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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Legislators have spent (at least) 60% of the state’s record budget surplus

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New Hampshire collected a record $430.1 million budget surplus in the 2022 fiscal year, which ended June 30th. Most of it is already gone. 

From January to June, legislators spent $261.7 million — or 60% — of the surplus.

For context, the amount of new spending in 2022 was just a bit larger than the $257.8 million stored in the state’s Rainy Day Fund (also a record).

The $430.1 million surplus is not what the state saved in the last fiscal year. It’s the amount by which state revenues exceeded budgeted spending. Lawmakers didn’t save even half of it.

Legislators passed 29 bills this year that appropriated money from the state budget surplus, according to a tally compiled by the Office of the Legislative Budget Assistant (see the list here: Appropriation Bills 6-30-22). 

The spending ranged from $60,000 over two years to fight cyanobacteria blooms to $71.1 million over two years to fund road and bridge work as well as body and dashboard cameras for law enforcement.

The next largest allocation came from House Bill 1587, which spent $42.9 million to increase retirement pay for 1,824 police officers and firefighters.

Another $21 million was put toward funding a dental benefit for Medicaid recipients, and $9.4 million went toward construction of a legislative parking garage.

Smaller items included $150,000 for a Hampton Beach pier feasibility study and $250,000 in capital improvement funds for state fairs and agricultural fairs.

The total appropriations of $261.7 million, per the Legislative Budget Assistant’s count, does not include the effects of tax law revisions approved this year.

The Office of Legislative Budget Assistant counts tax cuts as revenue reductions based on a simple static scoring of tax rate changes. We did not include these in the spending tally because (a) they aren’t spending, and (b) past calculations have been wildly off. 

For example, the LBA in 2017 projected that business tax cuts passed that year would reduce state revenues by $11 million. Instead, business tax revenues shot up, ending the year $151.6 million over budget rather than $11 million under budget.

The LBA estimated a total revenue reduction of $59.5 million through fiscal year 2024 due to tax law changes. 

Of those revenue reductions, $17.5 million through FY 2024 is projected to come from a tiny reduction in the Business Profits Tax. That’s the type of projection that has proven incorrect in the past.

The remaining $42 million, however, represents losses through FY 2024 that come from a change in the way the state requires businesses to apportion net operating losses. This projected loss is more likely to materialize because it eliminates what is effectively a double taxation of business.

If this $42 million is included, then legislators can be said to have reduced the budget surplus by $303.7 million.

That would leave only $126.4 million of the $430.1 million surplus in state coffers. 

The total could be even lower, as the LBA was unable to determine a cost for a few bills. 

This is not to condemn all of this spending as wasteful or unnecessary. Financing delayed bridge repairs, for example, can be a very good use of unexpected revenues. The spending was focused on one-time uses that won’t be written into the baseline budget going forward, which was also responsible. 

But the spending is haphazard, with money thrown to various projects that proved politically popular, rather than focused on, say, a priority list of state needs. 

With a 424-member legislative body, it might be unfair to expect a more focused approach to spending a massive one-time windfall. But the chaotic nature of governing with such a large Legislature doesn’t negate the wisdom of trying to impose a strategic focus on state spending.

In May, we recommended dedicating a large portion of the surplus to cover unfunded state pension liabilities, which would pay down an existing state obligation and save taxpayers money in the long run. That’s the kind of strategic planning that didn’t shape this $261.7 million in spending.  

However, the record $257.8 million Rainy Day Fund was the result of strategic planning, and it remains untouched. Legislators deserve credit for filling that fund and leaving it alone. As recently as 2014, the Rainy Day Fund held just $9.3 million.

The current fiscal year started in July, and although revenues were $13.9 million above budget, they were $4.2 million lower than last July.

The next Legislature needs to keep a careful watch on revenues. If another surplus materializes, it would be wise to have a priority list of state needs ready to go. If one doesn’t materialize, it might not take long to burn through what’s left of 2022’s record windfall.

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Legislators push student loan forgiveness for one industry

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As Republicans in Washington fight Democratic efforts to forgive federal student loans, GOP legislators in New Hampshire are promoting $1 million in tax-funded student loan forgiveness for graduates in one high-tech industry — human organ manufacturing.

In 2018, legislators passed a package of subsidies and tax breaks sought by the Advanced Regenerative Manufacturing Institute, a Manchester organization founded to develop synthetic human organs in partnership with other companies, including new local startups. 

That package, Senate Bill 564, granted companies engaged in advanced regenerative manufacturing a 10-year exemption from state business taxes. At the time, ARMI was the only organization that qualified for the tax exemption. The Department of Revenue Administration’s most recent annual tax expenditure report states that multiple companies have filed paperwork to be deemed eligible for the credit, but there are so few that disclosing details of the filings would violate their privacy under state tax information disclosure laws. 

Included in the law was a Regenerative Manufacturing Workforce Development Program, through which the state would finance the repayment or forgiveness of student loans for qualified graduates. To be eligible, the graduates would have to work for a qualifying manufacturer in New Hampshire for at least five years. 

In the four years since its authorization, the Regenerative Manufacturing Workforce Development Program has never been funded. Lawmakers tasked the New Hampshire Business Finance Authority (NHBFA) with designing and administering the program, but made no appropriation. 

Legislators learned of the program’s unfunded status earlier in the legislative session, and Republican leaders took steps to find money for it. A $1 million appropriation was attached to House Bill 1256, a bill dealing with the Department of Military Affairs and Veterans Services. 

In the HB 1256 conference committee last Wednesday, the funding drew bipartisan support, with legislators noting that the $1 million was a fraction of what had been intended for the program. 

“This is a test run to see how much they actually need for this,’ Rep. Al Baldasaro, R-Londonderry, said.

Need is an interesting choice of words. ARMI initially received an $80 million Department of Defense grant for its regenerative manufacturing work and $214 million in other investment, according to a DOD press release from 2016. It has attracted other companies to Manchester’s Millyard, where work on human tissue generation is expanding — without the student loan subsidy.

It is not known how much of an employee’s student loans the program would repay or forgive, as the program has been on hold pending funding. A draft proposal the NHBFA gave to legislators in 2019, assuming full funding, stated that employees would have their student loans entirely paid off over five years. 

In general, loan repayments are considered taxable income unless otherwise exempted from taxation by law (as is the case with many federal student loan repayment and forgiveness programs). The NHBFA’s draft proposal stated that under federal income tax laws as of 2019, the forgiveness “would result in taxable income” to the employee.

The local forgiveness for regenerative manufacturing employees is supposed to help keep the industry in New Hampshire and facilitate hiring. But such favoritism hurts other employers who compete for the same workforce, and it transfers wealth from some businesses to others, based purely on which ones are politically favored.

And such subsidies clearly aren’t needed in an industry that has proven capable of raising hundreds of millions of dollars in startup capital.

In Washington, Republicans are moving in the opposite direction. U.S. Senate Republicans in April introduced the “Stop Reckless Student Loans Action Act” to end the Biden administration’s pause on student loan repayments and block future loan forgiveness. 

One stated reason for opposing federal student loan forgiveness is that most Americans don’t have college degrees, and they would wind up subsidizing the degrees of the roughly one third of Americans who graduated from college.

In New Hampshire, 35.4% of men and 38.4% of women have a bachelor’s degree, according to a state report issued in 2019. 

For years, Republicans in Concord have been divided on the issue of student loan forgiveness.

Earlier in the session, legislators blocked a Sununu administration effort to create a larger-scale loan forgiveness program. The Joint Fiscal Committee tabled a proposal to use $17 million in federal American Rescue Plan funds to forgive the loans of students who agreed to work for at least four years in New Hampshire after graduating college. 

Gov. Sununu in 2019 proposed a $32 million student loan assistance program to be financed with revenue from the state’s 529 college savings program. Legislators rejected the idea in favor a smaller Graduate Retention Incentive Program. 

That program offers free job postings and marketing for companies that agree to give a $1,000 bonus or student debt payment to employees who agree to workin the state for four years.

New Hampshire has an established loan repayment program for medical professionals who agree to work in underserved areas of the state. It cost $766,783 in the current budget.

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Businesses are raining cash on the state budget

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With two months left in the fiscal year, state business tax collections are $217.2 million above budget. For context, business tax revenues came in $649.9 million over budget during the entire previous decade. 

So surplus business tax collections during the last 10 months have equaled 33% of the total surplus in business tax revenues collected from 2012-2021. 

To put it another way, business taxes have generated about three years’ worth of above-budget revenue in just 10 months. 

To get an idea of just how big that $217.2 million figure is, consider that business tax revenues for the first six months of FY 2012 totaled $231.7 million. 

The state’s collected almost as much in surplus business tax revenues during the 2022 fiscal year (so far) as it collected in total business tax revenues in the first half of 2012.

Total revenues from all state taxes for the current fiscal year are $382.2 million above budget. 

That’s a tremendous amount of surplus revenue for New Hampshire. Predictably, lawmakers have been busy allocating it to various priorities. (We’ll have more on this soon.) 

The good news is that they’ve been treating it as one-time revenue, and therefore not rolling it into permanent spending. The bad news is that they’re not dedicating any significant portion of it to state pensions, which would be the most fiscally responsible thing to do and would save the state money in the long run, as we outline here. 

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Moving some of the state surplus to pensions would save taxpayers money

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The state’s tremendous budget surplus is a windfall that should be used wisely. The last budget restored funding to the Rainy Day Fund. This year, policymakers would be wise to shift a large portion of the ($252 million so far) budget surplus to the state’s pension fund. This would save taxpayers money in the long run and be a responsible use of these unexpected revenues.

The Josiah Bartlett Center for Public Policy teamed up with the Reason Foundation’s Pension Integrity Project to create an explainer (posted below) outlining why this move makes good financial sense this year. (You can download a pdf copy here: REASON_BARTLETT_PENSION_EXPLAINER.)

 

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Should N.H. pay people to move here?

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New Hampshire attracts residents with its high quality of life and exceptional level of economic opportunity. Though located in remote northern New England, the state has posted population and economic growth rates superior to its Canada-bordering neighbors, both of whom are in serious danger of slipping into population decline this decade.

The biggest constraint on New Hampshire’s population growth is not a natural deficit in the state’s attractiveness, but a government-imposed housing shortage. 

So it’s interesting that legislators are considering a bill to spend $750,000 worth of taxpayer money to pay people to live here. 

House Bill 1524 would create a state National Service Alumni Attraction and Retention Fund. 

The money would finance “grants to New Hampshire-based employers and institutions of higher education for the purpose of providing financial assistance, workforce development, and education to AmeriCorps alumni and returned Peace Corps volunteers” interested in pursuing post-graduate education or work in the state.

The plan differs from an existing program in Vermont in scope, but not concept.

Vermont in 2018 created a remote worker relocation program that offered $10,000 to anyone who would commit to moving to Vermont and working remotely. It was followed by another program to pay people $7,500 to live and work in economically distressed parts of the state. 

Vermont’s treasurer reviewed the remote worker program in 2019 and concluded that it was impossible to determine whether people moved for the money or claimed the money for moves they’d previously planned. 

When a consultant used questionable multipliers to conclude last year that the programs paid for themselves, the treasurer publicly criticized the findings. 

In any case, the programs enrolled just 307 people, which comes to 0.047% of Vermont’s population of 645,570. From 2018-2019, a total of 14,915 people moved to Vermont voluntarily (who knows why?), and another 16.337 moved out. 

Maine is getting into the cash bait game too. The Senate just passed a bill intended to keep Mainers from leaving the state by forgiving up to $40,000 in student loan debt for first-time home buyers. The taxpayer cost would be $10 million. 

Now some New Hampshire legislators want to use taxpayer money to recruit national service volunteers to live or study in the state.

It’s not clear why these particular individuals would be more worthy of taxpayer-funded recruitment than, say, angel investors, construction workers, clergy, nurses or any other non-profit volunteers. But it’s certain that a program created to lure one group favored by politicians will be expanded to include other groups favored by other politicians.

And that gets to the heart of the problem. Any such program would open the state coffers for giveaways to whichever groups can gain the attention and admiration of politicians. A new program to bestow state favors on politically popular groups would create additional perverse incentives for politicians.

Politicians would have a strong incentive to add politically popular subgroups to the list of people eligible for taxpayer subsidies. Individuals, no matter how worthy, who can’t gain the favor of legislators would wind up subsidizing the groups who have. 

Taxpayer money is a finite resource to be used with restraint and discretion for public purposes only. The gifting of tax money to people who have performed a service favored by politicians runs against the spirit, if not the letter, of the state constitution. 

Part I, Article 31 states that the Legislature shall assemble for two reasons only, to redress public grievances and to make “such laws as the public good may require.” New Hampshire would have to be in a dire state of cultural decay for the public good to require taxpayer-funded recruitment of national service volunteers.

Part I, Article 36, limits the granting of public pensions under the principle that “economy” is “a most essential virtue in all states” and therefore “no pension shall be granted, but in consideration of actual services; and such pensions ought to be granted with great caution, by the Legislature, and never for more than one year at a time.”

The grants to be funded in HB 1524 aren’t pensions precisely, but they are similar. They are taxpayer grants to individuals in recognition for services rendered to the public. However, the public is not necessarily the taxpayers of New Hampshire, but rather the people of any place where the volunteers served. 

That makes the National Service Alumni Attraction and Retention Fund a payment by New Hampshire taxpayers for services rendered to any people on Earth. Why it’s in New Hampshire taxpayers’ vital interests to make cash payments to people for services rendered anywhere is a mystery. 

Finally, as the fund is designed to recruit these specific volunteers to New Hampshire, it is about more than just rewarding this service. Its goal is to improve the state by paying those volunteers to live here temporarily. 

The use of taxpayer money to create a custom-designed state population is questionable enough. But to recruit people with no specific economic assets for a year or two of work or study is of no discernible long-term value to the state. 

Good public policy in a republic avoids creating favored classes of citizens by bestowing tax money on politically preferred groups.

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Requiring U.S. steel in N.H. public projects would hurt taxpayers and workers

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With inflation at a 40-year high and March approaching the highest one-month gas price increase on record, this would be a strange moment for legislators to purposefully inflate public works costs for taxpayers. But that could happen, started by a Senate vote this week. 

Senate Bill 438 would raise costs on New Hampshire taxpayers for the sole purpose of protecting jobs in Pennsylvania, Michigan, Ohio, Illinois, Indiana and New York. It has 14 co-sponsors, 58% of the Senate. 

The bill would require all state-administered public works projects of $1 million or more to use American-made steel. Similar bills are being pushed by the steel industry in state legislatures around the country. It is a classic example of protectionism masquerading as patriotism.

The effect would be a politician-imposed transfer of wealth from New Hampshire taxpayers to the $100 billion American steel industry. 

The bill’s fiscal note states that the cost is indeterminable “due to wide-ranging price fluctuations for these goods, supply-chain shortages, and US imposed tariffs.” 

But it’s well-established that the effect of such protectionist laws is to increase prices. 

“Buy America rules prohibit customers from buying less expensive steel from overseas suppliers for use in public works projects,” the Congressional Research Service concluded in 2015. 

Compliance costs for “buy America” laws also raise end prices, the Congressional Research Service pointed out.

“Other direct costs associated with Buy America are mainly related to administering and enforcing its requirements, costs that are mostly absorbed by state and local government project sponsors. These costs include the effort required by contractors to document the national origin of iron, steel, and manufactured products and agency administration of the certification process. Extra work may also be required of contractors to put together two bids for a given project, one incorporating domestic products and one with foreign products. Waiver requests, another cost, may be prepared by the state or local government project sponsor alone or in cooperation with the contractor.”

Then there are the project delays, which also increase costs.

“Buy America may make it more time-consuming to complete transportation projects, ultimately causing higher project costs. Delays can arise from domestic supply problems and the waiver application process.”

Federal “buy America” requirements for rail cars led to municipal rail systems providing commuters with inferior cars at inflated prices.

It’s also well-established that industry protectionism costs more jobs than it saves and hurts domestic industries in the long run.

A 2017 study by Australian economists found that buy America requirements protected 57,000 U.S. manufacturing jobs while reducing overall U.S. employment by 363,000. According to that study, ending federal Buy America provisions would increase employment in New Hampshire by more than 800 jobs. 

Studies have detailed how protections for specific industries at the national level just transfer wealth from consumers to politically favored industries, sometimes costing consumers millions of dollars per job saved. 

They do so in the name of protecting manufacturing jobs from foreign competition, when in fact manufacturing job losses are primarily the result of productivity gains. 

That is particularly true for the steel industry. In 1980, it took 10.1 man hours to produce a ton of steel. By 2017, it took just 1.5 man hours.

U.S. steel industry productivity since the 1960s has been driven by two primary factors: technological gains and competition. Contrary to protectionist dogma, competition helps U.S. industries by making them more productive and more competitive. 

The U.S. steel industry is no exception, having been helped by imports.

The bill anticipates increased costs. It allows a waiver for the following conditions:

(1)  Application of the project would be inconsistent with the public interest;

(2)  The product is not produced or fabricated in the United States and that it would be in the public interest to provide a waiver;

(3)  The item for which a waiver is being requested is not produced and fabricated in the United States in sufficient and reasonably available quantities and of satisfactory quality; or

(4)  Alternate bidding procedures were used and the lowest overall total bid based on using domestic fabricated structural steel was at least 25 percent more than the lowest overall total bid based on using foreign steel.

Exception No. 4 indicates clearly that costs are expected to rise. It would write into law the presumption that cost increases of up to 24.99% are acceptable to legislators. That’s remarkable. 

If that weren’t enough, SB 438 could lower employment in New Hampshire for the purpose of increasing it in Pennsylvania. 

The effect of the law would be to raise the price of raw materials for public works projects. If those costs are large, contractors could seek to recoup them by hiring fewer employees. The result would lower employment in New Hampshire. 

American industries grow strong through competition, not coddling. If American steel is competitive, New Hampshire contractors will use it. If it isn’t, then forcing them to use it only raises costs and lowers quality. 

If other countries subsidize their industries, that should be addressed at the federal level. Preventing New Hampshire public works projects from using Canadian steel won’t have any effect on China’s state industrial policies. It will just make it harder for New Hampshire projects to be completed on time and at the best possible price. 

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N.H. business tax revenues’ stunning surge

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New Hampshire’s booming economy continues to fill state coffers with excess cash drawn from business taxation, with impressive numbers posted each month. But a longer look back illustrates the stunning sums businesses have contributed to the state budget in the past decade. 

From Fiscal Year 2012 through Fiscal Year 2021, business tax revenues exceeded budget projections by $649.6 million — or 100.1 percentage points. 

That is, over that time businesses gave legislators an additional $649.6 million to spend beyond what lawmakers had budgeted. 

State Fiscal Year 2022 began last July, and so far the trend continues.    

Since the start of the fiscal year in July, business tax revenues are $109.5 million (27.9%) above the prior fiscal year and $72.7 million (16.9%) above budget.

Add this to the total from FY 2012-2021, and business tax revenues have come in over budget by $722.3 million since FY 2012. 

To get an idea of just how much larger state business tax revenues are today, consider that in FY 2012, Business Profits Tax revenue from July-December totaled $140.5 million. 

Adjusted for inflation, that $140.5 million would be approximately $166 million in 2021.

Actual BPT revenues for July-December of 2021, however, were a record $381.2 million — 240.7 million (171%) higher than in 2012.

Combined BPT and BET revenues in the first six months of FY 2012 were $231.7 million. 

In the first six months of FY 2022, they were $501.8 million, a 216.5% increase.

The historical context shows that state is playing with house money, so to speak, when it comes to business tax revenues. It shows further that additional small reductions to business tax rates are not only affordable, but fully justified. 

The state has taken in nearly 3/4 of a billion dollars in unanticipated business tax revenue since 2012. Claims that tiny rate reductions will bankrupt the state or devastate essential services are laughably unfounded. 

Business tax rate reductions that began in the 2016 fiscal year did not cause business tax revenue to fall below previous levels, as critics had predicted. Then-Gov. Maggie Hassan said the rate cuts would reduce business tax revenue by $90 million. Instead, business tax revenues were $132.8 million (23.4%) above plan in FY 2016. 

From FY 2012-2021, business tax revenues came in below budget for the year only twice: in 2014 (before the start of the business tax cuts) and in 2020 (when businesses were hit by the pandemic). The huge gains in other years more than made up for those relatively small declines (2% and 13%, respectively). 

Businesses in New Hampshire have fed the state budget astonishing sums over the last decade. Yet every time anyone suggests slight reductions in corporate tax rates, advocates of higher taxes attack businesses as greedy, selfish, avaricious, even unpatriotic. 

In truth, New Hampshire employers have enabled the state’s ever growing social welfare spending, and most have remained in New Hampshire despite the lure of lower corporate tax rates in other states. They should be thanked for their contributions, not vilified. Adjusting their rates to let them keep a little more of their income would be a reasonable way to say thank you.

 

 

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Budget deal cuts state spending by 3%, lowers taxes, creates Education Freedom Accounts

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UPDATE: This analysis has been updated to incorporate the Legislative Budget Assistant’s official tally of spending in the Committee of Conference budget.

 

The New Hampshire Legislature is scheduled to wrap up this year’s session on Thursday when the House and Senate convene to consider nearly 40 committee of conference reports hammered out by negotiators for each chamber, including the compromise version of the state’s two-year budget.

The conference committee budget would:

  • Cut state General and Education Trust Fund spending by roughly $172.5 million, or 3.1%,
  • Further lower business tax rates,
  • Eliminate the Interest and Dividends Tax, making New Hampshire truly income-tax-free,
  • Cut the statewide property tax while increasing aid to municipalities,
  • Create Education Freedom Accounts to provide school choice to lower-income families,
  • Prohibit the state from asserting, through employee training and K-12 education, that one demographic group is superior or inferior to others,
  • Create a voluntary paid family leave program;
  • Restrict abortions after 24 weeks,
  • Give legislators the power to repeal a state of emergency declaration.

Overview

This year’s budget fight was unusual in that it did not center on taxes and spending, or indeed on fiscal issues much at all. In fact, House negotiators accepted the Senate’s version of House Bill 1, which contains the detailed spending for each state agency, with no changes. Instead, the field of debate shifted to House Bill 2, the trailer bill that contains the policy changes necessary to implement the state’s $13.5 billion budget plan over the next biennium.

The Senate-approved version of HB 1 would spend $5.4 billion from the state’s General Fund and Education Trust Fund in Fiscal Years 2022 and 2023. This represents a reduction in state General and Education Trust Fund spending of approximately $172.5 million, or roughly 3.1% of state spending. (The committee of conference made some changes to HB2, which will have a very small effect on this figure. To make sure we’re using official state numbers, we use totals from the Senate budget, as the Legislative Budget Assistant has not made an official tally of the Committee of Conference budget.)

That is an historic achievement and would be the second time in this century that state spending declined from one budget to the next. (The last time was in the 2012-13 state budget passed in 2011.) General and Education Trust Fund spending is the portion of state spending paid for by state revenues, such as business taxes, the tobacco tax, the Meals and Rooms Tax, etc. Total spending, which includes federal outlays, is $13.5 billion in this budget.

Tax Cuts for Everyone

Since 2015, Republicans at the State House have been pushing to lower the rates of the state’s two largest business taxes. The Business Enterprise Tax is a levy of payroll and operating expenses paid by all but the state’s smallest businesses. The Business Profits Tax is paid on profits, and it is largely borne by larger businesses. Six years ago, New Hampshire had among the highest effective corporate tax rates in the nation, prompting the GOP to take up business tax reform as a key step to improving the New Hampshire Advantage. Showdowns over business tax rate cuts led to impasses between Gov. Maggie Hassan and the Republican-led Legislature in 2015 and between Gov. Chris Sununu and the Democratic State House majorities in 2019.

This year, Republicans hold majorities in both chambers, as well as the governor’s office, and that has meant more business tax cuts. This year’s budget would lower the BET to 0.55%, down from 0.75% six years ago. The BPT would drop to 7.6%, down from a high of 8.5% six years ago. Cutting the state’s two largest taxes on Granite State employers by 27% and 10.5% over the course of four budget cycles is an impressive legacy for Republican lawmakers that has helped the state’s economy. Thanks in part to business tax reform, New Hampshire business tax revenues have exceeded projections every year since rates began to fall. The Granite State now boasts a growing economy, higher state tax revenue, and an unemployment rate of 2.5%. Business tax rates are just the first of many tax cuts contained in this budget.

HB 2 would also increase the filing threshold for businesses paying the BET from $200,000 to $250,000, meaning that many of the state’s smaller firms would no longer have any business tax liability, while delivering a small tax savings to all BET filers. This was an idea originally proposed by Senate Democrats as an alternative to Republican tax rate cuts, but was included in addition to the rate cuts.

The budget deal begins to phase out the Interest and Dividends Tax entirely. This 5% tax on investment income above $2,400 hits hardest seniors who have planned to retire on their investment income. It has led critics to charge that New Hampshire has never been truly income tax free. The tax phases out over five years, dropping a percentage point each year. This puts New Hampshire on the path to becoming the ninth state to have no tax on personal income.

The budget reduces the Meals and Rooms Tax, a levy on restaurant and hotel bills, from 9% to 8.5%.

And finally, the budget incorporates the provisions of Senate Bill 3, which would shield New Hampshire businesses from tax liability on loans received through the federal Paycheck Protection Program.

Property Tax Relief

The most expansive set of tax changes occur on property taxes, which fund state, county, municipal, and school district expenditures. The final budget package includes a House provision lowering the Statewide Education Property Tax (SWEPT) by $100 million in 2023. This is a direct tax cut for every property owner in New Hampshire.

The budget also increases revenue sharing with municipalities under the Meals and Rooms Tax. While the last budget sent approximately 22% of these revenues back to cities and towns, this package sets revenue sharing at 30% and sets them aside in a newly created dedicated fund. Meals and Rooms Tax revenues have been a popular target for state budget writers in both parties over the past two decades. In total, this budget would increase M&R revenue sharing by $50.5 million to a total of $188 million.

The budget increases funding for county nursing homes by $29.1 million. It also prevents a drop in the state’s education funding formula caused by the drop in fall enrollments and the Free and Reduced Lunch program during the COVID-19 pandemic. Left unaddressed, this would have resulted in a $67 million reduction in state aid to local school districts. The budget also contains $30 million for school building aid, $35 million targeted to school districts with the greatest fiscal need, and $1.9 million for schools shifting to full-day Kindergarten.

Remarkably, the state budget would provide tax relief on all four sections of every Granite Stater’s property tax bill: state, county, municipal, and school.

School Choice

The Senate has included the provisions of SB 130, the Education Freedom Accounts Act, in HB 2. This expansion of school choice would provide New Hampshire families earning up to 300% of the federal poverty level with scholarships funded by the state’s adequate education grants. They could use these scholarships for a wide range of educational alternatives, including non-public schools, remote learning hardware and software, transportation costs, and even tuition at another public school or the New Hampshire Community College System. Our analysis projected that these accounts would save taxpayers $6.65 million in the first two years alone while improving student outcomes.

Late-Term Abortion

Currently, 43 states limit late-term abortions. The current budget package would add New Hampshire to that list, prohibiting the practice after the 24th week of pregnancy expect in cases where the procedure would protect the life, health, or well-being of the pregnant mother. The budget would also strengthen current state statutes barring the use of taxpayer funding for abortion services, requiring regular audits of abortion providers.

Critical Race Theory

Opposition to the teaching of Critical Race Theory in schools prompted responses in both the New Hampshire House and Senate. The House approach, House Bill 544, was a ban on “divisive concepts.” The Senate took a different tack, strengthening the state’s existing non-discrimination laws to prevent the the state, in training materials or in K-12 education, from asserting as fact that people of a particular age, sex, gender identity, sexual orientation, race, creed, color, marital status, familial status, mental or physical disability, religion, or national origin are inherently superior or inferior to any other. The Senate language, which also provides a legal path for those who believe they have been exposed to such discrimination, has been added to the state budget package in HB 2.

Emergency Powers

The final hurdle to a budget deal is a limit on the broad emergency powers granted by the New Hampshire Legislature to the governor following the attacks of September 11, 2001. The current emergency statute gives the House and Senate the authority to terminate any state of emergency declared by the governor by majority vote of both chambers. But it does not explicitly give the Legislature the authority to rescind individual emergency orders issued under such a state of emergency, nor does it provide a smooth path for such a resolution to come to floor of the House or Senate.

During the COVID-19 pandemic, Gov. Chris Sununu issued dozens of executive orders. Some were waivers of state regulations, enabling health care workers to provide treatment free from red tape or allowing restaurants to serve beer and wine to go. Others, such as the statewide mask mandate, met with opposition from conservatives and libertarians concerned about government overreach.

Last year, with the legislative session cut short and limited to brief meeting on the UNH campus, Democratic leaders blocked attempts by a handful of legislators to address the state of emergency. This year, lawmakers dealt with a number of bills curtailing the governor’s emergency powers or codifying emergency procedures into state law, but never voted on whether to end the overall state of emergency.

The House position would have maintained gubernatorial authority to declare an emergency, but would have required a vote of the House and the Senate for it continue past 30 days. The Senate position would have clarified the Legislature’s ability to address individual executive orders and would have allowed a governor to renew any order unless and until both the House and Senate voted to cancel it. This has been a major point of contention between the two chambers.

The final compromise contains elements of both approaches. Governors in future emergencies would be able to renew any emergency order. But should any state of emergency last as long as 90 days, the governor would need to explain the continued need directly to the Legislature, which would then vote in each chamber whether to terminate the state of emergency. Should majorities of both the House and Senate approve, the state of emergency would end immediately. Much like a veto override, both chambers would need to agree to rescind the governor’s directive, though by a simple majority vote of each.

This compromise would ensure that the Legislature would have the chance to affirm or deny a governor’s emergency declarations with an up for down vote. It gives legislators a considerable amount of power while maintaining a governor’s ability to act swiftly to respond to an emergency.

In sum, this budget represents the largest bundle of conservative policy achievements passed in a single bill in living memory.

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