A string of state commissioners filed into the State Home listening to room late final month, every with their very own mission. For 3 days, Gov. Chris Sununu and his price range director would maintain price range hearings. Administration officers detailed the progress inside their departments and outlined their monetary wants, making the case for extra funding when Sununu crafts his price range subsequent yr.
However earlier than the proceedings started, Sununu gave a warning.
“I feel there’s loads of alternative on the desk to make certain, however we additionally must be cautious with the place the economic system as an entire might be going,” he mentioned.
He continued: “There’s actually no strategy to keep away from some type of a nationwide recession. It’s actual. It’s coming.”
Sununu isn’t alone in that concern: A report by Moody’s Analytics in September highlighted what its authors referred to as “a vital juncture” for state governments. Propped up for 2 years with report flows of federal COVID-19 stimulus funds, state governments are about to see a lot of that funding expire. And with rising inflation and climbing rates of interest meant to curb that inflation, the danger of an financial downturn is actual.
Making ready for that downturn, the Moody’s report mentioned, will probably be essential for state lawmakers within the subsequent few years. The New Hampshire Legislature should cross its subsequent two-year price range by July 2023; by custom, Sununu will current his draft price range to lawmakers in February.
However New Hampshire is among the many 5 least-prepared states for a recession, the evaluation concluded; if the state have been to face a reasonable recession, it might see an 18.1 % tax income shortfall, one of many largest within the nation.
New Hampshire financial analysts say the state has a lot going for it financially. Enterprise tax revenues proceed to return in sturdy, the state ended the final fiscal yr with a $430 million surplus, and lawmakers have put away a whole lot of tens of millions into the wet day fund, they be aware.
However in a reasonable recession, even that wet day fund wouldn’t offset income losses, Moody’s warned. New Hampshire, the report discovered, would nonetheless want to chop 10 % of its spending with the intention to make it out.
With jitters rising, New Hampshire observers say lawmakers should be savvy as they transfer ahead with a price range.
“You simply don’t wish to be in a scenario of getting to lift taxes or slash companies to cope with the results of a recession, for those who can keep away from it,” mentioned Drew Cline, president of the Josiah Bartlett Middle for Public Coverage, a fiscally conservative think-tank.
A various base of taxes
One motive for New Hampshire’s vulnerability to the results of a recession is the state’s dependence on enterprise taxes, notes Phil Sletten, analysis director on the New Hampshire Fiscal Coverage Institute. The state receives a few third of its basic fund revenues from the enterprise income tax and the enterprise enterprise tax. A lot of these enterprise income are paid by massive, multinational firms: Of the practically 80,000 companies that filed taxes in New Hampshire in 2019, 80 accounted for practically half of the full revenues, in accordance with an NHFPI evaluation. Sixty % of the filers that yr have been multinational firms, the NHFPI mentioned.
That dynamic means a significant a part of New Hampshire’s income stream relies on how the nationwide and world economies are doing. And it places New Hampshire at a possible drawback over states that depend on broad-based revenue taxes relating to weathering a recession.
Sletten mentioned taxes on company income “are typically thought-about extra unstable” than broad-based revenue taxes. The reason being easy, he added: In a recession, “income transfer extra considerably than compensation.”
However Sletten famous that New Hampshire nonetheless has a various array of income sources, and a few are extra inclined to recessions than others.
Some taxes are resilient. The statewide training property tax, which is collected and retained by cities, relies on property values, which don’t change from month to month. That tax doesn’t technically go into the state’s coffers nevertheless it does assist offset the amount of cash which may have left the Schooling Belief Fund to pay for college adequacy grants.
Income from alcohol and tobacco gross sales additionally are likely to climate financial downturns. These collections are substantial: Income constituted of the state-run Liquor Fee made up 5 % of the state’s income in fiscal yr 2021, and the tobacco tax introduced in 8.5 % that fiscal yr.
However many different New Hampshire taxes would take successful if the economic system modified. The meals and leases tax can be hit twofold, Sletten famous. Individuals who dwell in New Hampshire would probably exit to eating places much less. Individuals who don’t dwell in New Hampshire can be much less more likely to go to the state, that means much less in income from lodges, Airbnbs, and rental automotive companies.
And since the state doesn’t have a broad gross sales tax, a shift in habits from consuming out to grocery retailer purchases wouldn’t usher in extra income.
In the meantime, the true property switch tax, which introduced in 7 % of the state’s basic income in 2021, might endure if homebuying takes a dip, Sletten famous. That tax has been profitable lately, bolstered by a record-setting surge in median gross sales costs within the state, at the same time as the general variety of house gross sales has dropped. However with rising rates of interest from the Federal Reserve, that demand will probably cool off in coming years, Sletten famous. And if gross sales costs fall, the state’s low housing inventory will probably catch as much as it, bringing the switch tax revenues down.
One New Hampshire tax instantly tied to the inventory market is the curiosity and dividends tax. Whereas the climbing rates of interest might usher in larger yields for some New Hampshire traders, most individuals paying the tax are probably holding investments that might be damage by a struggling market.
Moreover, 2023 is the primary yr within the state’s 5 yr plan to part out the curiosity and dividends tax. The tax will drop from 5 % to 4 % for the 2023 tax yr, and can proceed to drop by 1 % a yr till 2027, when it should finish. No matter a recession, that can usher in much less income, Sletten famous.
Predictions are difficult
Exactly how a lot New Hampshire’s revenues may fall on account of a recession is tough to nail down; projections are slippery. However there are 4 main milestones to observe because the governor and Legislature craft the price range over the subsequent seven months, observers be aware.
The primary will are available February, when Sununu will submit his proposed price range in an handle to lawmakers. That price range will include income projections for the subsequent two state fiscal years, fiscal years 2024 and 2025, which span from July 2023 to June 2025.
When the Home presents and votes on its price range, probably by the tip of March, the Home Finance Committee will arrive at its personal income projections. Two months later, in Might, the Senate will take a 3rd crack at estimating revenues. Then in June, when Home and lawmakers negotiate to carry their proposals collectively into one price range, lawmakers will situation yet another projection of income.
Historically, the primary two passes on the price range – from each the governor and the Home – are much less correct as a result of they arrive earlier than enterprise tax returns are collected and processed in April. The Might and June price range drafts can think about these returns.
But when a recession is looming, even the up-to-date income projections in late spring subsequent yr gained’t seize the potential losses to return. For that, lawmakers should construct in their very own uncertainty.
A necessity for warning
New Hampshire’s sturdy income heading into a possible downturn presents each alternatives and pitfalls, argues Cline.
“Usually it’s a good suggestion you probably have some cash within the financial institution and it’s sitting within the basic fund, to only maintain on to it until we climate this occasion,” he mentioned.
If lawmakers don’t do that and revenues drop throughout a recession, the options should not as nice, he mentioned.
“You may increase taxes, scale back spending or drain your reserves,” he mentioned. “And people are 3 ways you possibly can modify to declining income.”
The Moody’s report agreed. “States that shuttled surplus tax revenues into rainy-day reserves and prevented spending onetime stimulus funds on recurring bills will probably be higher in a position to climate any such downturn,” authors Emily Mandel, Haley Curtin, and Bridget Ryan wrote.
However lawmakers should not historically exemplars of restraint relating to spending, particularly once they have cash to play with, Cline mentioned. Even the Republican-led Legislature spent a major quantity of the state’s surplus in non-budget spending over the previous two years. In the course of the biennium, the Legislature handed payments that appropriated $272 million in spending past the price range handed in 2021, in accordance with an inventory from state’s Legislative Funds Assistant.
Many lawmakers and advocates would argue that these bills have been necessary: $5.7 million went to wastewater tasks; $11.8 million was spent on a one-time allowance to state retirees; $25 million was spent to a remediation mortgage fund for PFAS contamination; and $15.3 million was spent to construct a brand new legislative parking storage in Harmony, to call a number of.
However to Cline, that form of spending must be restrained when the state is dealing with a recession.
“Sadly, the Legislature spent virtually 70 % of the excess by the tip of the final fiscal yr,” he mentioned.
Democrats have criticized New Hampshire’s tax construction lately, noting excessive property tax burdens that come from the state’s frugal strategy to native faculties. However they’ve typically eschewed the thought of broad-based taxes.
Cline, like different conservatives within the state, is proud of the state’s income construction, which he says is designed to fund the state whereas making a low tax burden on people with respect to state taxes. The important thing to surviving with such a reliance on enterprise taxes is to know the state’s monetary limitations and plan for them, he mentioned.
“It’s completely manageable, so long as we don’t act like a state that has a broad (tax) base,” he argued.
