tax $363.0 0.21% $170,082Meals and Rooms Tax $214.3 8.00% $2,679Liquor Revenues $133.0 28.30% $470Interest and Dividends Tax $118.7 5.00% $2,374Real Estate Transfer Tax $116.3 1.50% $7,753Communication Service Tax $80.9 7.00% $1,156

Revenue Adequacy: The reason we have taxes in the first place. Is the system volatile or stable? Adequacy seems to get little weight in policy

debates.

Total State Taxes as Percent of State GDP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

United States NEW ENGLAND New Hampshire

Most Volatile State EconomiesGDP Growth 1998 to 2008

Average StDeviation SD/AvgMichigan 0.3% 2.0% 751.3Alaska 0.7% 4.2% 647.8Louisiana 1.1% 2.6% 240.4Ohio 0.9% 1.5% 174.2Kentucky 1.2% 1.8% 147.9

GDP Growth 1998 to 2008Average StDeviation SD/Avg Rank in US

Connecticut 1.9% 2.0% 105.8 9Maine 1.7% 1.3% 75.6 23Massachusetts 3.0% 2.6% 86.1 16New Hampshire 3.0% 2.5% 83.5 18Rhode Island 2.1% 2.1% 102.0 11Vermont 3.1% 1.4% 44.1 45

Administration and Compliance:

Tax should be easy and inexpensive to administer.

A stepchild in tax policy discussions.

All these goals compete with one another:

Property taxes are stable, but people must pay them even when their income declines, creating a sense of unfairness.

Progressive income taxes usually grow faster over the long run than flat-rate taxes and in many people’s minds they are fairer, but the latter are more stable.

Sales taxes on limited items (excluding food and medical) makes the sales tax more costly to administer and easier to avoid.

Source: Donald Boyd, Rockefeller Institute, testimony on NY Income Tax, 3/19/09

Things you can do about Stability and Volatility:

Accept it, but manage it — Build large reserve funds in good times.

Accept it, but hedge it(!)—Purchase hedging instruments to insure against revenue volatility, much the way some large businesses hedge oil-price and exchange-rate risk.

Accept volatility in individual tax sources, but diversify.

Structure individual tax sources to be less volatile (Flatten tax and increase base).

Source: Donald Boyd, Rockefeller Institute, testimony on NY Income Tax, 3/19/09

Revenue & the Structural Deficit

Revenue sourcesHow have they changed over time?What is a “structural deficit”? Do we have one?Why does it matter?

General and ETF Fund Revenue by Source FY 20082008 NH Unrestricted Fund Revenue Sources

Business Profits Tax17%

Business Enterprise Tax10%

Statewide Property Tax16%

Tobacco Tax7%

Other Revenues4%

Interest and Dividends Tax5%

Estate and Legacy Tax0%

Dog & Horse Racing Revenue

0%

Liquor Revenue6%

Transfer from Lottery3%

Meals and Rooms Tax9%

Beer Tax1%

Board and Care1%

Insurance Taxes4%

Court Fines & Fees1%

Securities Revenue2%

Communications Taxes4%

Real Estate Transfer Tax5%

Net "Medicaid Enhancement"

5%Total:

$2,367 million

Comparing NH to New England and the US in FY 2008

2008 State Revenues by Major Source

1.6%

45.7%

6.4%

42.2%

4.1%2.7%

34.4%

3.7%

57.1%

2.2%

17.2%

35.2%

9.6%

32.5%

5.4%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Property Taxes Sales Taxes Licenses Income Taxes Other

US NE NH

Comparing NH to New England and the US in FY 2008

2008 Income Taxes to State Government (as % ofTotal Taxes

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

US NE NH

Individual income Corporation net income

General Fund Revenue ($ million)

Compound annual rate of

increase:

5.5%

Beer Tax $12.2 $12.7Board and Care Fees $14.5 $19.9Business Profits Tax $111.0 $317.4Business Enterprise Tax $0.0 $77.7Estate & Legacy Tax $24.3 $0.2Insurance Tax $43.1 $95.9Securities Revenue $0.0 $34.7Interest & Dividends Tax $40.7 $118.7Liquor Sales $55.1 $133.1Meals & Rooms Tax $83.8 $206.7Park Revenue $7.3 $0.0Dog & Horse Racing $10.5 $3.0Real Estate Transfer Tax $32.3 $77.7Communications Tax $12.8 $80.9Tobacco Tax $38.2 $57.1Utility Tax $8.2 $6.3Court Fines & Fees $22.6 $31.3Savings Bank Tax $12.6 $0.0Other $33.1 $117.5"Medicaid Enhancement" $0.0 $93.1Total $562.2 $1,483.9

1990 2008Revenue Source

General Fund Revenue ($ million) New Versus Old Revenues

Compound annual rate of increase:

3.8%

2008

Old Source Old Rate

New Sources

Increased Rates

Beer Tax $12.2 $12.7 $12.7Board and Care Fees $14.5 $19.9 $19.9Business Profits Tax $111.0 $317.4 $317.4Business Enterprise Tax $0.0 $77.7 $77.7Estate & Legacy Tax $24.3 $0.2 $0.2Insurance Tax $43.1 $95.9 $95.9Securities Revenue $0.0 $34.7 $34.7Interest & Dividends Tax $40.7 $118.7 $118.7Liquor Sales $55.1 $133.1 $133.1Meals & Rooms Tax $83.8 $206.7 $180.9 $25.8Park Revenue $7.3 $0.0Dog & Horse Racing $10.5 $3.0 $3.0Real Estate Transfer Tax $32.3 $77.7 $54.4 $23.3Communications Tax $12.8 $80.9 $9.5 $71.4Tobacco Tax $38.2 $57.1 $26.2 $30.9Utility Tax $8.2 $6.3 $6.3Court Fines & Fees $22.6 $31.3 $31.3Savings Bank Tax $12.6 $0.0Other $33.1 $117.5 $89.0 $28.5"Medicaid Enhancement" $0.0 $93.1 $93.1Total $562.2 $1,483.9 $1,098.5 $305.4 $80.0

1990 2008Revenue Source

General Fund Revenue ($ million) New Versus Old Revenues in 2008

Old Source Old Rate

New Sources

Increased Rates Old Source

New Sources

Increased Rates

Beer Tax $12.7Board and Care Fees $19.9Business Profits Tax $317.4 $68.0Business Enterprise Tax $0.0 $77.7 $155.0Estate & Legacy Tax $0.2Insurance Tax $95.9Securities Revenue $0.0 $34.7Interest & Dividends Tax $118.7Liquor Sales $133.1Meals & Rooms Tax $180.9 $25.8 $7.6Dog & Horse Racing $3.0Real Estate Transfer Tax $54.4 $23.3 $38.6Communications Tax $9.5 $71.4Tobacco Tax $26.2 $30.9 $109.3Utility Tax $6.3Court Fines & Fees $31.3Tobacco Settlement $40.0Utility Property Tax $24.2State Property Tax - retained $363.1State Property Tax - to stateSweepstakes Net Income $77.0Other $89.0 $28.5"Medicaid Enhancement" $0.0 $93.1Transfer from General FundTotal Taxes/Revenues $1,098.5 $305.4 $80.0 $440.1 $226.8 $215.8

State Fiscal Year 2005Revenue Source

General Fund Education Trust Fund

$882.7$1,483.9

Balancing the NH General Fund & Education Trust Fund, 1979-2013

$0

$250

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

$2,250

$2,500

$2,75019

79

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

State Fiscal Year

Mil

lio

ns

of

Do

llar

s

Non-tax GF Revenue:Medicaid EnhancementTobacco Settlement (2002 & 03)Flexible Federal Grant (2003)

GF + ETF Expenditures

Merrill

GreggSununuGallen

Shaheen

Benson

Regular General Fund Taxes and Revenues

Statewide Property Tax

Other ETF Taxes

Lynch?

Stimulus (ARRA of 2009)

and JUA

Balancing the NH General Fund, 1979-2013

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,00019

79

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

State Fiscal Year

Mil

lio

ns

of

Do

llar

s

Non-tax Revenue:Medicaid EnhancementTobacco Settlement (2002 & 03)Flexible Federal Grant (2003)

General Fund Expenditures

Merrill

GreggSununu

Gallen

Shaheen

Lynch

Benson

Regular General Fund Taxes and Revenues

?

Stimulus (ARRA 2009)

and JUA

Future

Gap

Use of one time monies creates future funding gap (2012-13)

NH General Fund Revenues (Current $)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

State Fiscal Year

Mil

lio

ns

of

Do

llar

s

Taxes and rates in place in 1988

Medicaid EnhancementNew taxes

Increased rates

$543

$990

$1,360$1,353

Growth from 1988 Levels

1.01.11.21.31.41.51.61.71.81.92.02.12.22.32.42.52.62.72.8

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

State Fiscal Year

1988

= 1

.0

General Fund Expenditures

Gross State Product

General Fund Revenues(without Medicaid Enhancement)

NH General Fund Taxes as % of Gross State Product, 1971-2008

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%19

71

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Year

Includes all regular state GF taxes but does not include Medicaid enhancement, tobacco settlement, rebates, etc.

NH General Fund Revenues as % of Gross State Product

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

State Fiscal Year

Per

cen

t

Taxes and rates in place in 1988

Medicaid Enhancement

Increased rates

New taxes

Growth in Comparison to the GSP, 1988-2009

0%

20%

40%

60%

80%

100%

120%

140%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

State Fiscal Year

Rel

ativ

e to

Gro

ss S

tate

Pro

du

ct

Real Expenditures 1988=1.00 Beer TaxBoard and Care Fees Dog & Horse RacingCourt Fines & Fees

Tobacco Tax Growth in Comparison to the GSP, 1988-2009

-10%

40%

90%

140%

190%

240%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

State Fiscal Year

Rel

ativ

e to

Gro

ss S

tate

Pro

du

ct

Real Expenditures 1988=1.00 At Actual Rate At 1988 Tax Rate

1990:increased to

21¢/pack

1998:increased to

37¢/pack

1991:increased to

25¢/pack

1988-89:17¢/pack

2006:increased to

80¢/pack

2008:increased to 108¢/pack

Note: Includes Amount Going to Education Trust Fund

2000:increased to

52¢/pack

2009:increased to 133¢/pack

Growth in Comparison to the GSP, 1988-2009

0%

20%

40%

60%

80%

100%

120%

140%

160%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

State Fiscal Year

Rel

ativ

e to

Gro

ss S

tate

Pro

du

ct

Real Expenditures 1988=1.00 Combined Business Taxes

Interest & Dividends Tax

Growth in Comparison to the GSP, 1988-2009

0%

20%

40%

60%

80%

100%

120%

140%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

State Fiscal Year

Rel

ativ

e to

Gro

ss S

tate

Pro

du

ct

Real Expenditures 1988=1.00 Meals & Rooms Tax Real Estate Transfer Tax

"temporary" surcharge added in 1990

Growth in Comparison to the GSP, 1988-2008

0%20%40%60%80%

100%120%140%160%180%200%220%240%260%280%300%320%340%360%380%400%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

State Fiscal Year

Rel

ativ

e to

Gro

ss S

tate

Pro

du

ct

Real Expenditures 1988=1.00 Communications Tax

tax was restructured

increased from 5.5% to 7%

What is a “Structural Deficit”?

A “structural deficit” is a situation where, with no change in tax laws or public services, tax revenues do not increase as fast as expenditures.

Does New Hampshire Have a Structural Deficit?

“New Hampshire can be characterized as having a long-term structural deficit in the sense that for a given scope of programs and revenue system, expenditures grow automatically faster than revenues.”

KPMG Peat Marwick

February 13, 1992

So What? Recognize to scale back on state activities OR

recognize the necessity to raise tax rates or add new taxes to maintain a constant level of services.

Results in more detailed review of all state programs every biennium because there is always a looming shortfall.

Creates regular atmosphere of crisis and stress. Reduces possibility of surpluses for investment in

desirable one-time projects. Makes long-term strategic planning more difficult. Should not be used as a political weapon to bludgeon

the other political party.