The 2022-23 state budget approved by the Senate Finance Committee makes some significant changes from the House version. It lowers overall taxes and spending while preserving several of the House’s policy initiatives, moving some out of the budget, and adding a few new ones. The Senate’s overall two-year state spending package would spend $150 million less in General and Education Funds than the House version, reduce taxes slightly more, and rely on higher revenue projections.

With business tax revenues booming, this has allowed the Senate Ways and Means Committee to count on General and Education Trust Fund revenues of $2.89 billion for the current fiscal year, which runs through June 30. That is $160 million higher than House estimates and nearly $200 million more than Gov. Chris Sununu’s estimate from February. This higher baseline carries over into higher estimates for FY 2022 and 2023 revenues, even though the governor, House, and Senate project revenues to grow at similar modest rates over the next two years. In total, the higher revenues generated in March, April, and May of this year give the Senate more than half a billion in General and Education Trust Fund revenue that their House counterparts did not have earlier this spring. (The above graphic represents the different budget revenue projections.)

Despite several differences, House and Senate budget writers arrived at similar bottom-line spending numbers. The House version of House Bill 1 would spend $13.6 billion in total funds, with $3.46 billion of that in General and Education Trust Funds. The Senate Finance package would spend $13.5 billion total, $3.32 billion from the General and Education Trust Funds.

For more, read our policy brief (pdf): Budget Visions 2022-23- Senate

If the Senate Finance Committee’s proposed budget becomes law, New Hampshire will at last become the only Northeastern state with no personal income tax.

New Hampshire markets itself as having no sales or income tax. But that’s not precisely true. Though the state does not tax individual earned income, it does tax personal income derived from interest and dividends. That is a personal income tax. 

The budget proposed by the Senate Finance Committee would phase out the state’s interest and dividends tax over five years. (The House-passed budget and the governor’s proposed budget also would phase out the tax.)

That tax brought in $105.8 million in Fiscal Year 2018, $114.7 million in Fiscal Year 2019, and $125.7 million in Fiscal Year 2020.

That might sound like a lot of money, but for context state business taxes alone have brought in $174.5 million in additional, unplanned revenue so far this fiscal year. The state is more than $200 million in the black this year, and that’s despite a $65 million pandemic-related drop in rooms and meal tax revenue below what was budgeted. 

In eliminating the interest and dividends tax, New Hampshire would follow Tennessee, which eliminated its Hall tax (on interest and dividend income) on Dec. 31, 2020. That tax was phased out over several years, beginning in 2016.

Being situated in Northern New England, New Hampshire has numerous geographical disadvantages that make it challenging to recruit businesses, entrepreneurs, retirees, and young people. It can’t change its weather or 18-mile coastline. But it can change its economic climate.

With an eye on economic and population growth, many other states are pursuing aggressive growth strategies that involve lowering tax rates and regulatory burdens. New Hampshire’s astounding economic growth over the last several decades can largely be attributed to its singular focus on growth-based economic policies. But as Massachusetts and other states have copied states like New Hampshire, Texas, Florida, and Tennessee, it’s become more difficult for New Hampshire to stand out — and to recruit entrepreneurs, businesses, and employees. 

If it eliminated the interest and dividends tax, New Hampshire would join Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming to become the ninth state to levy no tax at all on personal income. 

New Hampshire not only would be the only Northeastern state with no income tax, it would be the only one North and East of Tennessee. On top of New Hampshire’s already relatively competitive economic policies, that would help keep the New Hampshire Advantage alive.

Becoming truly income-tax-free would improve New Hampshire’s competitive position, not just in New England, but internationally. It would help preserve the New Hampshire Advantage in an increasingly competitive era in which states are working non-stop to attract an increasingly mobile workforce and entrepreneurial base.

The 2022-23 state budget approved by the state House represents a relatively small difference from Governor Chris Sununu’s General and Education Trust Fund spending priorities, particularly compared to the large differences at this point two years ago.

The House-approved versions of HB 1 and HB 2 would spend just $52.2 million less than the governor’s plan, a difference of less than one percent of the state’s General and Education Fund spending. Much of the debate over these bills will likely center on House-approved policy proposals not directly related to the state budget.

Sununu’s budget proposal would have represented a 3.3% cut in General and Education Fund spending in FY22 compared to the amount appropriated for FY21. But the state didn’t spend the appropriated amount, saving nearly $100 million through the hiring freeze and other pandemic-prompted cost controls. Instead, Sununu’s February budget would essentially level-fund state government, with 0.13% increase in FY22 with moderate spending growth in FY23.

The House-approved budget would spend $50 million less in FY22 and grow slightly slower in FY23. That would be 4.1% decrease in FY22 from FY21 appropriations, but just a 0.7% cut from what will actually be spent in FY21.

Over the two-year budget, the governor’s proposal represents a 0.47% drop in total General and Education Fund spending, while the House budget would be a 1.43% decrease.

Our full budget brief is available here in pdf: Budget Visions 2022-23

The 2022-23 state budget passed in the state House of Representatives on Wednesday would reduce state general and education fund spending by 1.4% below actual 2020-21 state spending. The reduction from what legislators approved in the last session is even larger. 

There is always some discrepancy between legislative appropriations and actual spending, as governors make adjustments when managing state operations. In the 2020-21 budget cycle, Gov. Chris Sununu took emergency measures, including a hiring freeze, to save money after the pandemic caused a dip in revenues last spring. 

As a result, the state has spent less money in the current budget cycle than legislators allotted. The 2022-23 budget approved by the House Republican majority Wednesday spends 1.4% less than actual state spending in the current budget (which still has a few months to go).

But when compared to total appropriations as approved by the previous, Democratic-controlled Legislature, the reduction totals 2.3% of general and education fund spending.

The general and education funds are the portions of the state budget funded by state tax and fee revenues. They do not include federal funding.

On taxes, the budget:

  • Reduces the Business Enterprise Tax rate from 0.6% to 0.55% and increases the filing threshold to $250,000 for both of the tax’s two threshold levels, gross receipts and enterprise tax base. Current thresholds are $200,000 for gross receipts and $100,000 for enterprise tax base. The budget thereby reduces both the BET rate and the number of businesses that have to pay it;
  • Reduces the Business Profits Tax from 7.7% to 7.6%;
  • Phases out the Interest & Dividends Tax by 1% a year over five years;
  • Reduces the Meals & Rooms tax from 9% to 8.5%;
  • Changes the triggers for unemployment insurance tax rate adjustments. Current law triggers rate cuts of 1% if the Unemployment Insurance Trust Fund reaches $275 million and 1.5% if it reaches $300 million. Those triggers are raised to $350 million and $400 million, respectively.

Those are the top-line state spending and tax changes. Josiah Bartlett Center will have a more detailed breakdown of the budget next week. 

Coming out of 2020, New Hampshire is in better financial shape that many other states thanks to a sound revenue structure, relatively restrained spending, a strong economy, and good management, concludes a new report from the Josiah Bartlett Center for Public Policy and the Economic Research Center at The Buckeye Institute. 

“Restrained state spending, a stable tax base and a strong economy let New Hampshire weather the pandemic better than many other states did,” Josiah Bartlett Center President Andrew Cline said. “Going forward, it’s important that New Hampshire maintains this fundamentally sound position.”

While some other states had to take drastic measures to balance their budgets, New Hampshire appears likely to end the current budget cycle with a surplus while avoiding tax rate increases or large cuts to core programs.

The state’s projected budget deficit for the current fiscal year fell from $319 million in May of 2020 to just $29.8 million in February of 2021.

Because New Hampshire does not rely on relatively unstable sales and income taxes, it did not suffer the scale of revenue loss seen in many other states. For the pandemic-affected months, state revenue was down only $31 million, or 1.3%, from the prior year. 

The majority of that decline occurred during the economic shutdown last spring. Once restrictions were lifted and people felt safer going out, the economy began to recover. State revenues have come in ahead of budget projections every month since August of 2020. 

On the spending side, New Hampshire was already in a good financial position when the pandemic hit. The state entered the pandemic with a projected a budget surplus of $27.1 million for the end of the 2020 fiscal year, and $115 million in its rainy day fund. 

The governor’s imposition of cost savings measures in response to projected revenue losses, and his vetoes of tax and spending increases that would have weakened the state’s economy, helped the state’s recovery.   

As legislators get to work on the next state budget, New Hampshire is in an enviable position. A combination of spending restraint, a reliable tax base, and a strong economy limited the damage done to the state budget by the pandemic. 

The current projected budget deficit of $29.8 million is easily covered by savings wisely socked away in the state’s rainy day fund over the past few budget cycles. But that probably won’t be necessary. Revenue trends suggest that the gap is likely to be covered entirely by additional revenues.

New Hampshire’s experience during the pandemic showed the value of budgetary restraint and sound financial management. State officials should continue to find ways to cut government spending or make it more efficient so that New Hampshire can avoid debilitating tax increases and maintain its low-tax environment moving forward, the report concludes.

The report was written by Logan Kolas, an economic policy analyst with the Economic Research Center at The Buckeye Institute. The full report can be read here: New Hampshire’s Economic Recovery-Better Than Expected. 

Gov. Chris Sununu’s proposed 2022-23 state budget cuts state general and education trust fund spending for the first time in a decade.

Strangely, this generally was not the big story in media coverage of the budget.

But it is a big story — because reductions in state spending are extremely rare.

Comparing the governor’s proposal to the current two-year budget, the governor’s plan represents a decrease in budgeted state general and education spending (not total spending — more on that later). That would be the first reduction since the 2012-2013 budget. 

How much of a decrease depends on what baseline you use. 

The governor’s budget summary shows a general and education fund spending reduction of $40.4 million, or about 0.7%. 

That’s based on actual 2020 spending and authorized (budgeted) 2021 spending. (The 2021 fiscal year ends at the end of June, so we don’t have actual spending for the year yet.) 

What the state actually spends in a fiscal year is not the same as what the state budgeted for that fiscal year. Typically, the governor manages spending so that some money is left over at the end of the year. 

In response to the pandemic, Gov. Sununu got quite aggressive about saving money, as revenues were projected to crater throughout much of 2020. 

Comparing the governor’s budget to the 2020-21 budget, the governor’s general and education spending is lower by $108 million. 

Such a savings from one budget to the next is highly unusual. Only twice since World War II has a state budget been lower than the previous budget.

Actual spending is a different story. With 4.5 months left in the fiscal year, it’s possible that the governor’s budget will spend more in general and education funds in 2022-23 than the state spent in 2020-21. We’ll have to see how the rest of this fiscal year works out. 

If you haven’t had enough caveats, here’s another. 

The budget was released Thursday and we haven’t gone through it line by line. We are looking at bottom-line totals. Perhaps a closer inspection will find details that produce… more caveats.

But looking at the bottom lines for budgeted general and education fund spending, this proposal represents a savings to state taxpayers.  

This will be confusing if you’ve seen stories that report higher spending in the proposed budget. That’s because total spending includes federal money and therefore is much larger than general and education fund spending.

Basically, the general and education funds spend money raised in New Hampshire from Granite Staters. The total state budget includes billions of dollars in federal funds.

The governor’s budget increases total spending by $712 million, or $5.6%, to $13.36 billion. 

The last time total spending went down was also in the 2012-13 budget. In that budget, led by then-House Speaker Bill O’Brien, general fund spending decreased by $536 million, or 18%, and total spending decreased by $1.2 billion, or 11%.

There’s much more to cover in this budget, of course. The governor proposed some substantial reorganizations of several state bureaucracies (including all of higher education), tax cuts (including phasing out the interest and dividends tax), a large increase in health and human services funding, and much more. We’ll do deeper dives later.

For now, the big initial takeaway is the unusual reduction in state taxpayer-financed spending.

Cigarette smokers and flavored tobacco scavengers from Massachusetts produced a surge of New Hampshire tobacco tax revenue that almost single-handedly prevented a business tax increase, preliminary, unaudited state figures suggest.

State tobacco tax collections rose significantly in March, April and June, putting tobacco tax revenue $14.5 million (7.3%) higher than budgeted and $13.7 million (6.9%) higher than last year, according to the Department of Administrative Services’ June revenue report. 

Revenue from the federal tobacco settlement was $2.9 million above plan, for a total tobacco-related increase over budget projections of $17.4 million. Preliminary, cash figures suggest that the state missed triggering an automatic business tax hike by $15.35 million. 

In the last state budget, lawmakers included a provision that would trigger automatic business tax hikes if state general and education fund revenue fell at least 6% below projections. Based on June’s cash figures, revenues appear to have fallen 5.4% below projections. These are preliminary figures, however, and are subject to revision when adjustments are made based on the state’s later, more thorough accounting of the year’s revenues.

If these figures hold, business owners could reasonably thank smokers and Massachusetts lawmakers for helping to prevent those automatic tax hikes. Tobacco tax revenue was 34.6% above budget in June, 34.9% above budget in April, and 10% above budget in March.

Department of Revenue Administration staff say those increases are most likely caused by smokers stocking up for the first lockdown and in anticipation of a second lockdown, combined with Massachusetts residents crossing the border to buy flavored tobacco. 

Massachusetts banned the sale of flavored tobacco products, including flavored snuff and chewing tobacco, effective June 1. In addition to a cigarette sales surge, state tobacco tax data show a large increase in smokeless tobacco sales, particularly snuff, in June. 

Sales of what the state classifies as “other tobacco products,” meaning everything excluding cigarettes and premium cigars, have spiked in recent months, surpassing 7% of all tobacco sales in June. 

A sizable portion of that is likely related to the Massachusetts ban on flavored tobacco products. In addition to flavored smokeless tobacco, the ban also includes menthol and other flavored cigarettes as well as flavored vaping products. 

New Hampshire budget writers expected to supplement state revenues this year by applying the tobacco tax to electronic cigarettes. Last year, legislators expanded the tobacco tax to cover e-cigarettes, even though there is no tobacco in e-cigarettes. 

The tax went into effect on January 1, but it has produced less revenue than expected. By the end of the state’s 2020 fiscal year on June 30, taxes on e-cigarettes had generated just $1.2 million. 

Legislators budgeted $5.7 million in revenue from e-cigarette sales for Fiscal Year 2021, which began on July 1. Based on the first six months of collections this year (covering the final half of Fiscal Year 2020), that projection seems unrealistic. Collections so far suggest that the state could expect to bring in less than half what it projected to take from e-cigarette sales in FY 2021.  

In a surprise motion, the Legislature’s Fiscal Committee voted 7-3 along party lines Monday to move $26 million in federal Coronavirus Relief Fund money to the state budget to pay for ongoing programs. But federal law does not allow such a transfer, leaving members confused about what the vote accomplished and whether it was legal. 

The Coronavirus Relief Fund included in the Cares Act provides $150 billion to states to help fight the virus. New Hampshire has so far received $625 million from the fund. That money is restricted for use in fighting the coronavirus. 

The IRS has issued clear guidance on how the funds are to be spent. It states:

“The CARES Act requires that the payments from the Coronavirus Relief Fund only be used to cover expenses that—

  1. are necessary expenditures incurred due to the public health emergency with respect to the Coronavirus Disease 2019 (COVID–19);
  2. were not accounted for in the budget most recently approved as of March 27, 2020 (the date of enactment of the CARES Act) for the State or government; and
  3. were incurred during the period that begins on March 1, 2020, and ends on December 30, 2020.”

Those three conditions make clear that the federal money may not be used to fund programs that were part of any state budget approved before March 27, 2020.  

Legislative Budget Assistant Mike Kane read that guidance to the Fiscal Committee during its Monday meeting, which took place over the phone. 

Nonetheless, the 7-member Democratic majority voted to move $26,050,000 in federal Coronavirus Relief Fund money to eight existing budget line items. 

In an attempt to navigate around the obvious legal obstacle, the committee’s motion contained the clause “to the extent U.S. Treasury guidance permits.” 

That clause prevents the money from being transferred unless Treasury issues new guidance authorizing budget backfilling.

After Republican members questioned the committee’s legal authority to move the funds, Kane said that under existing federal guidance “there’s not much that the committee can do at this point.”

“I would recommend that legal counsel should be sought,” he added.

He further suggested that any such transfer of federal CARES Act funds might have to be advisory only. 

Sen. Cindy Rosenwald, the motion’s sponsor, said she believed the clause requiring updated Treasury guidance made the motion advisory. 

But because the motion commits the committee to transferring the funds pending federal authorization, it is not clear that the motion is really advisory in nature. If Washington eventually allows the transfer, the vote on Monday presumably would make it automatic.

Sen. Lou D’Allesandro, D-Manchester, acknowledged that the committee didn’t know whether Washington would allow the transfer to happen.

“We now have the money, and if indeed it meets the requirements set forth by the federal government, we can again restore to the public items that we thought they needed at the time so that there’s no disruption in service,” he said.

“If that proves inaccurate, then we have to make a change,” he later added.

Though the move was legally dubious, from a public policy standpoint filling budget holes with relief money has merit.

States are incurring massive revenue losses as a result of the economic contraction caused by business closures and stay-home orders. Gov. Chris Sununu estimated that New Hampshire’s budget could face $500 million in cuts in the next fiscal year, on top of a few hundred million by June of this year.

The Josiah Bartlett Center for Public Policy last week joined other free-market state think tanks in urging Congress to remove those restrictions so states can backfill their budgets in just the way the Fiscal Committee voted to do on Monday.  (CARES Act Coalition Letter[1][1])

But until Washington acts, states cannot use Coronavirus Relief Fund money to fund programs that existed before March 27 of this year. 

Further clouding the issue, Sen. Rosenwald’s motion to move the $26 million was not on the Fiscal Committee’s agenda for Monday’s meeting. It surprised Republican members of the committee, who protested that the vote should be postponed until the public had a chance to weigh in and members had a chance to read the motion. 

No paper copy had been provided to committee members. The text was read aloud during the meeting. 

“We do not have a copy of that motion,” Rep. Lynne Ober, R-Hudson, protested. “I just think that it’s totally inappropriate to be voting on today.”

Rep. Erin Hennessey, R-Littleton, moved to table motion until the public had a chance to see it and guidance from Treasury allowed it. Her motion failed on a 7-3 party-line vote.

On public policy, New Hampshire should always beat Vermont, as a matter of principle. That goes double for the handling of money. The state that sends a self-proclaimed “socialist” to the U.S. Senate should never get to say it’s more responsible with a dollar.

New Hampshire has bragging rights here. The Granite State is 12th in the Mercatus Center’s ranking of states by fiscal condition. Maine is 34th, Vermont 39th, Massachusetts 47th. 

And yet there’s one area where New Hampshire and Vermont are uncomfortably close: the Pew Center’s national ranking of the best-funded state retirement systems. Both states are down in the 30s, with less than 70 percent of their pension liabilities funded. 

So Vermont officials might have watched approvingly on Wednesday when the House advanced a bill that would worsen the financial position of the New Hampshire Retirement System. 

Instead of edging the State Employee Retirement System closer to the point at which it might some day have enough money to pay what the state owes its retirees, House Bill 1205 would edge us slightly in the opposite direction.

The state’s retirement system ended the 2019 fiscal year 64.8% funded. The system hasn’t been above 70% funded since 2004. Vermont has two state retirement systems, one for state employees, which is just over 70% funded, and a separate system for teachers, which is funded at about 54%. Pew’s latest ranking (using 2017 data), puts Vermont at 64.3% funded.

By contrast, Maine is a Northern New England lighthouse beacon of frugality, with 82% of its obligations funded. 

HB 1205 would nudge New Hampshire downward by eliminating an existing 10% reduction in retiree benefits that kicks in for Group 1 employees (general government employees and teachers) at age 65. The bill would cost the retirement system $37 million, according to its fiscal note. It would cause a slight (less than half a percentage point) increase in government contributions to the system (that is, taxpayer contributions).

When the mandatory cut was passed into law in 1988, 65 was the Social Security retirement age. The age has since inched up to between 66 and 67 years for retirees born in 1938 or later, but state law has kept the pension reduction pegged to age 65.

As a technical update, one can see the logic behind HB 1205. But that logic doesn’t generate its own money. The bill includes no funding to pay for its increased cost.

It’s a $37 million “giveaway,” Rep. Carol McGuire said when speaking against the bill. 

McGuire wasn’t able to convince her colleagues to vote against the bill. But she did succeed in tabling a bigger one, HB 1341. That bill contains a lot of changes, the largest being that it would raise the contribution rate for a large chunk of Group II employees by changing the formula for calculating their pensions. Municipalities would be hit with a large, mandatory increase in their retirement contributions. 

The bill as originally drafted would have added $142 million in unfunded liabilities to the State Retirement System. An amended version on the House floor on Wednesday had no fiscal note, but legislators say it would cost less than the original. 

Supporters tried and failed to remove the bill from the table on Wednesday, so it remains in limbo for now.

Though New Hampshire’s general frugality has kept the state from issuing the sorts of lavish unfunded promises to state employees that have made jokes of the retirement systems in Connecticut, Illinois and New Jersey, most state pension funds are more fully funded than ours. 

Recent returns indicate that loading the system with more unfunded promises would be particularly risky this year. The retirement system’s rate of return on investment was only 5.7% last year, below the assumed 7.25% and well below the previous year’s 8.9%. That translates into a $229 million (32%) drop in investment income from 2018 to 2019.

The retirement system has a plan to move toward full funding over the next two decades, but it relies on hitting investment revenue targets. Consistently lower market returns, like last year’s, and adding large unfunded liabilities would throw off the plan.

Through a combination of one-time expenditures and increases in baseline formulas, the new state budget produces significant increases in education funding over the next two years. It is no wonder that state officials hailed the compromise as a windfall for public schools.

The budget was built upon an education funding compromise that dramatically reduced the budget’s structural deficit by shifting more than $60 million in recurring education spending to one-time spending.

But the other part of that compromise built into the budget several increases in baseline education spending that will require additional revenues in the future.

As part of the deal, increases in fiscal capacity disparity aid and free-and-reduced-price meal aid expire at the end of the 2021 fiscal year rather than continue indefinitely. Those bumps in aid are financed with $62.5 million in one-time money from the state’s budget surplus.

But other education aid increases are built into the baseline budget.

The budget changes the formula for kindergarten aid to count all kindergarteners as full-day rather than half-day students. That change will cost about $9.5 million a year above what Keno revenues had previously covered, according to the Office of Legislative Budget Assistant.

The budget also eliminates the formula by which stabilization grants were being gradually reduced. Stabilization grants are supplemental funds school districts receive as compensation for student enrollment declines. That is, schools get state funds to “stabilize” their budgets as they lose students (and the state adequacy aid that comes with those students).

The stabilization grants had been scheduled to decline by four percent of the 2012 grant level each fiscal year. The compromise budget restores them to 100 percent, permanently.

That change in state law increases 2020-2021 education spending by $56 million and adds about $6.2 million a year to the state budget going forward, according to the Office of Legislative Budget Assistant.

Finally, the budget increases the base per-pupil adequacy grant from $3,363 to $3,708. This increase was already scheduled under previous law, so it is not a new change. But it does drive state education spending higher.

Figures from the Office of Legislative Budget Assistant show that, including one-time and recurring expenditures, the budget spends $196 million more on education from FY19 through FY21, a 19.9% increase in appropriations over the 2019 budget.

Of that, $41 million is added for FY 2019, and $155 million for fiscal years 2020-21.

The line-item increase in total budgeted state education spending from FY19 to FY21 weighs in at 9.6%.

Adequate education aid accounts for the largest portion of the added spending. It rises by $111.9 million over the FY 2019 numbers approved in the previous budget.

Those are substantial spending increases, celebrated by both the Republican governor and Democratic Legislature. Yet we can’t help but suspect that political attack ads next year will frame things somewhat differently.