NH State Revenue Options and Consequences

NH Children’s Summit

December 8, 2008

Dennis DelayDeputy Director, NHCPPS

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

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

James Tibbetts

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 Revenue Options

Revenue Sources Then and Now How have they changed over time? How did the State respond to the

last two recessions? What are the revenue options now?

First, some history:

Balancing the NH General Fund, 1979-2007

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,60019

79

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

State Fiscal Year

Mill

ion

s o

f D

olla

rs

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

General Fund Expenditures

Merrill

Gregg

Sununu

Gallen

Shaheen

Lynch

Benson

Regular General Fund Taxes and Revenues

First, some history:

Balancing the NH General Fund & Education Trust Fund, 1979-2007

$0

$250

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

$2,250

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

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

GreggSununu

Gallen

Shaheen

Benson

Regular General Fund Taxes and Revenues

Statewide Property Tax

Other ETF Taxes

Lynch

General Fund over 18 Years

Beer Tax $12.2 $12.7Board and Care Fees $14.5 $18.4Business Profits Tax $111.0 $287.4Business Enterprise Tax $0.0 $79.3Estate & Legacy Tax $24.3 $0.6Insurance Tax $43.1 $97.9Securities Revenue $0.0 $33.0Interest & Dividends Tax $40.7 $108.1Liquor Sales $55.1 $124.7Meals & Rooms Tax $83.8 $202.6Park Revenue $7.3 $0.0Dog & Horse Racing $10.5 $3.1Real Estate Transfer Tax $32.3 $91.7Communications Tax $12.8 $73.0Tobacco Tax $38.2 $65.3Utility Tax $8.2 $5.8Court Fines & Fees $22.6 $30.5Savings Bank Tax $12.6 $0.0Other $33.1 $104.3"Medicaid Enhancement" $0.0 $83.3Total $562.2 $1,421.6

1990 2007Revenue Source

Compound annual

Rate of increase

5.6%

General Fund over 18 Years

Compound annual rate of increase 3.8%

2007

Old Source Old Rate

New Sources

Increased Rates

Beer Tax $12.2 $12.7 $12.7Board and Care Fees $14.5 $18.4 $18.4Business Profits Tax $111.0 $287.4 $287.4Business Enterprise Tax $0.0 $79.3 $79.3Estate & Legacy Tax $24.3 $0.6 $0.6Insurance Tax $43.1 $97.9 $97.9Securities Revenue $0.0 $33.0 $33.0Interest & Dividends Tax $40.7 $108.1 $108.1Liquor Sales $55.1 $124.7 $124.7Meals & Rooms Tax $83.8 $202.6 $177.3 $25.3Park Revenue $7.3 $0.0Dog & Horse Racing $10.5 $3.1 $3.1Real Estate Transfer Tax $32.3 $91.7 $64.2 $27.5Communications Tax $12.8 $73.0 $9.5 $63.5Tobacco Tax $38.2 $65.3 $30.0 $35.3Utility Tax $8.2 $5.8 $5.8Court Fines & Fees $22.6 $30.5 $30.5Savings Bank Tax $12.6 $0.0Other $33.1 $104.3 $88.5 $15.9"Medicaid Enhancement" $0.0 $83.3 $83.3Total $562.2 $1,421.6 $1,058.6 $274.9 $88.1

1990 2007Revenue Source

The State relied on new sources and increases………

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

State Fiscal Year

Mil

lio

ns

of

Do

llar

s

Taxes and rates in place in 1988

Medicaid Enhancement New taxes

Increased rates

$543

$1,058

$1,422

…to keep pace with overall economic growth.

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

State Fiscal Year

Per

cen

t

Taxes and rates in place in 1988

Medicaid Enhancement

Increased ratesNew taxes

The General Fund in 2008 (est):

Business Enterprise Tax5%

Meals & Rooms Tax14%

Liquor Sales9%

Insurance Tax7%

Tobacco Settlement1%Beer Tax

1%

Communications Tax5%

Securities Revenue2%

Court Fines & Fees2%

Board and Care Fees1%

Dog & Horse Racing0%

Utility Tax0%

Business Profits Tax21%

Tobacco Tax4%

Real Estate Transfer Tax5%

Other5%

"Medicaid Enhancement"

8%

Interest & Dividends Tax8%

Total:$1,464.1 million

NH Volume (per unit) taxes don’t keep pace with economy.

Growth in Comparison to the GSP, 1988-2007

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

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

A NH per unit tax with rate changes.Tobacco Tax Growth in Comparison to the GSP, 1988-2008

-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

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

Does the rate effect the volume?Estimated Packs of Cigarettes Sold in New Hampshire (millions)

0

50

100

150

200

250

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2008 based on $165m revenue and $1.08 tax

rate

1998:increased to

37¢/pack1991:

increased to 25¢/pack

2006:increased to

80¢/pack

2000:increased to

52¢/pack

NH Ad Valorem (value based) taxes move with the economy.

Growth in Comparison to the GSP, 1988-2008

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

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

How do the business taxes perform over business cycles?

General Fund Revenue from BPT & BET(In Millions)

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

State Fiscal Year

Tax

Rev

en

ue

($

mil

lio

n)

Business Profits Tax

Business Enterprise Tax

$91.6

$143.3

$391

How are the business taxes performing now?

NH Business Taxes

-$20.0

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

NH Business Taxes Moving Average

Note the steep decline in peak months

NH Ad Valorem (value based) taxes move with the economy.

Growth in Comparison to the GSP, 1988-2008

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

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

Revenue Risks in an Economic Downturn*

Business Profits Tax ($381m)• Fell by 36% in 1990’s recession.

Business Enterprise Tax ($230m)• More stable, larger base, but grows slowly.

Meals and Rooms ($214m)• Stable, but also follows the economy.

Interest and Dividends($118)• Was very strong, but faltering now!

Real Estate Transfer Tax ($116m)• Was $160m at the peak in 2006, how much lower?

*(Estimates for 2008 include GF+ETF)

NHCPPS Model Showing a $300m+ Revenue Shortfall

Projection of 2009 Combined General Fund & Education Trust Fund Revenues

(in millions of $)

-$400

-$300

-$200

-$100

$0

$100

$200Ju

ly

Au

g

Se

pt

Oct

No

v

De

c

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

e

Month of Fiscal Year Completed

Ab

ov

e (

Be

low

) B

ud

ge

t

How Did the State Respond in the Last Two Recessions?

How did the State respond to the last two recessions? (early 1990’s)

Early 1990’s recession was much worse in New Hampshire than in the US.

Changes to state taxes were significant:• BET created in 1994

• M&R increased from 7% to 8% in 1990

• RETT 30% 'temporary surcharge' in 1990

• Communications Tax revamped in 1991

• Utility Tax Revamped in 1992

• Tobacco Tax Increased in 1990 and again in 1991 (17 cents to 21 cents to 25 cents)

• Medicaid Enhancement Revenue from $50m in 1991 to $250m in 1994

A 1990-1991 style recession, without tax changes, equalsno State Revenue growth for five+ years

$400.000

$450.000

$500.000

$550.000

$600.000

$650.000

$700.000

1988 1989 1990 1991 1992 1993 1994

Total Real Taxes/Revenues Total Revenue, w /o New , Changes

In 2001 to 2003, State Revenue would have recovered the peakin three years, without changes to existing taxes or new taxes.

$600.0

$800.0

$1,000.0

$1,200.0

$1,400.0

$1,600.0

$1,800.0

2000 2001 2002 2003 2004 2005 2006

Subtotal Total Revenue, w/o New, Changes

What are the Revenue Options Now?

New Hampshire State Revenue Options:

Increase Ad Valorem Tax Rates Index per Unit Taxes to Inflation Increase the Tobacco Tax Federal ‘Bail-Out’ including Medicaid

Enhancement Revenue or FMAP increase New State Revenue Sources

• Estate & Legacy

• Amusement Tax

• Luxury Tax

• Gambling

• Capital Gains

5% Increase in Ad Valorem Taxes (2008 Revenues)

All data in Millions of 2008 Dollars

Business Profits Tax $19.1

Business Enterprise Tax $11.5

Meals and Rooms Tax $10.7

Interest and Dividends Tax $6.7

Real Estate Transfer Tax $5.8

Communication Service Tax $4.0

Extra 2008 Revenue If Per Unit Taxes Had Been Indexed to Inflation for Five Years

All data in Millions of 2008 Dollars

Court Fines and Fees $4.6

Board and Care $3.0

Beer Tax $1.9

Electric Consumption Tax $1.0

Dog & Horse Racing $0.5

Gas Road Toll Tax $20.9

MV Registrations $11.4

NH Cigarette Tax Increase of 25 cents.

Increase in the Tobacco Tax on Cigarettes at Current Annual Sales

Cents per Pack Increase $0.25 =$38m

New (and Renewed) Revenue

All data in Millions of 2008 Dollars

Estate & Legacy tax at 8% $24.0

Amusement Tax at 5% $32.0

Luxury Tax (Example 10% on Luxury Homes, $500K) $60.0

Gambling (Video Slot Machines) in New Hampshire $100-200

Capital Gains Tax at 5%$181.7

New Revenue May Not Come in as Expected

NH Capital Gains 1997-2006 (IRS SOI data)

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

New Hampshire’s Gaming Geography

Questions?