Making exceptions to general rules can seem harmless or even essential in the moment. When exceptions are made to achieve a short-term goal, the argument is that this one little violation of our collective standards or norms will quickly fade into history and everything will soon return to normal. 

Life doesn’t always work that way. The first exception becomes a precedent, the basis for further exceptions, and before you can say “Jesse Ventura” it can become a norm. Casual Friday spread throughout the United States in the 1990s as an experimental employee perk. U.S. necktie sales peaked in 1995, and 21 years later the New York Post declared the necktie dead. It’s now impossible to tell a tech CEO from a high school slacker unless they’re both standing beside their cars. 

Setting precedents matters. As a major directional shift in state tax policy, Senate Bill 564 sets a bad precedent for New Hampshire. 

The bill exempts regenerative manufacturing businesses (those that manufacture organic human body parts) from state business taxation. That not being considered enough aid, it also creates a state “regenerative manufacturing workforce development program.” 

The development program involves the state business finance authority taking over the student debt of regenerative manufacturing industry employees. 

As President Obama would say were he a writer for this newsletter, let’s be clear. The target of the bill is Dean Kamen’s Advanced Regenerative Manufacturing Institute. We admire Kamen, and the ARMI project is an exciting, potentially pivotal development for Manchester’s Millyard. This biotech business could — could — be the celebrity anchor tenant Manchester officials have long sought: a magnet tech firm that finally turns Manchester into a center of tech innovation. 

But no one can predict the future. Earlier this century, Kamen’s Segway was supposed to have been a transformative tech business, while Southern New Hampshire University was all but ignored as a small college in Hooksett. Today, SNHU is transforming the Millyard while Segway has moved to a small campus in Bedford. 

In seeking to help this one company, SB 564 creates, for the first time, an economic development incentive for a specific type of business. New Hampshire has for decades firmly and wisely rejected this wasteful and costly tax policy that has wasted so much taxpayer money in other states. 

Until now, New Hampshire has always been able to reject corporate requests for special tax breaks by noting that we just don’t do that in this state. Instead, we encourage economic development by keeping tax rates low for everyone. 

This approach limits rent-seeking and keeps politicians from being able to distribute favors via the tax code to friends or politically favored industries. Allowing no exceptions to the rules is the only way to ensure equal opportunity for all, from the obscure and unconnected to the rich and famous. 

SB 564 breaks with that tradition and grants favored status to a specific type of business. It seeks to justify this by predicting regenerative manufacturing’s benefits to New Hampshire.

“Regenerative manufacturing, the creation of new tissue for medical purposes, is an example of an emerging technology that will change current medical practice, advance the health of the citizens of New Hampshire and the United States, and create a new industry,” the bill states.

Any emerging medical technology could be described the same way. 

The bill asserts that subsidizing this industry will lead to numerous benefits, including “providing new, high paying jobs…attracting highly skilled professionals… fostering the development of a new industry… contributing to the sciences… increasing tax revenues….”

Almost any emerging industry would bring similar benefits.

SB 564 not only grants favors that others will cite when seeking special treatment in the future, but it attempts to justify those favors with language that other industries can easily copy and paste into their own lobbying efforts.  

With this bill, New Hampshire has waded blindly into the economic development incentive swamp. The economic research is quite clear that incentives are harmful at worst, useless at best. They don’t improve state economies. They do create two groups of businesses — insiders and outsiders. Insiders get state aid while outsiders are disadvantaged by having to subsidize their competitors. 

This is not the New Hampshire way. By getting New Hampshire into the incentive game, the precedent set by SB 564 threatens to undermine the foundation of the New Hampshire Advantage.

Why a constitutional amendment is needed to restore taxpayer standing
to challenge illegal spending

By Andrew Cline

On Sept. 1, 2015, Manchester’s Board of Mayor and Aldermen approved a contract with the city’s teachers union that included a pay raise. Three aldermen with immediate family members employed as city teachers voted for the contract, in direct violation of the city charter’s conflict of interest provision. (1)

Just five years earlier, taxpayers would have been able to challenge such an illegal vote at the state Supreme Court. For 147 years, New Hampshire taxpayers had the right to petition the court for opinions on the legality of alleged unlawful government expenditures.

As the court put it in Clapp v. Jaffrey (1953), “it is plain that every taxpayer of a town has a vital interest in and a right to the preservation of an orderly and lawful government regardless of whether his purse is immediately touched.” (2)

In Green v. Shaw (1974), nine members of the Portsmouth City Council had sought a judgement against the mayor and 291 municipal officials for numerous alleged violations of law that included the illegal expenditure of taxpayer funds. After making the initial complaint, six of the nine petitioners went off the council, so they brought the case to the court as taxpayers. (3)

“It is well settled in this State that plaintiffs, as taxpayers, have standing to seek redress for the unlawful acts of their public officials,” the court ruled in allowing the petition.

But in a 2010 case called Baer vs. New Hampshire Department of Education, the state Supreme Court summarily threw out a century and a half of established practice and its own legal precedents. It declared that ”taxpayer status, without an injury or an impairment of rights, is not sufficient to confer standing to bring a declaratory judgment action” under the state statute that had long authorized exactly what the court suddenly decided it no longer authorized. (4)

After Baer, legislators amended the statute to clarify that it allows taxpayer standing, but in 2014 the court ruled in Duncan v. State of New Hampshire, struck down that amendment, arguing that it violated Part II, Article 74 of the New Hampshire Constitution, which states that the court can issue advisory opinions to other branches of government. Though that provision doesn’t forbid the court from issuing those opinions to individuals, the court interpreted it as allowing opinions to be given only to the Legislature, governor and Executive Council. (5)

That interpretation, however, ignores the plain language of Part II, Article 4, which grants the Legislature the “full power and authority to erect and constitute judicatories and courts of record, or other courts, to beholden, in the name of the state, for the hearing, trying, and determining, all manner of crimes, offenses, pleas, processes, plaints, action, causes, matters and things whatsoever arising or happening within this state.…” (6)

The Legislature clearly has the “full power and authority” to “beholden” the courts for hearing “all manner of…things whatsoever….” That is not ambiguous. The Legislature can task the court with hearing any case, plea, action, etc.

Consistent with the Legislature’s constitutional authority, RSA 491:22 tasks the court with hearing taxpayer petitions for relief from illegal government acts. It states that “any taxpayer in the jurisdiction of the taxing district shall have standing to petition for relief under this section when it is alleged that the taxing district or any agency or authority thereof has engaged, or proposes to engage, in conduct that is unlawful or unauthorized, and in such a case the taxpayer shall not have to demonstrate that his or her personal rights were impaired or prejudiced.” (7)

RSA 491:22 is a remarkable statute. In it, legislators voluntarily checked their own power. They granted taxpayers a means of holding state and local government officials accountable should they break the law.

With the Baer and Duncan decisions, the New Hampshire Supreme Court eliminated a vital check on government power that had been used numerous times over the course of nearly1.5 centuries.

Just a few weeks ago, Hillsborough County Superior Court Judge Charles Temple cited the Duncan case in ruling that Nashua taxpayers didn’t have standing to challenge a city action that violated the tax cap. (8)

Legislators have proposed restoring the original understanding of taxpayer standing by passing a constitutional amendment, CACR 15. (9)

It would amend Part 1, Article 8 of the New Hampshire Constitution by adding the following language:

“The public also has a right to an orderly, lawful, and accountable government  Therefore, any individual taxpayer eligible to vote in the State shall have standing to petition the Superior Court to declare whether the State or political subdivision in which the taxpayer resides has spent, or has approved spending, public funds in violation of a law, ordinance, or constitutional provision.  In such a case, the taxpayer shall not have to demonstrate that his or her personal rights were impaired or prejudiced beyond his or her status as a taxpayer.  However, this right shall not apply when the challenged governmental action is the subject of a judicial or administrative decision from which there is a right of appeal by statute or otherwise by the parties to that proceeding.”

This clarifying language is not radical. It would restore the constitutional status quo that existed from 1863-2010 and gave taxpayers the ability to challenge illegal government expenditures.

Without a constitutional amendment to restore taxpayer standing, the public will have no recourse when the state or a local government spends money illegally. A vital check on government abuses of power will remain lost, and illegal spending will become more common as government officials learn that they can break the law with impunity.

Andrew Cline is president of the Josiah Bartlett Center for Public Policy.

 

Endnotes

  1. Manchester City Charter, Section 9:03 (e): “Conflict of interest.  No city official shall participate in the decision-making process of any matter in which the official or a member of the official’s immediate family has a direct personal or financial interest. Any official who believes such an interest exists shall disclose such interest and shall not participate in the matter further.”
  2. Clapp v. Jaffrey, N.H. Supreme Court, Oct. 9, 1952.
  3. Green v. Shaw, N.H. Supreme Court, April 30, 1974
  4. Baer v. New Hampshire Department of Education, Sept., 24, 2010.
  5. Duncan v. The State of New Hampshire, Aug. 24, 2014.
  6. How the Supreme Court got the Duncan case wrong and eliminated taxpayer suits — part 2,” New Hampshire Trial Bar News, Fall 2017.
  7. RSA 491:22
  8. Judge declares plaintiffs in Nashua spending cap suit have no standing,” New Hampshire Union Leader, Feb. 13, 2018.
  9. CACR 15, 2018 Session, New Hampshire General Court.

CONCORD — U.S. Sens. Jeanne Shaheen and Maggie Hassan should explain why they voted against ending the federal tax deduction for state and local taxes, which aids high-tax states at the expense of New Hampshire, Andrew Cline, interim president of the Josiah Bartlett Center for Public Policy, said.

“Through the state and local tax deduction, Granite Staters subsidize the high tax bills imposed by neighboring Vermont and Maine as well as other big-spending states,” Cline said.

“The deduction also reduces the incentive for business owners, investors, middle-class families, and others to move to a low-tax state. New Hampshire has benefitted from a steady influx of tax refugees from Massachusetts. Our booming economy has generated a 2.7 percent unemployment rate, which means we have a strong demand for more labor. Why would senators who represent New Hampshire want to continue a system in which Granite Staters essentially pay to make life more comfortable for our high-tax neighbors? Granite State taxpayers deserve an explanation.”

Sens. Shaheen and Hassan voted Thursday against an amendment to allow the federal government to reduce the state and local tax deduction. The vote is here.

The Josiah Bartlett Center for Public Policy, a 501 (c)(3) non-profit organization, is New Hampshire’s free-market think tank.

CONCORD — Under no circumstances should state officials offer special economic development incentives to try to land Amazon’s newly announced second headquarters (HQ2), Andrew Cline, interim president of the Josiah Bartlett Center for Public Policy, cautioned today. Granite Staters would fare better in the long run if the government focused instead on improving New Hampshire’s overall economic climate.

“Rather than join other states in a contest to see who can give the most taxpayer money to the world’s third-largest retailer, run by one of the three richest men on the planet, state officials should continue focusing on making New Hampshire a better place to live, work and do business for all,” Cline said.

“Amazon is an impressive company whose location here would be welcome,” Cline added. “Reaching out and talking up New Hampshire’s many charms is perfectly fine. But we should never cross the line between marketing the state and giving a big company special treatment that New Hampshire’s mom-and-pop businesses don’t get.”

Last Friday, the Democratic Party leadership in the state Legislature wrote to Gov. Chris Sununu to urge him to pursue Amazon’s second headquarters. “We know there is nothing either Connecticut or Utah can offer that we cannot,” they wrote.

In fact, both Utah and Connecticut offer financial incentives in the form of grants and state tax breaks that New Hampshire does not. Connecticut even offers business loans. Luring big businesses by giving them special tax breaks is not the New Hampshire way.

In its HQ2 request for proposals, Amazon expressed a strong desire for financial incentives that New Hampshire does not offer. “Incentives offered by the state/province and local communities to offset initial capital outlay and ongoing operational costs will be significant factors in the decision-making process,” the RFP states.

New Hampshire must never start playing the incentives game. Granite Staters will be better served if the state stays focused on policies that help all businesses — small, medium and large — instead of giving special treatment to the biggest companies.

-30-

March 9 , 2016

Broadband Boondoggle is Risky Proposition

Charles M. Arlinghaus

 

Changing state law to allow towns to borrow money to run their own internet companies is not about bringing service to the remarkably small number of consumers without access to broadband. It is a mistake that would expose property taxpayers to the same financial problems that plague government-owned networks across the country.

 

Today, in New Hampshire, there is a small list of purposes for which towns are allowed to borrow money. This government-limiting statute makes clear that long term debt is to be used sparingly and for core functions like government buildings and snowplows.

 

There is no legitimate government purpose in borrowing millions of dollars to be paid by taxpayers simply to compete with existing companies. However in the very few spots that don’t have access, town government is currently authorized to build infrastructure if they choose.

 

A proposed law would change that limited purpose. It would allow municipalities to build broadband for any purpose — not limiting it to those without access. The only possible excuse for the change is to allow government officials to use your money to build their own government-run company to compete with current providers.

 

Today, 93% of the state has access to broadband even under the new higher speed definition of broadband. Further, more than 98% of the state has access to mobile broadband. The number of those without service will decline as the federal Connect America Fund spends $25 million in New Hampshire to increase access.

 

For the last decade local government officials across the country have racked up huge debts running mediocre systems with high overhead and few subscribers. Locally, we are very familiar with the taxpayer-nightmare in Burlington, Vermont. The government-knows-best plan was a disaster from the beginning and ended its run in virtual bankruptcy settling a $33 million debt to the banks for $10 million and leaving taxpayers holding an additional $17 million default bag.

 

The best-named silliness is Utah’s UTOPIA. This plan, appropriately named after a fantasy world, saddled taxpayers in 11 Utah towns with $350 million in debt. To bail out the failed network, towns wanted to assess users and non-users a $240 per year tax — they fail, you pay.

 

I doubt any local official would be quite so blind as the local officials in Vermont, Connecticut, North Carolina, Utah, Tennessee, Louisiana and dozens of other communities across the country. But opening up that possibility creates an incentive for the official to think about empire building with no risk except to the taxpayer.

 

When a private company risks its capital, the potential for success is weighed against the possibility of going bankrupt, losing everything without recourse to your and my property taxes. The largest broadband companies in America spend between $35 and $50 billion each year to improve, expand, and upgrade their infrastructure.

 

High tech networks are continually updated at a rate towns can’t hope to compete with. The capital resources and incentives of a private company with national reach are probably greater than one town in one state.

 

Remember that the proposed change would allow towns to borrow money to build competing networks. They already have the power to borrow to serve the 7% of the population that has no service.

 

The question policymakers face is simple: does it make sense to allow government to borrow money which you and I have to pay back with our property taxes simply so they can attempt to compete with a business that invests hundreds of millions of dollars in our state to build state of the art networks in a high tech industry?

 

If we truly want to increase service coverage from 93% to closer to 99%, there are simpler, low-risk things we can do instead of repeating the mistakes of so many debt-ridden communities across the country.

 

Leave in the language allowing towns to serve unserved areas. Work with providers to target the $25 million the federal government wants to send here to ensure it goes to help someone instead of being wasted like the ridiculous “fast roads” project.

 

If a municipality has a proposal that current language doesn’t quite allow then the state can look at it and easily pass enabling legislation if it makes sense. What doesn’t make sense is to allow towns carte blanche to build their own doomed-to-fail internet companies on the backs of property taxpayers.

 

 

 

 

 

Charlie Arlinghaus

August 26, 2015

As originally published in the New Hampshire Union Leader

The best discussion of our understanding of modern tax policy comes from the classic television show Seinfeld. Everyone’s favorite economist, Kramer, encourages Jerry to defraud a company because big companies don’t need to worry. “Jerry, all these big companies, they write off everything.” Jerry claims that Kramer doesn’t even know what that means. Kramer’s defense: “But they do and they’re the ones writing it off.”


These mystical write-offs emerge in political rhetoric as giant subsidies to big corporations, illusory money floating through the corporate air. In an election, politicians want to eliminate them all. The right accuses the left of passing out subsidies like candy. The left accuses the right of hypocrisy, especially toward the dreaded evil Big Oil.


Subsidies and write-offs, however, are not the same thing. The difference lies in the way taxation works. The primary method of business taxation is through a corporate income tax. Companies are taxed on their income or profits rather than gross revenue.


A company makes a product and sells it for $100, but the cost of materials, labor, the store to sell it in, etc. was $90. The company profit was $10 and they pay tax on the $10. But companies and their expenses are quite complicated, so there are rules and regulations deciding what the company can count as an expense and therefore “write-off” against their final cost.


Traditionally, we refer to something as a subsidy when the government actually makes a payment to a company to support a specific task. Government grants or loan guarantees subsidize the cost of doing business and usually specific businesses or tasks — something that can be thought of as the government picking winners and losers. They pay for some favored tasks or products but not for others.


The rise in more direct subsidies for renewable energy projects has created impetus on the right and left to talk imprecisely about subsidies. Renewable projects have been more likely to benefit from direct subsidies like loan guarantees, grants or above-market subsidized power purchase agreements.
Politicians of the right will announce they want to eliminate all subsidies, renewable as well as oil and gas. Politicians of the left claim the right opposes only renewables and won’t touch huge oil subsidies.
Activists are led to believe the government doles out billions of dollars to oil companies who certainly don’t need the help.

 

We should, without question, eliminate all the subsidies regardless of energy type in the tax code. Don’t eliminate some but not others, get rid of everything and use the savings to lower rates for everyone.


Some special credits and research allowances qualify as small subsidies and should be eliminated, but other proposals would simply treat expenses differently for some companies and not others. For example, to create the illusion of large oil and gas subsidies, opponents act as if treating them the same as other businesses is a distortion and suggest making an exception of them so the government can collect more money.


The “section 199 deduction” is available for domestic producers of products, music, roads, almost anything. Good or bad policy, it is not an oil subsidy. Already oil producers have had it reduced — just for them — to 2/3 of the rate of other companies. That’s the direct opposite of a subsidy. The President and others have proposed eliminating it entirely for oil and leaving it for all others. Eliminating it for all or keeping it for all are both defensible options. Punishing only one sector is punitive gamesmanship but par for the political course.


Most expenses are deducted from revenue immediately, like cost of materials, labor and rent. Some large capital expenses are depreciated — deducted in pieces over time like a mortgage. For minerals and other natural resources, depreciation takes the form of a depletion allowance — deducting a percentage of revenue as an expense. Again, any changes — like the sensible provision allowing all business expenses to be deducted immediately rather than over elongated periods — should be made for all business and no one sector singled out. In fact, allowing immediate expensing would not only encourage investment, but also eliminate judgment calls about what is or isn’t the appropriate period of depreciation.


Too often tax changes are made to single out one unpopular sector. Tax neutrality — and a neutral government should be our goal — demands that tax rates and rules apply to all sectors equally without credit or exception. Subsidies involve special treatment instead of allowing companies to benefit by the same rules.

Charlie Arlinghaus

July 15, 2015

As originally published in the New Hampshire Union Leader

Today is the Ides of July — or Quintilis if you aren’t fond of Julius Caesar –and a good time to remind us all what we do and don’t know about taxes — that perennial political football. Tax myths abound and all too often color political debate. But a look at tax data tells us more about our economy and system than the insipid polemics that disease what passes for public discourse.

The individual income tax provides about half of all revenue for the federal government. In 2015, the individual income tax will provide $1.48 trillion, about 46% of all federal revenue. By contrast, corporate income taxes provide 10% of federal revenue, $341 billion in 2015.

Corporate taxes are also much more volatile. in the recession they plummeted to less than half their previous value and have increased by 147% since 2009. Individual taxes fell during the recession by just 22% and have climbed by 61%.

Individual income taxes are also much more progressive than you think. A huge percentage of Americans pay no income taxes at all — though of course they do pay other taxes like payroll taxes. in the tax year 2010, the most recent for which we have this calculation, 41% of tax returns had no liability or negative liability, up from 25% of returns just 10 years prior.

Remember though that those people aren’t outside the system altogether. They still pay payroll taxes if they work at all and other federal excise taxes.

By the way, this calculation has nothing to do with whether or not you got a refund — a refund is just the difference between your liability and pre-payments withheld.

The income tax is also much more progressive then you think. The much reviled top 1% of earners paid 38% of income taxes even though they only made 22% of all income. The progressivity follows at every level. For example, the top 10% of taxpayers made 48% of income but paid 70% of taxes. In contrast, the bottom 50% made 11% of income and paid just 2.8% of taxes.

By the way, to be in the top 25% of taxpayers in 2012 you needed a family income of $73,300 while a $125,200 would put you and your family in the top 10%.

The system is not just relatively progressive but getting more so. Ten years prior, the top 1% paid 33% of taxes not 38% and the top 10% of earners paid 64% not 70%. Go back even further, before the Reagan reforms of the 1980s and you find that thirty years ago the top 1% paid 19% (now it’s 38%) and the top 10% paid 45% (now it’s 70%). Much more progressive indeed!

In New Hampshire, we filed 680,000 federal income tax returns with total taxable income of $32.3 billion. That led to New Hampshire residents paying $6.1 billion in federal income taxes in 2012. In that same year businesses, residents, and non-residents paid a combined $3.1 billion in state and local property taxes in New Hampshire.

The businesses we work for paid an additional $554 million in the state’s combines business tax in the comparable fiscal year. The business taxes were paid by the firms that employ approximately 95% of us.

Most nominal businesses aren’t really businesses. About 77% of them are called non-employers — for most of them an accounting or tax filing tool to account for some sideline self-employment income.

The 4900 firms (3.7% of the nominal total) that have at least 20 employees account for 80% of the jobs. Just13,500 employers have at least 5 employees make up 95% of the jobs.

And that’s the average number of companies that have paid the Business Profits Tax over the last few years (15, 865 last year). So the companies paying the state’s business taxes account for 95% of the non-government jobs in New Hampshire.

Over the last twenty years, business taxes are becoming worse and worse. Since 1995, they have risen from just 14% of the state’s operating budget to 25% this year. We don’t rely on our largest revenue source to the same extent the federal government does but we’re getting there.

You needn’t fear the Ides of July like old Julius was troubled by March but the next time someone pontificates on taxes you might want to look behind the numbers.

 

Josh Elliott-Traficante

June 2014

As reported in the Nashua Telegraph, a Legislative audit of the Division of Economic Development, within the Department of Resources and Economic Development found that in 2011 and 2012, $875,750 was improperly given out as tax credits, while an additional $121,000 worth of tax credits were not given to business that were eligible to receive them. This mismanagement accounts for nearly half of all the tax credits granted by the Division. The specific programs in question are the Economic Revitalization Zone (ERZ)[i] tax credit and the Coös County Job Creation (CCJC) tax credit, both administered by the Department of Resources and Economic Development (DRED).

The ERZ tax credit is awarded to businesses that make capital improvements and create new jobs in specifically designated areas. Each year a total of $825,000 worth of credits are available. If there are more applications for credits then there are available, each applicant gets a proportional share. The Coös County Job Creation tax credit is designed to encourage full time, year round jobs in said county.  The applying company is eligible for up to $1000 per job created, and there is no cap on the total number of credits issued each year.

The audit found irregularities a total of 23 of the 29 applications for ERZ tax credits. 19 were found to not have qualified to receive the credits, while a further 4 should have received more. Of the infractions detailed:

  • 4 were awarded to businesses located outside of Economic Revitalization Zones, totaling $237,400.
  • 4 were awarded for employees who were not hired in the applicable year, totaling $81,000
  • 4 were awarded due to basic calculation errors, totaling $17,400
  • 3 were awarded based on incomplete paperwork, totaling $305,100
  • 3 were awarded the limit of $200,000, when the limit should have been $240,000
  • 1 application missed the deadline, but was awarded $188,200 in credits for the following tax year, in violation of the law.

For the 28 applications for the Coös County Job Creation tax credit, 7 were found to not be qualified to receive credits.[ii]

  • 1 was awarded $11,800 for employees retained during a takeover, which is not permitted
  • 6 were awarded for part time employees totaling $6,500. The credit explicitly requires employees to be full time.
  • 2 were awarded $1,500 for employees making below the minimum wage, in violation of the terms of the credit.

According to the auditors, one employee was responsible for reviewing and approving all of the applications.

From the report, it appears that these issues are due to a lack of oversight and competence rather than corruption. The auditors noted several problem areas, including a lack of controls over the application and award process, as well as a lack of safeguards to ensure compliance after the credit has been issued. For example, if a business was received a credit, but ended up cutting jobs, or moving out of state, there is no recourse for the state to get that money back.

The final recommendations include developing administrative rules for regulations, standards and forms relative to the tax credits and implementing policies that ensure adequate controls over calculating and awarding tax credits, consistent application of the same criteria, reviews, and obtaining supporting documentation to calculate tax credit awards.

The Division, to their credit, agreed with the recommendations and is taking steps to correct the problems with the tax credit programs highlighted by the audit.

Click here to read the report in its entirety.


[i] The list of all ERZs in the state, by municipality http://www.bnncpa.com/assets/uploads/general/NHincentivesapndx.pdf

[ii] Note: Some applications had multiple infractions.

Charlie Arlinghaus

June 4, 2014

As originally published in the New Hampshire Union Leader

The brokered deal on the Medicaid Enhancement Tax and lawsuit is a partial solution to an imperfect situation that will require difficult choices but it may still be the right choice to make. The complexity of the tax and the schemes surrounding it make evaluating and understanding the tax, the choices, and the possibilities difficult but let’s give it a try.

The Medicaid Enhancement Tax (or MET) was a convoluted scheme developed in 1991 to borrow from the hospitals and leverage money from the federal government at no cost to the hospitals. In the first decades it wasn’t a real tax, it had no cost to hospitals, and was something they could hardly refuse to go along with. It took almost 20 years but the folly of trusting a money hungry government finally hit them like a 2×4 to the face.

The no-cost favor hospitals did the government had created a structure to collect hundreds of millions of dollars. In 2009, the government took some money off the top. In 2011, hospitals were hit with a de facto tax increase of $250 million. When your taxes go up that much, you take action.

The hospitals stopped being cooperative doormats, hired good lawyers, and – despite the famous lyrical prediction to the contrary – fought the law and the law lost.

That put the government in an odd spot. If they took no action, about $370 million for the current budget would either not be collected or refunded while only $50 million of spending would go away.

Your perspective on what should happen next might depend on your thoughts about the lawsuit. If you believed the state’s appeal of the decision would be successful, you might not think any action necessary but few believed such a thing. Most people – and this includes me – believe that the tax would remain unconstitutional and there would be a $320 million budget hole.

This put hospitals in the driver’s seat. They were willing to negotiate a settlement that included more money for the state but insisted in exchange on some reversal of the earlier $250 million tax hike. There is no possible settlement that will not create a spending problem of some sort.

Theoretically, the tax was always collected to fund uncompensated care (largely free charity care that hospitals provide low income patients) and for Medicaid underpayment. Remember that Medicaid is not the government paying for health care. It is the government paying about a third to a half of what private insurance pays the same provider for the same service and expecting the provider to eat the rest of the cost. In theory, the MET is to help cover some of those underpayments.

The current proposed plan mandates that a minimum portion of the tax collected to fund uncompensated care actually does so and that those payments are made proportional to charity and Medicaid care actually provided. Even after we made a fake tax a real tax, some money went to such payments but that amount will probably rise by $125 million – half of which would be paid by the federal government.

There is a substantial difference between how much we will collect and how much we will return to hospitals. The remainder must be used – as it is used now voluntarily – to support regular Medicaid provider payments which we have to make either way. That additional amount can be thought of as the portion of the scheme that is a real tax. That amount is likely to be around $80-100 million less in the next budget than it is today. That’s a big hole but it’s after the election so politicians are happy.

The precise language of the law is being tweaked to eliminate drafting errors and some inconsistencies so it is a bit of a moving target. To make matters worse, there is not yet a fiscal note attached to the bill that is publicly available. I remain convinced that no legislation should be passed that does not include a fiscal note – the official financial analysis – that is available to the public for a week before the vote.

All that having been said, something has to be done or the state will have a huge financial hole. If lawmakers are confident the State would win an appeal to the Supreme Court, they might vote against this incomplete agreement. However, I think the state would lose an appeal and so do most lawyers I know. In the battle between a crap shoot and a beat up used car, the jalopy wins.

Charlie Arlinghaus

March 12, 2014

As originally published in the New Hampshire Union Leader

Every legislative session there are 3 or 4 issues which dominate the media’s attention but some of the most important long term decisions pass by with little notice. You’d be forgiven for thinking the gas tax, gambling, and Medicaid expansion are the only three issues before the legislature. These are important but you’ll forgive me if I take a moment to talk about the state budget.

Too often legislatures focus o the budget one year and completely ignore it the next year. The budget passed last year was balanced in its own way but had a few problems that the legislature wants to correct. The most important correction is a simple but controversial partial correction to the state’s rainy day fund.

Recall that our budget is balanced on the basis of a two-year estimate of revenues. Estimating 24 months of revenues in an uncertain economy is necessarily imprecise. Lawmakers, typically but perhaps not always, try to estimate cautiously which tends to leave a small remainder at the end of the two year cycle. By a state law honored more in the breach than in the observance, that residual is supposed to be set aside for a rainy day.

No one wants to create a slush fund with the remainders so the fund has a cap on its total amount (larger amounts should obviously be returned to the payer) and relatively strict rules about when withdrawals can be made.

The last two year budget ended with $72.2 million that should, by law, have been transferred to the rainy day fund. Instead, lawmakers spent it. That is, they spent most of it. At the time spending decisions were made, rather than balancing projected revenue and spending, they took about $50 million extra to enhance their spending thoughts instead and “temporarily” suspended the law that requires it be put in the rainy day fund.

In the final accounting, it turned out that there was more money than they thought. What to do with the extra $15.3 million? Predictably, one group has spending eyes. A second group, the Republican leadership of both houses, wants to deposit it into the rainy day fund. It’s about time.

Suspended state law would have required a $72 million deposit. Republicans want to deposit just the $15.3 million the compromise state budget hasn’t already spent. Oddly, that’s too much for the governor. Rather than be satisfied that she’s managed to tap into $57 million she’s not supposed to have, she wants to spend most of the extra as well. Ridiculous.

The $15.3 million should merely be an opening good faith deposit. The first of two fiscal years of this budget will see about $25 million in revenue above the budget – depending on business tax receipts the next two months.  That money should also be set aside, by law, to get us to half of what should have been deposited.

This is not merely a side issue unrelated to important things. Rather, it is a test of whether or not the legislature can discipline itself. We have state laws that create structures to impose modicums of discipline. Those laws turn from discipline to cynical mockeries of the taxpayer if they are merely suspended every budget season.

Some lawmakers are under the mistaken impression that we are still laboring under the supposedly dramatic cuts of the 2011 passed budget. The state’s operating budget (general and education funds plus a handful of relabeled funds) that year was a merely a reversal of the prior increase. That prior increase was not supported by tax dollars but by a one-time windfall (borrowing and a bailout).  The pre-bailout amount of $2.336 billion became $2.327 in the dramatic cut year.

That cut itself was almost entirely erased in the current budget. The pre-cut operating budget was $2.465 billion. After a brief decline, operating spending came back up to $2.457 in year two of the current budget. This time, however, the spending is supported largely by tax revenues  not by hundreds of millions of dollars of one-time windfalls. The money that should have been put in the rainy day fund amounts to 1.2% of the two-year budget (compared to 9.8% one-time cash in the borrowing and bailout budget).

Future budgets are dictated by current discipline. We can save ourselves a lot of trouble tomorrow by exercising discipline today. Until the proposed Rainy Day Fund deposit is $72 million, all calls to spend it instead should be resisted. Proposing $15.3 million is a pittance and ought not be controversial.