Norm Major’s eternal advice: budget cautiously

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The House, Senate and governor are divided over the very foundation of the state budget. (No, not liquor outlet ghost drops.) Revenue estimates. 

Including adjustments for the remainder of Fiscal Year 2025, the gap between the governor’s and House’s revenue estimates exceeds $800 million (with all revenue adjustments, including the House’s removal of lottery revenue from the Education Trust Fund). Both sides insist their estimates are accurate. 

In the middle of this, former House Ways & Means Chairman Norm Major quietly passed away at age 91, on Tax Day of all days. Had he been back in his old saddle, he would’ve offered wise counsel, although his guidance and example are evident in the House’s lean budget.

Norm Major, the Josiah Bartlett Center’s 2023 Libertas Award winner, was the quiet hero of New Hampshire public policy during his years on and then heading the Ways & Means Committee. Budget after budget, Norm carefully analyzed loads of economic data to figure out how much revenue the state could expect to collect in the future. Woe be to those who tried to cajole him into raising his estimates so they could raise spending.

Norm held the line on state spending like Col. Joshua Chamberlain on Little Round Top. Wave after wave of spending requests would charge up the lightly manned hill, only to be repelled. Legislative leaders, lobbyists, activists, governors… none could break through. 

Norm was a supremely kind man. He didn’t tell people “no” out of meanness. Norm just lived in the real world, and he insisted that the state budget live there too. 

He called unrealistic revenue estimates “wishful thinking.”

In a 2016 Union Leader column, he retold the story of 2007, when legislators made the mistake of overestimating revenues for the express purpose of inflating spending.

“In 2007, we witnessed what happens when legislators disregard data, and choose revenue estimates that fit their spending needs, rather than choose spending limits to fit their expected revenue. 

“While the Ways and Means Committee worked diligently to develop appropriate estimates, a Democrat leader on the Finance committee asked us to “look to the sky” to identify a way to raise those estimates so they could spend more. The House majority at the time bowed to the partisan political pressure and adopted over-ambitious revenue estimates that led the state down a path of overspending. Then-Gov. Lynch was forced to call the Legislature back to Concord for a special session where millions of dollars in appropriations had to be cut or reallocated. When Republicans regained the majority in 2011, they were left with an $800 million structural deficit, which required a massive budget overhaul.”

Balancing the next state budget was disruptive because lawmakers had to fill holes created by irresponsible budget gimmicks. Our then-President Charlie Arlinghaus summarized in 2010 how the budget written with inflated revenue estimates had to be patched when the fantasy revenue didn’t arrive:

“Although the total budget increased over the last four years by $2 billion, the increase in general and education funds was about $700 million while state tax revenues declined slightly. That revenue decline put a lot of pressure on the state budget. Ordinarily, without the money to pay for it, spending would need to have remained flat as well.

“To keep increasing spending as if they had the money, legislators and the governor were forced to turn to three temporary sources for $597 million of one-time revenue. The largest chunk of temporary scaffolding came from the federal stimulus. Some stimulus money is meant for dedicated projects like paving. However, the current budget for FY10 and FY11 includes $351 million in state bailout funds to be used for whatever we wish. It goes away next year.

“The budget also includes $90 million in one-time state revenues like the sale of state assets. Obviously you can’t sell things twice so that revenue also goes away next year.

“Finally, the most dangerous thing we did was to borrow $156 million to plug what would have been a deficit including borrowing more money to pay the interest on money we borrowed in the past. As an added bonus, under state accounting, if you pay for a program with borrowed money it doesn’t count as spending so you can claim it as a spending cut.”

Norm, who served 26 years in the House, considered it his solemn duty to avoid putting the state in that situation. His loyalty was to the taxpayers, state employees and citizens who relied on him to lay a stable, reliable foundation for the budget so it wouldn’t collapse in two years, causing chaos and disruption. 

The next two months could give budget writers good reason to raise revenue estimates. That would be welcome, in no small part because that would indicate greater economic strength than current events seem to suggest. We’ll see.

The primary cause of large, disruptive budget cuts is the mismatch between revenues and spending, and the primary cause of that mismatch is “wishful thinking” about state revenues. To avoid the next budget ending in more chaos and disruption, budget negotiators should let themselves be guided by a simple acronym: WWND What Would Norm Do?

One thing Norm would do is advise, as always, that caution is prudent because caution today averts catastrophe tomorrow. 

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House Finance budget rolls back post-COVID growth in state spending

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Note: This analysis based on the Legislative Budget Assistant’s Surplus Statement published on April 3. Any adjustments made after that date will not be accounted for in this policy brief. 

A decade’s worth of state revenue growth, primarily from rising business tax collections, has fueled significant state spending increases since 2015, with a particularly large jump coming in the 2024-25 budget. When writing that budget, lawmakers included more than $850 million in new revenues. That pushed state budget growth well above the rate of inflation and necessitated spending reductions in the following budget cycle, should revenues level off.

And revenues have leveled off. Though revenues are only $6.6 million below budget through March of this year, House budget writers expect them to be lower in FY 2027 than in FY 2025. High levels of current economic disruption suggest that such cautious estimates are warranted.

With that in mind, House budget writers have sought to balance the 2026-27 state budget by clawing back state spending increases of the last few years. The budget presented last Thursday by the House Finance Committee does that and more. 

The House Finance Committee budget lowers state General and Education Trust Fund spending to almost the same level as the 2020-21 budget, erasing most of the post-pandemic state spending spree. 

The proposed budget appropriates $5.62 billion in General and Education Trust Fund spending. (That’s the portion of the budget funded by state taxes and some additional state revenues.) It then dedicates $546.85 million from lottery revenues to state adequate education spending. (More about this below.)

The $5.62 billion is not just lower than the current state General and Education Trust Fund budget. It’s also lower than the previous one and nearly as low as the one before that.

The 2020-21 budget spent $5.57 billion from the General and Education Trust Funds, according to state annual financial reports. The House Finance Committee’s $5.62 billion in General and Education Trust Fund appropriations is just 0.9% more than that.

The House Finance Committee adds in $546.85 million in lottery revenue, earmarked for adequate education grants. That lifts the total state spend from $5.62 billion to $6.2 billion. On paper, that is the same as the original appropriation for the 2024-25 budget. But actual spending has been higher. Based on actual expenditures, the House Finance Committee  proposal spends less in General and Education Trust Funds than either the 2022-23 or 2024-25 budgets, effectively wiping out post-Covid state spending increases. 

Download this policy brief here: House Budget Brief April 2025.

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Five ways defined contribution retirement plans would benefit N.H.

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In 2025, the public appetite for cutting unnecessary government expenses, improving efficiency and reducing taxpayer liabilities is enormous. Inflation put tremendous stress on household finances as COVID-era regulatory and spending decisions tanked Americans’ trust in government management. In New Hampshire, policymakers are looking for new ways to deliver core services at lower costs. 

One reform that would lower taxpayer liabilities while improving services is switching from a traditional defined benefit (DB) pension to a defined contribution (DC) retirement plan for new state employees. This would be a responsible way to create long-term savings without cutting state services. DB plans obligate taxpayers to finance specific payouts to public employee retirees even if the state failed to fully fund those payouts. DC retirement plans, which most private-sector employees (thus, most taxpayers) have, can provide retirement benefits at lower costs and lower risk.

This policy brief offers five reasons to consider creating a DC retirement plan for new state employees.

1. A DC plan avoids future unfunded pension liabilities

The New Hampshire Retirement System is a defined benefit pension plan in which employees are promised specific payouts after retirement. The state must pay these obligations even if it failed to fully fund them or the plan’s investments didn’t generate enough revenue to meet them. Currently the retirement system’s unfunded liabilities are about $5.6 billion. The design of this system creates future unfunded obligations that must be paid (if the state keeps its word). In other words, debt. That debt obligation falls on taxpayers. This chart from the Reason Foundation’s Annual Pension Solvency and Performance Report shows the steady gap between New Hampshire’s pension assets and liabilities.  

Instead of obligating taxpayers to finance a fixed annual payment decades in the future, DC plans create investment accounts into which the state deposits fixed amounts. The taxpayer is obligated to make an investment up front, rather than a determined payment at the end. Because the taxpayer obligation comes from the initial investment, DC plans don’t have unfunded liabilities. 

2. Pension liabilities crowd out other needs

Government pension benefits are typically treated lavishly in contract negotiations, but not fully funded later. That creates debt obligations that crowd out other services as governments divert funds to pension obligations. A 2024 University of Texas study of the effects of pension liabilities on California cities found that to free up money for pensions, cities “primarily reduce non-current expenses, specifically capital investment.” They also “cut payrolls and employment, with police employment declines specifically. Further, there are accompanying increases in crime rates. These estimates imply that pension pressure impairs local public service provision, with contributions displacing other spending.” During testimony this year on a bill to allow open enrollment in K-12 public schools, the president of the N.H. chapter of American Federation of Teachers underscored the point made in the study above. She opposed the bill, she said, because districts had to maintain enrollment to fund pension obligations. A pension system that discourages innovation is one that serves neither taxpayers nor citizens well.

3. DC plans offer portability & earlier vesting

The old-fashioned public-employee pension plan is not designed for today’s mobile workforce. It’s not even designed well for older workers. A U.S. Bureau of Labor Statistics study of Americans born between  1957-1964 found that they averaged 12.7 jobs over their careers. Members of Gen. Z are expected to have an average of 18 jobs over their careers. A BLS study last year found that wage and salary workers spent a median of 3.9 years with their current employer. Few employees, public or private, stay in one job for even a decade, much less their entire careers. 

It takes 10 years for state employee pensions to vest, but most state employees don’t last that long. A 2024 Reason Foundation study of public pension plans in 12 states found that 62% of public workers leave before their pensions vest. Many people believe it’s compassionate to offer public employees a generous DB pension. But a pension system designed so that the large majority of public employees will never vest in it is not a good deal for most public employees. DC plans vest much earlier, usually within a few years, and could vest immediately. DC plans also are heritable if an employee dies, unlike DB plans. 

4. Pensions are more costly and less safe than assumed

Defenders of DB pensions claim that traditional pensions are safer than DC plans. State Employee Association President Rich Gulla testified in January that New Hampshire shouldn’t adopt a DC plan for state employees because such a plan would be invested in stocks, which risk losses. Asked if the New Hampshire Retirement System invested in the stock market, he said he didn’t know. It does. In the 2024 fiscal year, 51.3% of NHRS funds were invested in equities.

How did those investments do? According to the system’s annual report, the 8.8% return on total investments “underperformed the total fund custom index (a blended composition of major market indices in proportion to the NHRS’ asset allocation), which returned 11.9%.” The equities portion of the NHRS portfolio underperformed the market in FY 2024 as well. “Domestic Equity generated a return of 19.0%, underperforming the Russell 3000 Index return of 23.1% by 420 basis points. The non-U.S. equity portfolio returned 11.3% during fiscal year 2024, underperforming the MSCI All Country World (ex U.S.) index return of 11.6% by 30 basis points,” the annual report stated.

Trading lower returns for a guaranteed payout isn’t necessarily a great deal, especially for younger employees. The NHRS was just 68.6% funded in FY 2024. A January study by the Equable Institute had our funded ratio slightly higher, yet still ranking just 41st in the country. Contrary to the messaging of public employee union leaders, state pensions are far from secure, and New Hampshire’s is one of the least well-funded in the country. A Pew Charitable Trusts analysis concluded that New Hampshire had to dedicate 9.4% of the state’s own-source revenue ($512 million) annually to cover pension obligations. 

And that’s if our liability estimates are correct. A 2024 Stanford University study of public pensions concluded that they were in far worse financial shape than official data suggest because “future pension obligations are being grossly undervalued.” 

The problem is structural, the study concluded, and the lead author recommended that “states and cities could move to defined contribution plans similar to those offered by private employers. Employer contributions could still be quite generous, but the plans would be much less expensive to run because they would not guarantee a preset lifetime benefit.”

5. DC plans can lower costs and achieve solvency

The average N.H. state employee pay is $65,360, which is just $750 less than the average for the state as a whole ($66,110). It’s hard, then, to justify making taxpayers shoulder the burden of financing expensive guaranteed pensions they don’t enjoy themselves. With a DC plan for new state employees, this discrepancy would end, and the plan would be easier to fully fund.

In 2010, the Oklahoma Public Employees Retirement System was in a similar position to New Hampshire’s. Oklahoma’s system was only 66% funded. Legislators made two critical reforms that changed the trajectory of the system, the Reason Foundation reported. They ended future cost-of-living adjustment (COLA) benefit increases that weren’t fully funded in advance. And in 2015 they shifted new employees to a DC plan. (In addition, they kept the state contribution to both plans at 16.5%.)

The Reason Foundation’s Pension Integrity Project charted the effects of these changes to Oklahoma’s system (shared below). 

Conclusion

New Hampshire’s state pension system is a relic of a bygone era. As Oklahoma took its system from 66% funded to fully funded by making critical reforms that featured creating a DC plan for new hires, New Hampshire’s has limped along with no substantial improvement in its funded ratio. Taxpayers remain on the hook for $5.6 million in unfunded liabilities while state employees have to put in a decade of service to vest in a plan that doesn’t generate great returns. 

Creating a DC plan for new state employee hires is a financially sound way to lower state costs, stop crowding out other government programs, reduce taxpayer obligations and create a fully funded, portable retirement plan that doesn’t take a decade to vest. 

Download this policy brief here: JBC Brief DC Retirement Plans March 25

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The Medicaid alarm is ringing

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Two years ago this week, we warned legislators that a day of reckoning was coming for Medicaid. 

“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,” we wrote.

With Congress looking to make $2 trillion in spending reductions, that day is suddenly closer, if it has not yet arrived.

U.S. House Republicans want to trim $880 billion from funding overseen by the Energy and Commerce Committee, which controls Medicaid and Medicare spending, among other appropriations. Medicaid is the most likely source of most of these savings. As The New York Times put it on Tuesday: “What can House Republicans cut instead of Medicaid? Not much.”

Even if immediate reductions in the rate of growth of Medicaid spending survive the current budget negotiations, changes have to come. The Congressional Budget Office (CBO) projected last year that federal spending on Medicaid and the Children’s Health Insurance Program (CHIP) would increase from $571 billion in 2023 to $858 billion in 2034 despite falling Medicaid enrollments. 

The federal deficit in Fiscal Year 2024 was $1.8 trillion. The federal debt surpasses $36 trillion. Washington’s deficit spending is driven primarily by entitlement programs. Last fiscal year, Washington spent more on interest payments than defense. Congress, at last, is starting to pay attention.

The CBO recommended in December that Congress cap Medicaid spending and reduce federal matching rates as a way of reducing federal deficit spending. House Speaker Mike Johnson this week rejected those options for the current stopgap spending bill, but they remain on the table going forward.

Looming federal reductions, even in just the rate of growth of the program, are not the only reason for legislators seek savings in Medicaid. 

Medicaid now consumes 29.6% of New Hampshire spending, according to the National Association of State Budget Officers. That’s 10 percentage points higher than K-12 education spending (19.6%).

Despite having the lowest poverty rate in the nation, New Hampshire devotes a higher share of its state spending to Medicaid than all other New England states except Maine. To the extent that Medicaid funds health insurance coverage for able-bodied adults who could purchase insurance on the private market or obtain it from an employer, these are wasted dollars that could fund other state priorities or be returned to taxpayers.

Activists and some legislators have expressed alarm that Gov. Kelly Ayotte has proposed a premium payment for some Medicaid recipients. Given the size of the Medicaid spending problem, Ayotte’s proposal is extremely modest and should meet with zero opposition. Maine, Massachusetts, Connecticut and New York charge premiums to some Medicaid recipients. New Hampshire should have been doing this all along. 

Though a premium is a good start, it can’t be the end of the conversation. A more serious reconsideration of Medicaid spending should follow. Long-time assumptions about the federal government’s ability to continue borrowing to pay for this program are no longer operable, and the state’s own contribution is straining other budget priorities. 

It is not financially sustainable for Medicaid to continue consuming more and more of the state budget. If lawmakers are not reconsidering current levels of Medicaid eligibility and spending, particularly for the population that received expanded Medicaid coverage after the Affordable Care Act, they are setting the state up for a nasty fiscal surprise in the not-too-distant future.

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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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