Debunking five myths about N.H.’s business tax cuts

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Nine years after the state began reducing business tax rates, five narratives are driving the policy discussion of those cuts. All five are false.  

In a new briefing paper, we debunk the five most common myths about the business tax cuts that ran from 2015-2022.

Background: From 2015-2022, legislators cut the Business Profits Tax from 8.5% to 7.5% and the Business Enterprise Tax from 0.75% to 0.55%. Opponents predicted that the cuts would starve the state of revenue, resulting in defunded programs, lower public school spending, and reduced aid to local governments. 

Those predictions continue to be asserted as fact. Official state data prove them false. 

Note: State spending numbers extend through FY 2025, but audited revenues are complete only through FY 2023. For that reason, we use revenue data only through FY 2023. 

Myth No. 1: Business tax cuts resulted in lower business tax revenues. 

Fact: Revenues from business taxes have more than doubled since the tax cuts began, rising by 124% from state Fiscal Years 2015-2023.

Source: State Comprehensive Annual Financial Reports, 2015-2023.

Myth No. 2: Business tax cuts reduced the share of state revenues paid by businesses. (“Businesses aren’t paying their fair share.”)

Fact: The share of state tax revenues generated by business taxes rose by 56% from 2015-2023. The share of total state revenues, including federal funding, paid by businesses rose by 40%.

Source: State Comprehensive Annual Financial Reports, 2015-2023.

Myth No. 3: Business tax cuts resulted in lower state aid for local governments and public schools.

Fact: State aid to local governments increased by $214 million from Fiscal Years 2015-2025, or 19%.

Source: Office of Legislative Budget Assistant report, “State Aid to Cities, Towns and School Districts Fiscal Year Ending June 30, 2024,” Oct. 1, 2024.

Myth No. 4: Business Tax Cuts reduced aid to public schools, resulting in property tax increases.

Fact: State aid to public schools increased by 15% from 2015-2024. (Both adequate education grants and total aid to public schools increased by 15%.) At the same time, public school enrollment fell by 16,373 students, or 9%, resulting in average per-pupil state aid rising by 26%, from $5,115 in 2015 to $6,469 in 2024.

Source: Office of Legislative Budget Assistant report, “State Aid to Cities, Towns and School Districts Fiscal Year Ending June 30, 2024,” Oct. 1, 2024, Department of Education Average Daily Membership reports, 2014-2024. *State adequate education aid is based on the prior year’s enrollment.

Myth No. 5: Revenue declines caused by business tax cuts are the reason for projected revenue shortfalls in Fiscal Year 2025.

Fact: Business tax revenues and total state revenues are dramatically higher, not lower, since 2015. However, from 2015-2025 legislators increased spending to match revenues. Had spending simply grown at the rate of inflation, slower revenue growth would not be an issue in 2025. 

Note: “Total State Revenue” in the chart below refers to revenue from state sources, excluding federal funds. 

Download this briefing paper here: Business Tax Cut Myths 2024.

 

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Business tax cuts did not reduce state aid to local governments

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Since New Hampshire began cutting business tax rates in 2015, state aid to municipalities and public school districts has fallen, according to a prominent political narrative. 

That narrative is false.

Aid to local governments and local school districts rose by by $214 million (19%) from Fiscal Year 2015 to Fiscal Year 2025, an October report from the Office of Legislative Budget Assistant shows.

A related false narrative asserts that if state aid to localities is up, that’s only because of federal COVID relief spending. 

This also is false. 

The $214 million increase in state aid consists entirely of state tax revenue. Federal COVID relief money and all other federal spending are separate. 

What about school districts? 

The state has increased adequate education grants and total state aid to public school districts since 2015. 

State adequate education aid rose by $139 million (15%).

Total state aid to public school districts rose by $148 million (15%). 

While state aid to public schools increased by 15%, public school enrollment fell by 16,373 students, or 9%. 

So although the total dollar increase might look relatively small, it is spread among fewer students, creating a larger per-pupil expenditure.

Looking only at state adequate education grants, the state government sent local public schools an average of $5,115 per pupil in 2015. That rose to an average of $6,469 per pupil in FY 2025 (the current school year), an increase of 26%.

Inflation over the last decade grew faster than the increase in state aid to local governments and school districts, eating away at the value of those increases. 

But the claim from tax cut opponents is not that the hundreds of millions of dollars in additional aid was consumed by bad federal policies that sent inflation soaring. The claim is that the state cut local aid in absolute terms because state revenues fell following the tax cuts. This is entirely untrue.

Not only did legislators increase local aid, those increases were funded by soaring business tax revenues, which have more than doubled since 2015. 

Local governments and public school districts received $214 million in additional state aid over the last decade, including a 26% increase in the per-pupil value of adequate education grants. If they raised property taxes during this time, the blame cannot be placed on state aid.

These increases do not include any of the $112 million in Local Fiscal Recovery Fund moneys distributed to towns, $994.5 million in American Rescue Plan and Coronavirus State Fiscal Recovery Funds allocated by the state, $486 million in ESSER funding for public schools, or other COVID relief funds sent directly from the federal government to cities. 

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After tax cuts, businesses pay a larger share of state revenue

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Businesses not paying their fair share. Shrinking state revenues. A tax burden shifted from businesses to property tax payers. 

Those were the predictions critics have made since 2015, when New Hampshire legislators began a series of business tax cuts. 

Not only did those predictions fail to materialize, but the exact opposite happened.

Since the rate cuts began, businesses tax revenues for the state General and Education Trust Funds have more than doubled, from $561.7 million to $1.2 billion.

And the share of state government revenues paid by businesses has risen, while the share paid by property taxpayers has fallen by more than half.

 

Business shoulder larger share of state revenues

New Hampshire has two primary business taxes, the Business Profits Tax (BPT) and the Business Enterprise Tax (BET). Starting in 2015, legislators began to cut these tax rates. 

From 2016-2022, legislators cut the BPT rate from 8.5% to 7.5%, and the BET rate from 0.75% to 0.55%. 

In Fiscal Year 2015, the last year before these rate cuts took effect, business taxes accounted for 11% of total general government revenues, the state’s Comprehensive Annual Financial Report shows. (These exclude business activities such as liquor sales, lottery sales, toll revenue and unemployment insurance taxes.)

In Fiscal Year 2023 (the last year for which we have final, audited data), business taxes accounted for 15.4% of total general government revenue, a 40% increase, the state’s Comprehensive Annual Financial Report shows.

At the same time, the share of total general government revenues paid through general property taxes fell by more than 50%. General property taxes comprised 8% of general government revenues in FY 2015 and just 3.6% in FY 2023. 

Those figures include federal funding. Restricting the analysis to state General and Education Trust Fund revenue alone, the increase is even more pronounced.

In 2015, business tax revenues accounted for 25% of General and Education Trust Fund revenue.

In 2023, they accounted for 39%, a 56% increase over 2015.

In fact, business tax revenues alone in 2023 ($1.26 billion) were larger than the entire Education Trust Fund in 2015 ($895 million) and nearly as large as the entire 2015 General Fund budget ($1.3 billion).

Opponents of the business tax cuts continue to claim that they resulted in businesses not paying “their fair share.”

In fact, businesses’ share of General and Education Trust Fund revenues rose by 56%, and their share of total general government revenues rose by 40%. Any way you do the numbers, businesses now pay a much larger share of state revenues than before the tax cuts began.

Smaller tax changes

Some smaller tax changes were made during these years, but they are too small to account for this shift in state budget burden from property taxpayers to businesses. 

For example, legislators eliminated the Electricity Consumption Tax in 2017, effective in 2019, and trimmed the Rooms & Meals Tax by half a percentage point in 2019. Legislators also began to phase out the Interest & Dividends tax by reducing the rate from 5% to 4% in 2023, then to 3% in 2024, and to zero in 2025. 

The Electricity Consumption Tax collected roughly $6 million a year before it was eliminated. And Rooms & Meals Tax revenue did not decline, but increased from $341.6 million in FY 2018 to $464.3 million in FY 2024, according to the Department of Revenue Administration 2024 Annual Report. Though Rooms & Meals Tax revenue rose by more than $100 million, its share of state revenues fell from 5% to 3.7% from 2015 to 2024. 

Interest & Dividend Tax revenue fell slightly, from $156.4 million in FY 2022 to $150.6 million in FY 2023, before spiking to $184 million in FY 2024.

These comparatively small changes cannot explain the shift in tax burden toward businesses.

Increasing business activity

The increasing share of state revenues paid by businesses is primarily the result of a booming economy and rising business profits.

The number of businesses in good standing registered with the state increased from 160,000 in 2015 to 188,000 in 2022, the last year for which the Department of Revenue Administration has posted complete data (a 17.5% increase).

The number of businesses filing a return rose by 3,174, or 4.4%, while the number making a business tax payment rose by 5,401, or 12.4%.

These figures indicate that New Hampshire’s growing economy generated increased business formation and business activity. In other words, more businesses made more money, which generated more state revenue.

In short, businesses now pay a significantly larger share of state revenues, while a lower share comes from property tax payers–exactly the result progressives said they wanted to achieve by raising business taxes.

 

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Housing affordability is dinging the state budget

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The Josiah Bartlett Center has warned for the last few years that local government inaction on housing might prompt legislators to restrict local zoning authority. But legislators might have an even stronger incentive to act than the growing public frustration with local land use regulations: Falling revenue.

A combination of high interest rates and an extreme shortage of homes on the market has pushed housing affordability to a two-decade low in the state. Though interest rates clearly play a role, the New Hampshire Association of Realtors points out that supply remains the primary culprit. “It’s a lack of inventory that continues to push pricing to record heights,” the association wrote last month.

Home prices have fallen a bit in New Hampshire since hitting a record in October. But that’s not because the market has improved. Rather, interest rates are keeping some potential buyers on the sidelines, causing a decline in the number of aggressive bidding wars. When interest rates ease, buyers will return to a market still plagued by a severe inventory shortage.

No one knows how long interest rates will remain high. If the squeeze of high rates and low inventory continues to push buyers out of the market, New Hampshire could see a prolonged home sales slump. And that will be felt in Concord. In fact, it already has been.

For the first five months of the 2024 fiscal year, real estate transfer tax revenues are down 20%, or $23 million. That’s the largest decline of any state tax this year. 

We know what some are probably thinking right now. “But what about Interest & Dividends tax revenue?” Eliminating that tax, as state law does by the end of next year, will have a larger impact on the state budget. 

But the I&D tax phaseout is part of a strategy to make New Hampshire more economically competitive. The anticipated tradeoff is that making the state more attractive to investors, retirees and entrepreneurs will generate greater economic activity, and thus greater economic growth, in the long term. 

There is no such tradeoff with falling home sales. A $50 million annual decline in real estate transfer tax revenue caused by falling home sales is simply lost revenue. 

Worse, it reflects shrinking economic activity in an important industry, which will have ripple effects in the broader economy. Lawmakers have made clear that they want state policy to stimulate economic growth. Local policies that hurt economic growth, such as overly restrictive land use regulations, are increasingly being scrutinized by legislators. 

Though state lawmakers and local boards are unable to affect interest rates, they can do something about the housing supply. They can lift regulatory burdens that block or restrict new home construction. 

So far, legislators have been reluctant to preempt local regulations. Yet with  polls showing that most Granite Staters want government to address the state’s housing shortage, pressure is increasing on legislators to act. Falling state revenue by itself probably wouldn’t trigger state action. Combined with rising political pressure to act, though, it becomes another incentive for legislators to do something. 

So local boards (and voters at town meeting) have another warning sign. The longer local governments wait to clear the way for more home construction, the more likely it becomes that legislators will do it themselves. 

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Markets, not judges, set prices, even for education

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There is one and only one way to determine the “true cost” of an adequate education. That is to create a competitive education marketplace. Alas, that is not the approach New Hampshire has taken.

Instead, legislators have tried to set the cost by decree. Public school districts, asserting with some justification that the amount is too low, have asked courts to… set the cost by decree.

Now a court has done so, and the results are as absurd as one would expect.

On November 20th, Rockingham County Superior Court Justice David Ruoff ruled that the Legislature’s decreed amount ($4,100 per pupil; he excluded differentiated aid) was unconstitutionally low. But, he said, the plaintiff school districts’ asserted amount ($9,929) was too high. The actual minimum constitutionally permissive state per-pupil expenditure was, he figured, $7,356.01. 

Note the penny. Such precision carries the weight of both mathematical and legal certainty. 

Except, the entire number, including the penny, is merely a guess offered as a suggestion for legislators to consider because the court lacked enough information to find the true figure. So says… Justice David Ruoff.

“Although the evidence demonstrates that a base adequacy aid level of $7,356.01 would be constitutionally insufficient, the Court cannot set a higher threshold at this time,” Ruoff wrote. “Such a step is precluded by the limitations of the evidence presented at trial, as well as the involvement of certain policy considerations. The Court is confident, however, that the guidance offered here will empower the legislature to meaningfully consider and appropriately respond to the relevant issues.”

Well, glad that’s cleared up. 

How did Justice Ruoff conclude both that $7,356.01 was the minimum threshold of constitutionality and that he had too little information to make such a conclusion?

After reviewing the statutory and regulatory requirements for adequacy, and examining actual school district spending, he undertook the following policy analysis: 

He used “common sense” to guess that some district spending wasn’t essential for adequacy, lopped off an arbitrary percentage from some figures (without examining others that would be relevant, such as public charter school spending), and wound up with a back-of-the-envelope guess that can’t quite be called educated, but probably could pass as educated at a cocktail party if it didn’t talk too much. 

Justice Ruoff tasked himself with deciding three questions:

“[T]here are three inquires before the Court: (I) what are the necessary components or cost-drivers of a constitutionally adequate education, as defined by the legislature, exclusive of additional services provided to students eligible for differentiated aid?; (II) what funding is necessary for school districts to provide those components and cost- drivers?; and (III) how does that amount compare to the funding currently provided via base adequacy aid? As the third inquiry is a matter of simple mathematics, the evidence presented at trial largely focused on the first two inquiries.”

To answer these questions, Ruoff considered state requirements and district expenditures. At no point did the court consider whether there might be other, more effective, more efficient and less costly ways to satisfy the state requirements.

Damning for the decision is that the word “market” appears just nine times in the 69-page ruling. Plaintiffs use it to argue for higher teacher compensation, as competition for good teachers drives up wages, and the court uses it to argue that professional development funds are part of adequacy. 

The word is used to justify higher spending, never lower. That’s odd, given that competitive market forces have been shown to improve productivity and drive down costs in K-12 education. 

  • A 2010 Harvard University Graduate School of Education study found that “competition from private schools boosts achievement and lowers costs.” According to the study, “a 10 percent increase in enrollment in private schools improves a country’s mathematics test scores on PISA by almost half a year’s worth of learning. A 10 percent increase in private school enrollment also reduces the total educational spending per student by over 5 percent of the OECD average.”
  • A 2012 study of open enrollment policies in Wisconsin found that “schools respond to competitive forces by improving quality.”
  • A 2003 study found that “regular public schools boosted their productivity when exposed to competition.” That productivity increase typically took the form of higher performance rather than lowered spending. Nonetheless, the study shows that schools can produce better results without higher spending when competition is introduced.
  • A 2019 study of private schools participating in Wisconsin’s voucher program found that “private and independent charter schools tend to be more cost-effective than district-run public schools in the state overall and for the vast majority of individual cities.” Particularly, private schools received 27% less funding than district public schools overall but generated “2.27 more points on the Accountability Report Card for every $1,000 invested than district-run public schools, demonstrating a 36 percent cost- effectiveness advantage for private schools.”

Any examination of school spending that ignores chartered public schools and non-public schools is incomplete at best. And any that doesn’t even consider the effects that competition could have on the system is negligent. 

The understatement of the ruling came in Justice Ruoff’s caveat that he was hindered by the “limitations of the evidence presented at trial.” Those limitations, he acknowledged, prevented him from determining with certainty how much an adequate education should cost. But the limitations were greater than he realized. 

Not only did the court lack sufficient school district data to make an accurate cost determination, but it lacked equally important data on the efficiency gains created by competition. Going forward with an analysis despite such huge gaps in available data was a critical error. 

The ruling was plagued with numerous problems, the first being its roots in the wrongly decided Claremont decision. But even accepting the Claremont fallacy, the ruling was doomed by fatal methodological flaws and a devastating shortage of information. 

The information problem should have been obvious from the start. Prices are information. Prices absent competition are woefully inadequate information. Since no competitive education market exists in New Hampshire, the court is left applying legal analysis and back-of-the-envelope math to discover something that only the market can discover: the best available cost of a service. 

It’s clear that legislators set a low figure in the hope that this will press district spending downward. Districts, however, encourage local voters to approve ever higher budgets, which counters the Legislature’s intent. Districts then use those higher levels of spending to claim that the state appropriation is too low. Given these dynamics, it’s impossible to determine with any accuracy just how low district spending could go while meeting the state mandates for adequacy.

Until New Hampshire introduces some form of robust market competition, Granite Staters will never know what an adequate education really should cost. 

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Revenues end year half-billion over budget as unemployment hits record low

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Lost amid all the political and economic news this month was an important bit of data that’s particularly noteworthy as the 2024 governor’s race gets under way. (Yes, already.)

The state’s fiscal year ended in June. When it did, the state posted a General and Education Trust Fund surplus of $538.9 million. 

When revenues exceed budgeted expenses by more than half a billion dollars, that’s notable. Large budget surpluses have so commonplace, though, that they barely prompt a blurb anymore. 

And this is after multiple rounds of business tax cuts that critics said would devastate the state budget and leave New Hampshire with too little revenue to fund basic services.

The surge in business tax revenues (which we documented last year) is one of New Hampshire’s most important economic (and political) stories of the last decade.

It hasn’t stopped. Business tax revenues for the 2022 fiscal year were $323.2 million (or 33.7%) above plan and $68 million (5.6%) above the prior fiscal year.

Looking back to 2012, it’s remarkable how state General and Education Fund revenues have grown. Total revenues for both funds were $3.23 billion in the 2022 fiscal year. In 2012, they were $2.16 billion. 

Inflation (using the national Consumer Price Index) can account for $663 million of that $1.068 billion revenue increase. The rest, about $404 million, is new money.

The other big economic news this month was the achievement of a new record-low unemployment rate of 1.8%. New Hampshire’s economy is churning out jobs and revenue. This isn’t all because of the business tax cuts that have occurred since 2015, but they’ve helped. And the phase out of the Interest & Dividends Tax by 2025 will help more. 

While New Hampshire is enjoying these successes, other states are showing why punishing successful residents with high tax rates is a bad idea.

In Massachusetts, the new 9% income tax rate for millionaires helped to push Celtics star Grant Williams to seek a trade to low-tax Texas.

In April, a new 4% surtax on homes worth more than $5 million took effect in Los Angeles. Movie stars including Mark Wahlberg and Brad Pitt rushed to sell homes before the tax took effect, and since April 1 the supply of homes worth more than $5 million has plunged as owners pulled their listings, according to The Hollywood Reporter. 

California legislators in June had to cover a $32 billion budget shortfall caused by rising spending and falling revenues. Massachusetts is dealing with declining revenues, and current spending proposals for the new fiscal year exceed revenues by about $500 million. 

Keeping taxes and spending low is paying off for New Hampshire’s economy and the state budget. Having the latest state data confirm that fact yet again, as poster-child progressive states spend beyond their means and send rich residents fleeing, is a good starting point for the governor’s race.

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Flush with revenue, Legislature raises spending while cutting taxes

State appropriations grew substantially this week as legislators passed a $15.2 billion state budget for fiscal years 2024–25. The budget appropriates $6.25 billion in the General and Education Trust Funds.

Crafted by the Senate Finance Committee from a House version that passed earlier in the session, the budget raises total spending by more than 12% from the $13.5 billion FY 2022–23 budget. 

The governor’s proposed FY 24–25 budget spent $15.7 billion and the House’s spent $15.9 billion.

In General Fund and Education Trust Fund spending (the portion financed by state taxes), the FY 24–25 budget appropriates $6.25 billion, a 16% increase from the FY 22–23 budget ($5.39 billion).

By contrast, legislators cut General Fund and Education Trust Fund appropriations by 3.1% between the FY 20–21 and FY 22–23 budgets. Total spending between those budgets grew by a little more than 2%, from $13.2 billion to $13.5 billion. 

So the FY 24–25 budget represents a substantial increase in budgeted state appropriations. It spends about $566 million more in the General Fund and nearly $299 million more in the Education Trust Fund than the previous budget did. In total, the budget allocates nearly $3.8 billion in the General Fund and close to $2.46 billion in the Education Trust Fund.

The governor’s version had $6.29 billion in approved spending in both funds, while the House’s had $6.42 billion. 

Across all the line items, the Senate cut nearly $50 million in approved General Fund and Education Trust Fund spending from the House’s version. After adjustments and lapses are accounted for, the final budget spends $163.7 million less than the House and $33 million less than Gov. Sununu in General and Education Trust Funds.

Combined General and Education Trust Funds
Senate (FY 24–25) $6.25 billion
House (FY 24–25) $6.42 billion
Governor (FY 24–25) $6.29 billion
Current Budget (FY 22–23) $5.39 billion

One-time and off-budget spending

All versions made additional, off-budget appropriations in the current fiscal year. The final budget spends about $80.2 million more than the House and $133.4 million more than the governor proposed in FY 2023.

These current-year allocations make the difference in total spending between the Senate’s and the House’s budgets much closer than the FY 24–25 numbers would suggest. 

The Senate shifted several spending items to FY 23 that the House appropriated for FY 24–25, making it appear that the Senate made larger cuts to the House’s budget. For example, the Senate shifted $1.2 million in moving and fit-up costs to FY 23, as well as $3.6 million in building maintenance funds and $9.2 million in episodic treatment payments in education.

The increases in FY 23 spending were fueled by increased revenues. The budget pegs FY 23 revenue at $3.17 billion, which is $486 million higher than legislators had estimated when writing the FY 23 budget.

As we pointed out here, legislators used higher than anticipated revenues to approve hundreds of millions of dollars in additional FY 22–23 spending. 

Based on budgeted appropriations, the FY 24–25 budget is about 16% larger than its predecessor. But when actual spending is tallied at the end of the current budget, the difference will be much smaller. That’s because legislators spent most of the big budget surpluses accumulated in the last two years. 

Higher revenues 

The budget projects that state revenues over the biennium will be $121.1 million higher than the House’s estimated revenues and $59 million higher than the governor’s. 

The budget’s $6.359 billion in projected revenues are $868.7 million higher than the previous budget’s projected revenues, which explains how legislators were able to raise spending so much without raising taxes.

Some of this extra revenue goes to savings. The final budget ends the biennium with $231.9 million in the Rainy Day Fund, while the House set aside $200.7 million and the governor saved $341.3 million in the fund.

Education funding

Each budget proposal changed the state’s adequate education grant formula. The final budget uses the formula offered by the Senate, which was a compromise between the governor’s and the House’s numbers. 

Per-pupil adequate education grants are set at $4,100 under the Senate’s version, compared to $4,000 in the House’s version and $4,700 in the governor’s draft. 

This represents a $313 increase (8.3%) in base adequacy spending from FY 22–23 ($3,786.66).   

In addition, the Senate’s budget increases funding for differential aid. It includes $2,300 for each student eligible for free or reduced-price meals, $2,100 for each student receiving special education services, and $800 for each student who is an English language learner. 

In the FY 22–23 budget, those levels were $1,893 for students eligible for free or reduced-price meals, $2,037 for students receiving special education services, and $740 for English language learners. 

The following table shows the per-pupil adequacy spending within each proposed budget compared to adequacy spending under the FY 22–23 budget.

Senate 

(FY 24–25)

 House

(FY 24–25)

 Governor

(FY 24–25)

 Current Budget

(FY 22–23)
Base $4,100 $4,000 $4,700 $3,786.66
Free/Reduced Meals $2,300 $2,100 $2,500 $1,893.32
Special Education $2,100 $2,100 $2,079.89 $2,037.11
English Learner $800 $1,000 $756.43 $740.87
3rd Grade Reading Score* N/A N/A N/A $740.87

*This appropriation was for each 3rd grade pupil whose reading score on the state assessment was below proficiency. It has been cut from all three versions of the FY 24–25 budget.

State aid to public charter schools also gets a boost. The per-pupil adequate education grant for charter school students goes from $3,561 to $4,100, and the additional per-pupil grant (given because charter schools don’t receive local property tax revenue) goes from $3,411 to $4,900, for a combined per-pupil total of $9,000.

In total, the FY 24–25 budget increases state education spending by $169 million in the biennium and a projected $1 billion over 10 years.  

The Senate restored about $187.6 million to the Education Trust Fund that the House had moved to the General Fund (though it would’ve continued to be spent on education). 

Medicaid

The House budget provided for a two-year extension of the Granite Health Care Advantage Program, the state’s expanded Medicaid program. The Senate’s proposal, adopted in the final budget, extends this program for seven years.

In FY 2022, with the federal government funding 90% of the program, the state was responsible for paying the remaining 10% of the Granite Health Care Advantage Program, or $56.2 million. If this total stays relatively steady, this Medicaid program is expected to cost the state roughly $393 million over the next seven years.

The budget increases Medicaid provider payments by $134 million, a $110 million increase from the governor’s proposal.

Interest & Dividends Tax

Despite a razor-thin majority in the House, Republicans were able to include an accelerated repeal of the Interest & Dividends Tax in the budget. The tax was scheduled to phase out by 1 percentage point a year, ending with its elimination in 2027. The FY 24–25 budget pushed the elimination date up to January 1, 2025.

Overall, the FY 24–25 budget ratchets officially budgeted state appropriations up by 16%, which sets a new baseline for state spending, without raising taxes. This was made possible by the relatively steady flood of revenues, particularly from business taxes. Thus, to maintain this new, higher level of spending, the state will need those revenues to solidify into a new baseline too. If they trend downward for more than a brief period, the next Legislature could face some tough choices.

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State budget on track for a large double-digit increase in 2024-25

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The big story of the 2024-25 state budget has lurked just below the surface of most media coverage. It’s not the $99.6 million in employee pay raises, the increase in adequate education aid or the shifting of some Education Trust Fund line items to the General Fund. 

The big story is that lawmakers and the governor have incorporated at least $850 million in new revenues into the budget — and spent it. 

For the last decade, state revenues have exceeded projections in every fiscal year except for the pandemic year of 2020. Gov. Chris Sununu and legislative leaders have tended to categorize most of these annual surpluses as happy accidents (“one-time money”) rather than permanent funds to be counted on for future budgets.

That has changed. 

Legislative leaders and the governor this year incorporated the higher revenues into future revenue projections, and into the budget. 

The governor’s 2024-2025 budget projects revenues that are $912 million higher than those in the 2022-2023 budget. The House Finance Committee projects revenues $850 million above the previous budget. 

In Fiscal Year 2022, revenues were $435 million above budget. So far in Fiscal Year 2023 (through March), they are $323.7 million above budget. Lawmakers made quite conservative revenue estimates for the 2022-2023 budget. When the large surpluses materialized, most of the money found its way into appropriations.

Based on actual spending levels, then, the final 2024-2025 budget might not be that much bigger than the one before it. But measuring from one official budget to the next, the increase is very large. In practice, the main difference between the two budgets is the increase in baseline revenue assumptions, which are then used to fund ongoing spending. 

The question is not whether budget writers should accept, with caution, a higher baseline budget. It’s whether to spend that money or cut taxes. The follow-up question is how to prioritize those dollars if spending is the chosen option. 

Both the governor’s proposal and the House Finance Committee budget opt primarily for spending, though both contain some additional tax relief.

There are clear inflation-related reasons to raise state spending in some areas. The Department of Administrative Services notes, for example, that since 2018, state employee cost of living raises have totaled 5.4% while inflation has totaled 20.7%. With large vacancy rates in many departments (51% for entry-level positions at the Department of Corrections, according to the department), the market is sending a signal that state employee pay is too low. 

The state’s rates for medical providers who offer services through Medicaid also have been eroded by inflation, as has state adequate education aid. 

But both budget proposals raise General Fund and Education Trust Fund spending (money that comes from state taxes) above the rate of inflation.

The governor’s budget increases General Fund and Education Trust Fund spending by $889 million over the biennium, or 16.6%. General and Education Trust Fund spending under the governor’s plan totals $6.285 billion.

The House Finance Committee budget increases General Fund and Education Trust Fund spending by $981.4 million, or 18%. General Fund and Education Trust Fund spending under the House Finance Committee budget totals $6.37 billion. (Again, those represent increases from the approved 2022-2023 budget, rather than from actual appropriations.)

House Finance Committee Chairman Ken Weyler said during a budget presentation on Tuesday that the committee strives to keep spending below the combination of the inflation rate and population growth, which is best practice. The current budget, he acknowledged, exceeds that combined growth.  

The House Finance Committee used an inflation rate of 12.7% and a population growth rate of 1.5% to reach an optimal maximum budget growth rate of 14.2%, Weyler said. 

Had the committee kept spending to that level, the growth would be approximately $765 million. Instead, the committee proposes increasing spending by $981.4 million, which is $216.4 million above the combined inflation and population growth rate. 

The final percentage increase over the current state budget remains subject to negotiation. But the big takeaway is that a decade-long growth in state revenues plus a huge inflation spike have combined to ratchet state General Fund and Education Trust Fund spending to a level in excess of $3 billion a year. 

Going forward, this will be considered the new normal. Experience suggests that once a new baseline budget level is reached, returning below that level is extraordinarily difficult. 

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Medicaid can’t continue expanding forever

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As legislators consider more proposals to expand Medicaid eligibility or services to specific populations, they ought to consider that Medicaid is both like and unlike the universe.

Like the universe, Medicaid is expanding faster than it should be. Unlike the universe, there’s no scientific possibility of Medicaid expanding forever. (Maybe the universe can’t either.)

Two bills moving through the Legislature this session are based on increasingly questionable assumptions about federal spending commitments. House Bill 282 would end the five-year waiting period for Medicaid eligibility for “lawfully residing” children and pregnant immigrants. House Bill 565 would extend Medicaid benefits for new mothers from two months after birth to a full year. 

These expansions come as New Hampshire enjoys a temporary, pandemic-related increase in its Federal Medical Assistance Percentage (FMAP), which is the share of Medicaid spending the federal government covers. For the duration of the federally declared COVID-19 emergency, 56.2% of New Hampshire Medicaid spending is covered by the federal government. When the emergency declaration ends on May 11, New Hampshire’s FMAP rate reverts to its normal level of 50%. 

(Incidentally, the additional 6.2 percentage points of additional federal funding during the pandemic emergency was given on the condition that the state not conduct eligibility determinations. That waiver of eligibility requirements will end when the emergency ends, which will affect an estimated 72,500 current enrollees. The pandemic enrollment increase has been so costly to the state that it has pumped additional federal funds into the Medicaid program.)

Legislators tend to assume that the default 50% rate will continue indefinitely. But the federal budget situation could prompt reductions in the federal contribution, something the Congressional Budget Office (CBO) recently suggested. 

The CBO this month projected that the federal deficit will nearly double from $1.4 trillion to $2.7 trillion in the next decade, and the federal debt held by the public would reach a record 118% of Gross Domestic Product. 

This record debt is driven by historically high federal spending, which is projected to increase from 23.7% of GDP to 24.9% of GDP by 2033. Federal spending has exceeded 24% of GDP only during World War II, the 2008 financial crisis, and the COVID pandemic. The CBO projects it to reach this level again within the next decade simply due to regular budget outlays. 

Federal revenues, meanwhile, are projected to remain around 18% of GDP through 2033. 

That unsustainable course will put pressure on Congress to cut costs or raise taxes or both. Anticipating this, the CBO in December offered suggestions for reducing the federal deficit. In the area of health care spending, the CBO suggested that Congress “establish caps on federal spending for Medicaid” and “reduce federal Medicaid matching rates.” 

Such actions are not out of the question. As the Congressional Research Service puts it, “Medicaid was designed to provide coverage to groups with a wide range of health care needs that historically were excluded from the private health insurance market.” But the program has grown over the years to cover people who could find coverage in the private market. 

By routinely expanding Medicaid benefits and eligibility, lawmakers have grown the program’s outlays from $206.2 billion at the turn of this century to $748 billion in federal fiscal year 2021. Medicaid accounts for 17% of U.S. health care expenditures. 

These expansions are unsustainable for both the state and federal governments. Eventually, some level of financial discipline, however small or limited, will have to be imposed. Clawing back Medicaid spending is politically easier than touching Social Security or Medicare. That is especially true after Medicaid has grown to cover people who could find alternative insurance coverage. Given those realities, current levels of federal Medicaid spending cannot be taken for granted.

Any discussion of expanding Medicaid coverage or eligibility should start with the understanding that current spending levels are unsustainable, and increasing those levels just accelerates the date of reckoning.

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With electricity rebate, legislators could spend more than 75% of the 2022 budget surplus

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Gov. Chris Sununu has proposed tapping $60 million of the state budget surplus to give $100 rebates to electricity ratepayers. The plan requires approval by the Legislature and could come up for a vote this Thursday when legislators return to take up bills vetoed by the governor.

In the spring, a gas tax holiday was floated by both Republicans and Democrats. At the time, we wrote that a gas tax holiday was just a holiday from reality. A state-funded rebate on customer electricity bills is reminiscent of a gas tax holiday. Both offer a small dose of relief for individuals without addressing the underlying cause of rising prices, and both come with substantial opportunity costs.

The opportunity cost is best seen in context of the state surplus from which the spending would be drawn.

Legislators have already spent 60% of the state’s record $430.1 million budget surplus. 

A change in the way businesses apportion net operating losses, also passed this year, could consume another $42 million of the surplus.

With $261.7 million of the state budget surplus spent, the proposed $60 million in electricity rebates would bring the total to $321.7 million. That would represent 75% of the total surplus.

If the $42 million from the apportionment change is included, the sum rises to $363.7 million, or 85%.

So, after boasting that their frugality left the state with a record budget surplus, Republicans would have to explain to voters how they spent 75%-85% of that surplus in nine months. 

By any measure, that would be an impressive spending spree. 

If legislators simply want to transfer a portion of the state surplus to consumers, electric utility rebates represent one way to do that. We’re certainly not against returning money to the private sector. 

However, the state does have obligations, and surplus revenue can be used in a way that returns money to taxpayers in the long run while simultaneously reducing the cost of state government. 

As we pointed out in May, the state’s unfunded pension obligations cost taxpayers money. Using the surplus to pay down those obligations reduces state debt service, saves taxpayers money, lowers the overall cost of government, and reduces a debt owed by taxpayers.

That’s not as politically attractive as a utility bill rebate. But it would achieve several conservative goals while leaving the state in a better financial position. 

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