The state of the state is hot

If it weren’t for the expectation (among modern governors) that modern governors must use state-of-the-state addresses to excite the populace with a list of flashy new policy proposals, Gov. Chris Sununu could have simply read excerpts from the state’s recent Comprehensive Annual Financial Report, released December 27. 

We quote a few key passages below.

“In 2018, New Hampshire was no.1 for economic opportunity (US News and World Report); child well-being (Annie E. Carsey Foundation), and, for the fourth year in a row, Politico proclaimed New Hampshire as the Best State in the Union. The state placed high in other areas, including: Best state to live in; to raise a family; quality of life; best economy; best taxpayer ROI.

“As stated, the state’s unemployment rate (seasonally adjusted, non-farm), as of October 2018, stood at 2.6 percent, which was well below the national average of 3.7 percent; both rates remained unchanged from October 2017. Year-to-date, 15,300 more people were employed in Oc-tober 2018 than in October 2017. The seasonally unadjusted rate for October 2018 was 2.1 percent statewide, with some counties below that, including Grafton (1.6 percent); Sullivan (1.7 percent), and Merrimack and Stafford (both 1.8 percent).”

Then there’s the budget news.

“Traditional unrestricted revenue for the General and Education Trust Funds received during fiscal year 2018 totaled $2,577.2 million which was above the fiscal year 2018 Plan of $2,443.9 million by $133.3 million, or 5.5%. The favorable results as compared to the fiscal year 2018 budget resulted, in part, from the following taxes which performed better than expected: Business Taxes by $118.8 million (17.9%); Interest and Dividends Taxes by $9.8 million (10.2%); Meals and Rooms Taxes by $1.9 million (0.6%); and Insurance Taxes by $1.4 million (1.2%). Real Estate Transfer Taxes were below the fiscal year 2018 budget by approximately $5.8 million (3.7%), as well as Tobacco Taxes below budget by $3.4 million (1.6%) and Communications Taxes below budget by $0.6 million (1.4%). The State’s other remaining revenue sources combined were approximately $11.2 million above the fiscal year 2018 budget.”

The non-technical translation of the above passage would read: “We rollin’ in money, ya’ll.”
Business activity is robust, which is generating a lot more revenue than budget writers anticipated. Note that the revenue gains are in business, investment, insurance and entertainment taxes. These are consistent with a strong economy that is experiencing increases in business and consumer spending. 

It’s worth noting that the decline in real-estate transfer tax revenue is a reflection of a cooling real estate market, which is a reflection of increasing interest rates combined with high prices caused by New Hampshire’s housing shortage.

And that brings up another graph of the report.

“New Hampshire’s demographic trends coupled with the third-lowest unemployment of any state in the country demands a focus on workforce recruitment and training to fuel state employer requirements. Growth is in sectors that require an educated and qualified workforce, such as precision manufacturing, biomed tech, high-tech, and healthcare. Positive trends for workforce growth include increases in labor force participation, declining median ages in certain areas of the state, and positive net migration numbers in key age demographics.”
The non-technical translation of this passage would read: “Without more skilled employees, this train’s gonna run outta steam and slow to a crawl right in front of a bunch of hobos burning trash in rusty oil barrels.”

The governor addressed this issue, most notably with his mention of a new plan to offer students a year of community college education at no additional cost to the state. A lot of N.H. employers are deeply concerned about workforce retraction and retention, and for good reason. 
Another important component of the workforce shortage is housing, which remains a serious obstacle to long-term economic growth. The high cost of housing — created by supply restrictions — discourages young people from moving here (or staying) to fill all the jobs our businesses are creating. This is a drag on the economy and has to be addressed. 

Given the rosy revenue picture, one would naturally expect a governor to propose a laundry list of new, permanent spending. Governors often try to cement their legacies by creating permanent programs, which they know are harder to kill than a baboon’s body odor.

To his credit, Gov. Sununu avoided this spending trap. His new initiatives were proposed as one-time expenditures that would not recur in future budgets.

We would prefer that any surplus money be put into the Rainy Day Fund (as the governor’s previous budget did) or be returned via tax cuts. But if it is to be spent, treating one-time money as one-time money is preferable to creating new line items in the state budget.

The governor pointed out that the state is flush with cash because the economy is booming, and it is booming in part because the state has resisted the temptation to burden commerce with higher taxes and heavier regulations. If we had written his speech, we would have mentioned this many more times. He should continue to press the point during the legislative session. It would be hard to stress it too much.