1. www.nhpolicy.org All of our reports are available on the web: www.nhpolicy.org New Hampshire Center for Public Policy Studies Board of Directors Donna Sytek, Chair John B. Andrews John D. Crosier William H. Dunlap Shelia T. Francoeur Chuck Morse Todd Selig Stuart Smith Brian Walsh Kimon S. Zachos Martin Gross Staff Steve Norton Dennis Delay Ryan Tappin “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

2. State Revenues and the Economy: Revenue Structure Informational Session 10/21/09 Dennis Delay “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

3. General and ETF Fund Revenue by Source FY 2008

4. Topics for Presentation  Competing Goals of Taxation  Revenue and the Structural Deficit

5. Competing goals of taxation. 1.Taxpayer equity or fairness 2.Taxpayer neutrality 3.Revenue adequacy 4.Low cost administration and compliance

6. Equity or fairness:  Horizontal equity – if you have $50K and I have $50K are we each taxed the same?  Vertical equity – treating taxpayers differently, but fairly – should someone with ten times my income pay ten times more (proportional), 20 times as much (progressive) or 5 times as much (regressive)?  People have very different ideas of what is fair!

7. Taxpayer Neutrality:  Tax systems should not distort economic behavior. Broad base, low rate taxes follow this example (BET And Statewide property tax are good examples).  High tax rates on narrow bases create incentives to avoid and evade taxes, and/or create “deadweight loss”.  Sometimes we want to change behavior and create high rates on a narrow base: (like the tobacco tax).

9. Revenue Adequacy:  The reason we have taxes in the first place.  Is the system volatile or stable?  Adequacy seems to get little weight in policy debates.

12. Administration and Compliance:  Tax should be easy and inexpensive to administer.  A stepchild in tax policy discussions.

13. All these goals compete with one another:  Property taxes are stable, but people must pay them even when their income declines, creating a sense of unfairness.  Progressive income taxes usually grow faster over the long run than flat-rate taxes and in many people’s minds they are fairer, but the latter are more stable.  Sales taxes on limited items (excluding food and medical) makes the sales tax more costly to administer and easier to avoid. Source: Donald Boyd, Rockefeller Institute, testimony on NY Income Tax, 3/19/09

14. Things you can do about Stability and Volatility:  Accept it, but manage it — Build large reserve funds in good times.  Accept it, but hedge it(!)—Purchase hedging instruments to insure against revenue volatility, much the way some large businesses hedge oil- price and exchange-rate risk.  Accept volatility in individual tax sources, but diversify.  Structure individual tax sources to be less volatile (Flatten tax and increase base). Source: Donald Boyd, Rockefeller Institute, testimony on NY Income Tax, 3/19/09

15. Revenue & the Structural Deficit  Revenue sources  How have they changed over time?  What is a “structural deficit”?  Do we have one?  Why does it matter?

16. General and ETF Fund Revenue by Source FY 2008

17. Comparing NH to New England and the US in FY 2008

19. General Fund Revenue ($ million) Compound annual rate of increase: 5.5%

20. General Fund Revenue ($ million) New Versus Old Revenues Compound annual rate of increase: 3.8%

21. General Fund Revenue ($ million) New Versus Old Revenues in 2008

23. Future Gap Use of one time monies creates future funding gap (2012-13)

33. What is a “Structural Deficit”? A “structural deficit” is a situation where, with no change in tax laws or public services, tax revenues do not increase as fast as expenditures.

34. Does New Hampshire Have a Structural Deficit? “New Hampshire can be characterized as having a long-term structural deficit in the sense that for a given scope of programs and revenue system, expenditures grow automatically faster than revenues.” KPMG Peat Marwick February 13, 1992

35. So What?  Recognize to scale back on state activities OR recognize the necessity to raise tax rates or add new taxes to maintain a constant level of services.  Results in more detailed review of all state programs every biennium because there is always a looming shortfall.  Creates regular atmosphere of crisis and stress.  Reduces possibility of surpluses for investment in desirable one-time projects.  Makes long-term strategic planning more difficult.  Should not be used as a political weapon to bludgeon the other political party.