StateImpact
4:00 pm
Wed December 14, 2011

Economics And Politics Clash Over NH Tax Revenue Forecast

Yesterday, StateImpact liveblogged the Joint Economic Session.  Members of the House and Senate Finance and Ways and Means Committees gathered for hours to hear economists offer projections on where the global, national, and state economies are headed in 2012.

Admittedly, it was pretty dry stuff.  And we were ready to do what we’ve done with our other economic forecast liveblogs–just wait until an interesting trend or factoid pops up, and highlight it for you.

Then, economist Dennis Delay with the New Hampshire Center for Public Policy Studies brought up the idea that the state has a structural deficit.

Shortly thereafter, the political fireworks started.

What’s A Structural Deficit, Anyway?

Before we go any farther, it’s important to understand what a structural deficit is.  (We promise, what comes after the explanation is definitely worth the wait.)

Basically, when economists talk about a “structural deficit” they mean there’s a problem built into the tax structure:  State revenues (taxes) can’t keep pace with state expenditures.  But New Hampshire, of all states, runs pretty lean and mean.  So how in the world do we supposedly have this structural deficit?

As Delay explained it, New Hampshire has two main kinds of taxes–per unit and ad valorem.  Per unit taxes are what you pay on specific items you buy.  When you fill up with gas, you pay a set tax on each gallon (unit) purchased.  The same goes for cigarettes and other taxed “units.”  And these taxes can be problematic because they’re not tied to inflation.  The gas tax in New Hampshire hasn’t been raised since 1993.  But the cost of the stuff the gas tax pays for–building and repairing transportation infrastructure–has gone up with inflation.

So you’ve got an underlying problem.  These kinds of per unit taxes just can’t pay for what they used to as the years progress.  It’s a design flaw in the tax system…or a “structural deficit,” if you will.  During his presentation yesterday, Delay estimated $765.3 million in 2010 state revenues was made up of per unit taxes that have remained unchanged for some period of time.  That number should be a lot higher to keep up with inflation.

The other half of the structural deficit issue, Delay said, has to do with ad valorem taxes.  Those are taxes you pay on the value of an item or service.  Are you staying in a hotel at the rate of $100 a night?  Then adding in the ad valorem Meals and Rooms tax, you’ll actually pay $109.  Since tourism is fairly stable in New Hampshire, even in bad times–as are certain other ad valorem-oriented sectors–we could count on $444.7 million in relatively stable revenue in 2010.  And we can probably expect something close to that number in the future.

But corporate taxes–the Business Enterprise and Profits Taxes–are also ad valorem.  And firms are much more susceptible to uncomfortable swings in the market.  If they have to lay people off, that’s less Business Enterprise Tax money firms are paying on employee wages.  And if customers don’t buy their products, that’s lower Profits Tax revenue making it into state coffers.  Delay estimated in 2010, $679.8 million in state revenues came from the “unstable” end of the ad valorem spectrum.

All told, Delay told lawmakers yesterday, “Two-thirds of New Hampshire revenue does not grow with the economy, or is volatile.”

In other words, we’ve got a good-sized structural deficit.

And Delay noted that really only leaves legislators with two choices every year:  Either maintain your current levels of government services and raise taxes to be able to pay for them, or continually cut back services as your revenues fall short year after year.

The Political Defense Of NH’s Tax Structure

Thanks to the tough economy, last session was a particularly hard budget year.  So the legislature, pushed by a Republican-dominated House, opted to make a series of deep cuts to various state programs rather than raise taxes.  One of the legislators leading the charge was Representative Neal Kurk of Weare, who chairs the Division III Finance Committee.

During the Q&A session following Delay’s presentation, Kurk raised his hand and passionately defended New Hampshire’s tax structure.  We’ve transcribed the exchange–edited slightly for clarity–below.

Rep. Kurk:  “Thank you and welcome again, Dennis.  Once again, you used the words ‘structural deficit,’ and a deficit is something most of us think of as bad.  So this is a negative term.  It was concocted by economists who set up values, with respect to the size of government, that vastly differs from those of New Hampshire.  So they created a term, ‘structural deficit’ to suggest as your expenses grow, your revenue should rise to meet it.  If it doesn’t, something bad is the case with your revenue structure.

I put it to you we have a structural balanced revenue structure, designed to do exactly what you said at the end, to make us answer the tough questions—do we want to raise taxes or cut services—every two years.

I’d only point out to you that every state…that does not have a structural deficit—maybe not every stat–that has income…and sales taxes, is on a roller coaster ride with only one way of growing government.  And that’s tough.  Because every time a surplus comes in, they of course satisfy every constituent by spending it.  Then the roller coaster goes down in the recession, and they cannot cut.  They cannot cut, so they simply raise taxes.  So they’re on a path of upward growth.  We’re on the path to relative stability.  We grow, but we grow at a moderate rate.

I’m sorry to get off on this as a diatribe, because it really isn’t a question, but I can get very upset when people use the words ‘structural deficit’ and don’t acknowledge…that in point of fact, it is a PR term, created by, in my word, liberal economists.”

Delay: “I didn’t mean to use the term in a pejorative way, Representative Kurk, and I think your points are well taken.

And I’ll again just say that, one of the things that, however you would name this situation, [what it] forces us to do in New Hampshire is look very hard every year at everything we spend money on, and try to make informed, intelligent choices about it, rather than let things sort of roll along.

So, you know, there are some who might say that, whatever that is—let’s call it an ‘elephant’—whatever that elephant is, is a very bad thing.  There are some who might say whatever that elephant is, is a very good thing.  But it is the elephant in the room.”

During the exchange, Kurk garnered some laughs–and knowing nods–from House Republican leadership.  Meanwhile, a lighter smattering of chuckles from their Democratic counterparts went Delay’s way.

Following the exchange, House Finance Chairman Kenneth Weyler cracked, “We like elephants!”

If you’d like to see the presentation Delay gave for legislators yesterday (complete with cool graphs), you can check out the PowerPoint slides here.