1. 1 The Economic and Revenue Trends and Outlooks for New Hampshire Presentation to The Committee on Ways and Means January 8, 2013 Brian Gottlob PolEcon Research bgottlob@poleconresearch.com

2. 2 Topics for Discussion Some Disclosures, Caveats, and Advice NH’s Economic Conditions The Revenue Outlook for the Biennium. Some Factors That Affect Key Sources of NH Revenue “Unknowns” - Hospital Lawsuits, Medicaid etc. Will Have a Large Impact But I Will Not Address Those Issues

3. 3 The Past Four Years Have Been Among the State’s Worst on Record for Revenue Growth Shaded Areas = Recession

4. 4 Growth is Slower Everywhere but New Hampshire No Longer Leads the Pack in New England

5. 5 During the 1990’s NH’s Private Sector Job Growth Looked More Like a Fast Growing State in the South or West than that of a Northeastern State Source: U.S. Bureau of Labor Statistics, PolEcon calculations NH VT ME

6. 6 But Since the Recession of the Early 2000s, NH and Almost Half the States Have Seen Little or No “Net” Private Sector Job Growth Source: U.S. Bureau of Labor Statistics, PolEcon calculations NH

7. 7 NH is Near the Bottom of All States in Job Growth Over the Past 12 Months NH MA VT

8. 8 NH’s Job Growth Trend Has Moved in the Wrong Direction in 2012 Year-Over-Year % Total Non-Farm Job Growth (3 Mos. Moving Average) NH MA U.S.

9. 9 The Long-Term: Current Demographic Path Shows the Number of Working Age NH Residents Will Peak Late This Decade –Potentially Slowing Economic Growth, Wealth Creation & Revenue Growth Projections Source: U.S. Census Bureau, PolEcon

10. 10 Much of the Focus of the Fiscal Implications of Demographics Deals With Spending – The Impacts are Likely to be as Strong on Revenues. “Back-of-the-Envelope” Estimates of How Slow Growth in Working Age and Higher Growth in Older Population Will Affect Some Key Sources of State Revenues Income Tax (Negatively) Interest & Dividends (Somewhat Positively) General Sales Tax ( Mostly Negative) BET (Negatively) BPT (Mostly Neutral to Somewhat Negatively) Selective Sales (Mixed) Property Tax (Mostly Neutral)

11. 11 Despite “Holding the Line” on Revenues, NH’s Private Sector Job Growth Rate is Well Below MA and VT. This Doesn’t Mean Raising Revenue Will Increase Emp. But Neither Does it Mean More Revenue Always Slows Employment Growth MA VT NH ME

12. 12 Whether Because of Stronger Economic Growth or Adjustments to Revenue Sources and Rates, Other NE States Have Recovered to Pre-Recession Levels of Revenue While NH Has Not NH MA VT ME

13. 13 Absent Policy Changes (Rate and Other Changes to Sources), Emp. Growth (Not the Unemp. Rate) is the Best Indicator of Likely Revenue Growth

14. 14 PolEcon’s NH Leading Index is Signaling Stronger Employment Growth Ahead

15. 15 The NH Leading Index is Also a Reasonable Predictor of Revenue Growth. The Index Suggests Revenue Growth Should Have Been Higher Over Much of the Past Few Years – The Effects of Policy Changes (Fixable) are One Reason But Structural NH Economic Issues (Not So Fixable) are Another

16. 16 With Current Levels of Economic Growth, Business Taxes Would Increase About 3% Annually and With Even Modest Improvement in NH’s Economy–That Rate of Revenue Growth Would Double Shaded Area = Recession

17. 17 The Current Path of Revenue Growth Calls for Minimal Revenue Growth (Just Over 2% Annually) From the 8 Largest Sources of General Revenue. A Moderately More Optimistic Scenario Calls For Growth of About 4-5% Annually Forecast

18. 18 The End of the Payroll Tax Reduction Will Cost NH Residents an Estimated $650 Million, Reducing Consumer Expenditures and Taking an Estimated $12 Million From General Fund Revenues

19. 19 Through QIII 2012, the Federal Housing Finance Agency Repeat Sales Index Shows NH Prices Haven’t Yet Begun to Rebound MA NH U.S.

20. 20 According to the Federal Housing Finance Agency, Only Two States Had Lower Year-Over-Year Price Appreciation in 2012 Than Did NH Source: Federal Housing Finance Agency Home Price Appreciation Index, Issued November 27, 2012 NH

21. 21 Job Growth (Along With Pop. Growth) Affects Home Sales and Home Price Appreciation – NH’s Slow Job Growth Hampers Housing Recovery, Home Prices, and thus the Real Estate Transfer Tax

22. 22 When Households & Business Spend More on Energy (Because of High Oil, Gasoline or Electricity Prices, Discretionary Income is Lowered, Affecting the Many NH Revenues That Depend on Them How Much Moe State Residents Spend on Energy by Price of Oil

23. 23 A Large Portion of NH Revenues Depend on “Discretionary Spending.” Anything that Affects Discretionary Spending Will Affect NH Revenues. The Only Way to Measure the Impact of High Oil and Gasoline Prices on Different Revenue Sources is to “Seasonally Adjust” Revenues to Account for the Patterns of Higher and Lower Revenue That Normally Occur Throughout the Year for Many Revenues (Example: Some Revenues Always Spike in the Summer When Visits to NH are Higher etc. – That is the Same Time When Gasoline Prices Typically Spike – Does That Mean Higher Gasoline Prices Lead to Higher Revenues? No!!!

24. 24 Example: When Gas Price Spikes Monthly Cigarette Sales (on a Seasonally Adjusted Basis) are Reduced

25. 25 Example: Higher Gasoline Prices Lower Real (Inflation Adjusted) Restaurant Sales

26. 26 The Cigarette Tax is an Example of the Pitfalls and Misinformation (i.e. “NH Loses Money When it Raises the Cigarette Tax Rate”) The Ways and Means Committee Must Confront and Which Hampers Reasoned Policy Debates $.62 Fed Tax Hike & $.45 NH Hike $.25 NH Tax Hike $.28 NH Tax Hikes $.28 NH Tax Hike $.08 NH Tax Hike $.05 NH Tax Hike $.10 Fed Tax Hike & $.15 NH Hike $.10 NH Tax Cut

27. 27 The Tobacco Tax, Because of Rate Adjustments, Helped Keep NH’s Major “Own Source” General Revenues From Falling Even More Dramatically

28. 28 Conclusion and Some Editorializing: Expect modest revenue growth 2-4% Demand sound empirical evidence from advocates and be wary of ideological claims Try to keep a record of accurate and inaccurate policy advocates – expect accountability NH can weather the storm, if we don’t hamstring ourselves Historically NH has avoided fiscal meltdowns because of balance and compromise (even with large political majorities) The “Left” had to accept that NH state government would provided “needed” services but few “wanted” services and the “right” had to accept that the tax price (via rates and sources) would sometimes have to be adjusted to fund services Today we have less balance and willingness to compromise and thus there is a potential for a larger crisis