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Good Start for State Budget
Published Tuesday, April 25, 2017

Every year since the Great Recession, NH governors have faced slow growth in revenue, requiring belt-tightening and tradeoffs. This  budget season is different.

Revenue has grown more quickly than anticipated and more quickly than spending has increased. Gov. Chris Sununu and the Republican-led legislature will have budget options unlike any governor since, perhaps, Gov. John Sununu.  

First, revenue growth exceeded all expectations. Between fiscal years 2015 and 2016 (which ended June 2016), revenue grew by almost 7 percent, driven by torrid growth in business taxes (16.3 percent) and real estate transfer tax receipts (14.5 percent) and a 6.9 percent increase in the state’s tax on meals and rooms. The end result was the rainy day fund increasing from $22 million to $93 million with a net balance of close to $90 million. In essence, this means that spending in FY 2016 was significantly less, by more than $100 million, than revenue.

And FY 2017? Through December, the last month for which we have data, revenue appears to be continuing to increase, albeit at a slower rate. Growth in the first half of 2017 is also being driven by business taxes (4.5 percent increase year over year), meals and rooms (5.2 percent) and real estate transfer tax receipts (7.1 percent). If you assume revenues for the remainder of the year come in as they have done in the past, that means the state will have $165 million in revenue beyond the existing plan.   

What Does This Mean?  
First, the state can likely fill the rainy day fund to its statutory limit (10 percent of the prior year’s general fund revenue) and potentially make strategic, one time, investments.  

Second, unless spending increased by $165 million beyond the FY 2017 budget, there will be wiggle room in creating the 2018-2019 budget for the first time since the Great Recession.  

Health and Human Services
As always, Health and Human Services, which accounts for more than half of the state’s budget, is the place where conversations will start (and likely end). Health and Human Services has already submitted budget requests for the 2018-2019 biennium that included requests for an additional $89 million annually. That reflects an increase in the contracted costs of the Medicaid managed care rates and under-budgeting for the growth in the number of individuals on the Medicaid program. An additional $46 million was requested to fully fund the developmental services wait list.

Both will be controversial. The conversation around managed care cost increases will focus on whether the program has saved money, as promised. The developmental service system came under fire in prior years for not spending budgeted resources.  

Education will also be a prominent part of the budget conversation. Both the University System of NH and the Community College System have requested additional resources ($10 million per year for USNH, and about $7.5 million for the community college system) to freeze tuition.

In the middle of this conversation will be questions about student debt levels, workforce development opportunities and the responsiveness of each educational institution to the business needs of NH. Gov. Sununu (and almost all elected officials) has made workforce development through our educational institutions a major issue.

Business Taxes
The third area of focus is likely to be business taxes. As part of the last budget session, both the business profits tax (BPT) and the business enterprise tax (BET) were reduced. The business and profits tax was cut from 8.5 percent to 8.2 percent, and the business enterprise tax was cut from .75 percent to .72 percent. The second set of reductions will go into place in June 2017, lowering the rate from 8.2 to 7.9 percent. Strong growth in revenue, despite the reductions in rates, will raise the question of whether additional reductions should be implemented.  

What’s the impact of this change? It is hard to tell. At the 8.5 percent level, 39 states had a lower corporate tax rate than NH. At the 7.9 percent level, where NH will stand at the end of FY 2017, 35 states had lower corporate tax rates. To put NH in the top 10—that is, states with the lowest corporate tax rates—NH would have to lower its rate to 5 percent, significantly lowering the state’s largest source of revenue.  

What About the Feds?
Congressional action at the federal level could significantly affect NH. On the revenue side, the Affordable Care Act significantly increased health insurance coverage, resulting in significant growth in insurance tax receipts. Any repeal of the ACA that results in a decline in insurance coverage will lower state revenues. The potential repeal of the Act and for Medicaid to be distributed to states in block grants could throw our state budget conversations into confusion. Prudent minds will likely give states considerable time to work through these changes.

Steve Norton is executive director of the NH Center for Public Policy Studies, a nonprofit, non-partisan organization in Concord. Norton can be reached at snorton@nhpolicy.org.

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