Good Revenue Estimates Avoid Crisis Planning

Charlie Arlinghaus

July 11, 2012

As originally published in the New Hampshire Union Leader

Last year, the state’s revenue estimates were a controversial part of the budget process. With the first of the budget’s two fiscal years under our belt, it’s hard to see what all the fuss was about. The state seems to have returned to cautious budgeting and avoiding the major planning failure that decimated the state budget over the previous four years and created a huge deficit.

When the legislature and the governor began debating the current budget more than a year ago, the centerpiece of their dispute was a disagreement over estimating revenues. Recall that the state balances its two-year budget with an estimate of revenues over the two years ahead. If those estimates are cautious, the budget is balanced but if they are optimistic, spending goes forward without the revenue to balance it and problems ensue.

New Hampshire’s history is of cautiously estimating revenue. This is important when, for example, the governor’s February budget proposal is expected to anticipate the revenue levels we might expect two and half years later.

For the ten years ending in FY2007, revenues came in higher than estimated in nine of the ten years. Then our fiscal crisis began. My own warning about the 2008-2009 budget was ridiculed as ridiculous pessimism. Charlie, I was told, we have an excellent track record. Your warnings are ridiculous. One budget writer even told me I should be embarrassed for my detailed analysis that suggested revenue estimates were overly optimistic and would create a budget hole.

In fact, for four straight years optimistic revenue estimates weren’t met, falling a total of $471 million below the amount budget to be spent. The result was an extraordinary fiscal collapse, special sessions, budget adjustments, last minute cuts, borrowing problems all leading to a nightmarish budget process in 2011.

Despite all those problems, optimism was still rampant in some quarters. In 2011, the governor was very critical of the House for adopting pessimistic revenue estimates. He and his legislative allies hoped to spend more and therefore estimated optimistically. Yet, by most measures even then, the economic outlook was uncertain.

After hopeful estimating had led to the $650 million deficit legislators were being forced to close, I suggested treading carefully. In April, two months before final passage of the budget, I wrote “there is no question that the House estimates are cautious and pessimistic but it this uncertain economy it would be difficult to argue they are overly cautious.” 

Those cautious estimates were eventually adopted with only slight changes. Before they were agreed to, the author’s of the previous four years of bad estimates proposed adopting “a responsible revenue estimate” and adding back in $38 million of spending based on higher estimates. The House instead lowered their cautious estimates by another $18 million. At the end of the process, a compromise with the Senate didn’t adopt the lower number and added in $5 million, not exactly splitting the difference.

A year later, we know how they did and the answer is pretty good.

The fiscal year ended June 30 and the tax total is 0.2% above budget, about $5 million. This is ideal; a very small cushion allows for slight modifications and engenders no crises.

There is still a dispute over “Medicaid enhancement” revenues between hospitals and the state. Both sides claim they will win in the end but the result is unclear. At the end of the day, that’s a legal dispute not an estimating problem.

Revenues tracked well not because any estimator is omniscient. Estimators were closer on some taxes than other, higher and lower on others. But they were optimistic on some and pessimistic on others and it balanced out.

The biggest problem was tobacco taxes. The tobacco tax rate was cut by ten cents per pack partially as a response to four increases in four years that more than tripled the price of a product used disproportionately by people at low income levels. The net cost to the state budget was $12 million (sales decline each year for cigarettes regardless of price).

I have been an advocate for reducing taxes to help the economy but I would have started with a tax with a direct economic effect. Cutting the Business Profits Tax rate, among the highest in the country, by a half a percent would send a stronger signal to businesses that we are trying to attract as the recession ends and would have cost $18 million instead of $12 million.

Caution and well founded pessimism, however, have created a good situation. For the first time in five years, we aren’t panicked about a budget spiraling out of control and in need of special sessions or emergency spending cuts. That’s a nice change.