An Overview of New Hampshire s Tax System

An Overview of New Hampshire s Tax System Presentation to the House Ways & Means Committee January 9, 2013 Jeff McLynch Executive Director New Hampshire Fiscal Policy Institute 603.856.8337 jmclynch@nhfpi.org www.nhfpi.org

An Overview of New Hampshire s Tax System What are the key elements of New Hampshire s tax system? What are some of the distinguishing features of New Hampshire s tax system? What are some of the revenue challenges that are likely to be before the Legislature in the coming year? 2

How Does New Hampshire Generate Revenue? Projected FY12-13 General & Education Fund Revenue: $4.44 billion individual sources of revenue in millions of dollars Source: NHFPI calculations based on Chapter 223 of the Acts of 2011 3

How Does New Hampshire Generate Revenue? Principal Sources of Tax Revenue, FY 2012 FY 2012 Revenue Rate General & Education Funds Business Profits Tax $310 M 8.50% Business Enterprise Tax $202 M 0.75% Meals & Rooms Tax $239 M 9.00% Real Estate Transfer Tax $83 M $0.75 / $100 value Tobacco Tax $215 M $1.68 / pack General Fund only Interest & Dividends Tax $83 M 5.00% Education Fund only State Property Tax Highway Fund only $363 M Varies ($2.39 / $1000 value) Motor Fuel $123 M $0.18 / gallon Source: Department of Administrative Services; Department of Revenue Administration 4

Sources of NH Tax Revenue Have Changed in Last Two Decades Composition of Total Tax Revenue by Source, FY 1991 & FY 2010 Source: NHFPI calculations based on Comprehensive Annual Financial Report data 5

An Overview of New Hampshire s Tax System What are the key elements of New Hampshire s tax system? What are some of the distinguishing features of New Hampshire s tax system? What are some of the revenue challenges that are likely to be before the Legislature in the coming year? 6

Taxes in NH Very Low Relative to Aggregate Ability to Pay Total State and Local Taxes as a Share of Personal Income, FY 2010 21% 18% 15% 12% 9% US 10.5% NH 8.8% 6% 3% 0% AK NY ND ME HI WV RI CA OH LA US IA NE NV PA MS UT FL NC OK AZ ID VA SC NH TN Source: NHFPI calculations based on US Census Bureau, US Bureau of Economic Analysis data 7

New Hampshire s Tax System is Regressive Low-income Granite Staters have an effective tax rate that is four times that of the most well-off. Total State and Local Taxes in New Hampshire, Non-Elderly Taxpayers Source: Institute on Taxation and Economic Policy 8

New Hampshire s Tax System Contributes to Perpetual Budget Woes Average Annual Change in Personal Income and in General Fund Tax Revenue, Adjusted for Inflation and Rate Changes, 1994-2011 2.5% 2.0% 2.4% 1.5% 1.0% 0.5% 0.6% 0.0% Personal Income General Fund Tax Revenue Source: NHFPI calculations based on LBA, US BEA data 9

An Overview of New Hampshire s Tax System What are the key elements of New Hampshire s tax system? What are some of the distinguishing features of New Hampshire s tax system? What are some of the revenue challenges that are likely to be before the Legislature in the coming year? 10

Several Key Revenue Sources Outperforming Expectations FY 2013 YTD General & Education Fund projected & actual revenue collections, by source, as share of projected FY 2013 total 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% BPT/BET M&R Plan Actual I&D CST RETT Tobacco MET Source: NHFPI calculations based on data from NH Department of Administrative Services 11

Slow Revenue Growth Will Constrain Budget Choices in the Coming Biennium Projected FY 2014-15 General & Education Fund Revenue Under Select Scenarios 4.6 4.5 4.4 $87 M $110 M $157 M 4.3 4.2 $4.40 B 4.1 4.0 FY12-13 FY14-15 (Oct 1 Projection) FY14-15 (Tobacco Restored) FY14-15 (Tobacco Restored & Higher Growth) Source: NHFPI calculations based on data from NH Department of Administrative Services 12

Slow Revenue Growth Will Constrain Budget Choices in the Coming Biennium Projected FY14-15 General Fund Revenue v. FY14-15 General Fund Maintenance Budget Increases, $M 400 350 300 250 200 150 All Else Judiciary Safety Treasury DAS Corrections CCSNH DHHS 100 50 USNH 0 Projected Increase in FY14-15 Revenue FY14-15 Maintenance Budget Increases Source: NHFPI calculations based on data from NH Department of Administrative Services 13

How Will Baseline Revenue Growth Stack Up? Year to Year Change in General Fund Tax Revenue Adjusted for Changes in Policy, 2001-2011 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: NHFPI calculations based on data from the Office of the Legislative Budget Assistant 14

Tax Cuts Enacted in 2011 and 2012 Will Yield Permanent Revenue Losses BILL# DESCRIPTION EFF. DATE SB125 BPT: REASONABLE COMPENSATION DEDUCTION 1-Jan-11 HB229 REPEAL GAMBLING WINNINGS TAX 23-May-11 HB2 REDUCE CIGARETTE TAX RATE 1-Jul-11 REDUCE OTHER TOBACCO TAXES 1-Jul-11 HB 1418 BPT: SEC 179 EXPENSING 1-Jan-12 CST: BAN TAX ON INTERNET ACCESS 21-Jun-12 HB 518 BPT: DELAY R&D CREDIT REPEAL 4-Aug-12 HB 1607 BPT: EDUCATION TAX CREDITS 1-Jan-13 HB 242 BPT: INCREASE NOL LIMIT 1-Jan-13 HB 1418 BET: INCREASE THRESHOLDS 31-Dec-13 HB187 BPT: EXTEND BET CARRYFORWARD 1-Jul-14 15

Tax Cuts Enacted in 2011 and 2012 Will Yield Permanent Revenue Losses All figures in millions of dollars and are for General & Education Funds combined $120 $100 $80 $60 $40 $110 $60 Effective 1.1.13 or later $20 $- Projected increase in revenue from FY12-13 to FY14-15 $29 Revenue loss due to changes in tax policy Effective prior to 1.1.13 Source: NHFPI calculations based on data from NH DAS, NH DRA 16

Most Major Sources of Tax Revenue in NH Have Declined Since Start of Recession Projected Real Aggregate Change in Select NH Taxes, FY 2008 FY 2015-50% -40% -30% -20% -10% 0% 10% 20% 30% BPT/BET Meals & Rooms Tobacco Interest & Dividends Insurance Communications Real Estate Transfer FY08-12 FY08-15 Source: NHFPI calculations based on NH DAS & US Bureau of Labor Statistics data 17

Revenue Still Well Below Prior Levels General & Education Fund Collections in Millions of FY 15 Dollars, FY 2001-2015 $2,800 $2,600 $2,400 $2,200 $2,000 $1,800 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: NHFPI calculations based on NH DAS and US Bureau of Labor Statistics data 18

Stabilization Deposits Generally Made Near End of Economic Cycles Stabilization fund balances (in millions; left axis); General & Education Fund nominal revenue growth over prior year (right axis) 100.0 75.0 50.0 25.0 - (25.0) Stabilization balance Change in revenue 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Source: NHFPI calculations based on NH DAS data 19

14% New Hampshire Employs a Higher Statutory Rate than Many States Highest Statutory Corporate Income Tax Rate, by State, 2011 12% 10% NH 8.5% 8% 6% 4% 2% 0% IA MN AK RI CA IN VT MD LA NE NM CT AZ MT AR HI MO KY VA MS UT CO Source: Urban-Brookings Tax Policy Center 20

Yet, Business Taxation in NH is Lower than in Most States Total State & Local Taxes Paid by Business as a Share of Private Sector Gross State Product, FY 2011 14% 12% 10% 8% 6% US 5.0% NH 4.6% 4% 2% 0% AK VT NM NY RI CA NJ PA AL IL WI SD LA TN IN MD UT Source: Council on State Taxation 21

Most Businesses Owe Little or No BPT or BET Share of Combined BPT & BET Returns, by Range of Combined Liability, TY 2010 Source: NHFPI calculations based on NH DRA data 22

State Business Taxes Are a Relatively Small Share of the Taxes Businesses Pay Composition of State and Local Taxes Paid by New Hampshire Businesses, FY 2011 Source: Council on State Taxation 23

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