On Feb. 15, Senate President Peter Bragdon is expected to bring before the Senate a proposal to rewrite the New Hampshire Constitution to cap the growth of the state budget at the rate of inflation, unless three-fifths of both the House of Representatives and the Senate were to vote to waive such a cap. Based on this new information, the New Hampshire Fiscal Policy Institute has revised its earlier issue brief assessing the impact of such a policy going forward, including calculating what such a cap would mean for state spending going forward.

Later this week, Senate President Peter Bragdon is expected to put forward a proposal to amend the New Hampshire Constitution to impose a new and severe constraint on the state budget process.  More specifically, the Senator seems likely to offer a proposal that would cap the growth of the state budget from one biennium to the next at the rate of inflation, unless three-fifths of both the House of Representatives and the Senate were to vote to waive such a cap.

If the Legislature were to approve a spending cap along these lines and the voters were to enact it in the fall, the consequences for New Hampshire would be far-reaching and long-lasting.  Most notably, in the absence of regular votes to waive the proposed spending cap, Senator Bragdon’s amendment would serve to lock in the effect of economic downturns for years at a time, potentially ratcheting down spending levels during recessions, but dramatically slowing their recovery even during periods of economic growth.

Similar constitutional limits on taxes and spending have been proposed in other states over the past several years, but, in each case, they were ultimately rejected, either by state legislators or by voters at the ballot.  Only Colorado now has such a cap in place.  Importantly, its effect on the public services that foster economic growth and ensure the public welfare was so debilitating that, due in large extent to appeals from business and civic leaders, it was suspended for the latter half of the 2000s.

The remainder of this Issue Brief examines the problems associated with the proposed spending cap in more detail.  As it notes:

• The proposed cap would promote gridlock at the State House, as it would empower a very small number of legislators to block action on important priorities.
• The proposed cap would lock in spending cuts enacted during recessions, even as the New Hampshire economy rebounds.
• The proposed cap would likely hold state spending below 2010-2011 levels for a decade or more.
• The proposed cap would have other unintended consequences, likely leading to further cost-shifting and imperiling the state’s bond rating.
• The cap’s arbitrary formula reflects neither the costs New Hampshire faces, nor its ability to support public services.
• Colorado’s experience with its tax and spending cap should serve as a warning, not as a model to emulate.

Proposed Cap Would Promote Gridlock at the State House

Under the proposed spending cap, New Hampshire’s budget could not grow by more than the rate of inflation – unless three-fifths of both the House of Representatives and the Senate voted to suspend the cap.  As a rule, supermajority requirements of this kind greatly increase the chance of legislative stalemates, as they create incentives for policymakers to attempt to extract concessions on other, unrelated matters in exchange for their votes.  Thus, New Hampshire’s biennial budget – typically the single most important matter on which legislators act each term they are in office – would become captive to demands for projects in legislators’ home districts or for favorable treatment of other legislation, should the state need to increase spending over and above the rate of inflation.  In other words, the proposed spending cap would not make state government more responsive to the voting public or more efficient in its use of their tax dollars, but it could end up making it less so.

Proposed Cap Would Lock In Spending Cuts Enacted During Recessions, Even as Economy Rebounds

If the proposed spending cap were to be approved by the voters this fall, it would be instituted immediately following a sharp reduction in state spending, a reduction driven by the 2007-2009 recession and the struggle to recover from it.  As a result, that significantly reduced spending level would serve as the starting point for calculating the amount of spending allowed in future budgets.  In other words, instituting the spending cap in 2013, would, in the absence of regular supermajority votes to waive it, lock in place economically-suppressed spending levels for years to come, even as the New Hampshire economy rebounds and the state’s overall capacity to support public services again begins to rise.

Just as importantly, when New Hampshire experiences another economic downturn in the future – and should it choose to reduce spending in response – the process would be repeated once more.  The level of spending permitted under the proposed cap in the years following any future recession would, failing a supermajority vote, be based on that reduced amount.  Thus, the spending cap would likely ensure that the state continues to feel the effect of all future economic downturns well after they have passed.

Proposed Cap Would Likely Hold State Spending Below 2010-2011 Levels for a Decade or More

 As the figure below indicates, appropriations for the FY 2012-2013 biennium from all sources – the General Fund, the Highway Fund, federal funds, and others – totaled $10.49 billion.  This sum is approximately $1.06 billion, or roughly 9 percent, lower than Total Fund appropriations for FY 2010-2011, when they amounted to $11.55 billion.[i]

According to Congressional Budget Office (CBO) projections released on January 31, inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), is expected to range between 1.5 and 2.3 percent annually over the next decade.[ii]

Should those projections hold and barring a supermajority to approve the budget in any given year, then, under the proposed spending cap, total appropriations would not return to their FY 2010-2011 levels until sometime after FY 2022-2023, as the figure at right illustrates.[iii]

Consequently, it may take the better part of a decade for New Hampshire to restore the spending cuts it enacted as part of the FY12-13 budget, if the proposed cap were incorporated into the Constitution.  For instance, to help bring the budget into balance, the state reduced total fund appropriations for uncompensated care payments to hospitals by approximately $230 million and for the University System of New Hampshire by $94 million.  Given the limits that the spending cap would impose on future budgets, New Hampshire likely could not bring funding for just these two areas back to prior levels until the FY 2016-2017 biennium, even if economic growth – and, by extension, state revenue growth – were sufficient to permit it.  If funding in other areas were restored more quickly or if policymakers created new initiatives in the interim, the delay could be even longer.

Spending Cap’s Arbitrary Formula Reflects Neither the Costs New Hampshire Faces Nor Its Ability to Support Public Services

In order to maintain the same level of public services over time, budgets should grow to mirror changes in the number of people receiving such services or changes in the costs associated with providing them.  At first glance, the proposed spending cap seems to allow for some growth, but a simple adjustment for inflation each year does not fully reflect the changes state government generally experiences.

Inflation, as measured by the Consumer Price Index or CPI, shows the change in price of a set of goods and services purchased by the typical consumer, such as groceries, housing, or cell phones.  State governments, on the other hand, usually purchase a much different set of goods and services.  In particular, one of the items that takes up the most space in the governmental shopping cart is health care. As is well understood and as is illustrated in the figure below, the growth in health care costs rose much faster than inflation in the past decade.  More specifically, between 2000 and 2009, the CPI – that is, inflation generally – grew by 2.5 percent per year on average.  In contrast, costs within Medicaid, the joint federal-state program that provides health care to the poor, the elderly, and the disabled climbed by 4.6 percent per year during that stretch.  Critically, though, that degree of cost growth has not occurred solely within public sector health programs; as the figure shows, costs climbed even more rapidly within the private sector during the 2000s.

What’s more, the proposed spending cap fails to account for any future increase in the number of people using a specific public service or set of services or even in the number of state residents generally.  Over the past decade, New Hampshire’s population has grown by roughly 0.4 percent per year on average, with increases of more than one percent in some years.  Subsets of the population, such as the elderly, are expected to grow more rapidly in the years ahead.  Thus, even if the per person cost of providing a specific service were simply to rise at the rate of inflation, state government might not be able to provide that service to everyone who needs it under the proposed spending cap.

Finally, the proposed spending cap ignores New Hampshire’s capacity to support public services and how it may change over time.  Ultimately, all state spending – whether as constrained by the proposed cap or as determined by the needs and preferences of the states’ citizens – has to come from the economic resources available within the state.  Over the last two decades, as summarized in the figure at right, that capacity has expanded much more substantially than the rate of inflation.  In fact, personal income in New Hampshire – one proxy for the size of the state’s economy – grew by about 4.8 percent per year on average between 1990 and 2010, while inflation climbed at an annual rate of just 2.6 percent over that span.

Spending Cap Would Have Other Unintended Consequences, Likely Leading to Further Cost-Shifting and Imperiling the State’s Bond Rating

One other consequence of the proposed spending cap to consider is its impact on individual portions of the state budget.  That is, with a spending cap in place, should policymakers decide to increase funding for a particular area of the budget – or should the courts mandate an increase in support for a specific program — at a rate that exceeds inflation, funding for the remainder of the budget will have to rise more slowly or to be cut outright.  In other words, under the limits imposed by the proposed spending cap, should policymakers choose to embark on a new initiative or to address a long-neglected area of need, the rest of the budget would pay the price, even if total revenue were sufficient to cover those higher costs.  Under such circumstances, the state would likely have to shift costs to other levels of government, local businesses and non-profits, and individuals and families throughout New Hampshire.

In addition, the proposed spending cap could imperil the state’s bond rating and lead to higher borrowing costs.  In creating a hard and fast limit on the amount of funds the state may expend in any given budget, the proposed constitutional amendment increases the likelihood that the funds available to meet the state’s obligations, including payments of interest and principal on the bonds it has issued, will be insufficient.  The greater the risk that the state is unable to make such payments, the greater the chance bond rating agencies such as Moody’s or Standard & Poors will lower the state’s rating.  If that were to occur, the costs the state would incur in borrowing funds in capital markets would rise.

Colorado’s Experience Should Serve as a Warning, Not as a Model

In recent years, a variety of states have considered incorporating some form of a tax or spending cap into their constitutions.  In each case, legislators or voters in those states realized the potential effects of such caps and rejected them, leaving just one state – Colorado – with a rigid formula limiting taxes and spending as part of its constitution.  Initially adopted in 1992, Colorado’s so-called Taxpayer Bill of Rights (or TABOR, for short) limits revenue growth – and, by extension, spending growth – within the state’s General Fund to the rate of inflation for the Denver metropolitan area plus state population growth.  It also requires voter approval of any tax increase and prohibits the state from levying certain taxes altogether, such as a real property tax or a graduated income tax.[iv]

The consequences of TABOR for essential services in Colorado, including for primary and secondary education, public universities, public health, and health care coverage generally, have been severe.  For instance:

• Under TABOR, the share of personal income Colorado devoted to K-12 education fell from 35^th out of the 50 states to 49^th between 1992 and 2001.
• Likewise, Colorado’s national ranking for the share of personal income dedicated to college and university funding dropped from 35^th in 1992 to 48^th in 2004.
• Between 1992 and 2005, the proportion of low-income children in Colorado without health insurance doubled. [v]

The consequences of TABOR were so far-reaching in fact that, in 2005, Colorado citizens, including a bipartisan group of state legislators and a coalition of business and civic leaders, approved a ballot initiative suspending it for 5 years.

Conclusion

In sum, an amendment to the New Hampshire constitution to cap spending growth at the rate of inflation would represent a dramatic departure for the state.  It would replace the deliberative process the New Hampshire Legislature has used for decades to determine the state’s budget priorities with an imported and arbitrary formula that reflects neither the needs of the state’s citizens, nor their collective ability to support public services.  In so doing, it would severely impair the state’s ability to make investments, now and in the future, in education, transportation, and other areas critical to sustained and shared prosperity.

Nevertheless, policymakers are weighing new restrictions upon the families that rely upon the program. In particular, legislation now before the House of Representatives – HB 1658 – would prohibit women who have a child while participating in the program from receiving any additional assistance related to that child. This Issue Brief presents an overview of the federal Temporary Assistance to Needy Families (TANF) program and its New Hampshire incarnation, FANF, and aims to provide a context for considering greater restrictions on families already struggling to make ends meet.

Principal Features of Temporary Assistance to Needy Families (TANF)

Federal and State Governments Share Responsibility for TANF

Temporary Assistance to Needy Families (TANF) is a public program through which the federal government provides a fixed sum of money – known as the TANF Block Grant – to each state every year.  The states, in turn, generally use that block grant, plus their own funds, to provide financial assistance and employment supports, such as job training or basic education, to extremely low-income families.  In fact, under federal law, states are required to match a specific share of the block grant they receive with their own funds.  Thus, under the auspices of New Hampshire’s TANF program, $38.5 million comes from federal funds, with the remaining $32.1 million attributable to state sources.

States may – and frequently do — use TANF funds in a variety of ways.  TANF funds are used to provide direct cash assistance, child care assistance, and employment or education supports, all with the goals of maintaining a certain minimum level of income and improving the employment prospects of TANF recipients.

Eligibility for TANF Restricted to Families with Children, Time-Limited, and Tied to Work

While states have broad discretion to determine who is eligible for TANF benefits and services, TANF funds must generally be used to serve low-income families with children in which at least one parent is unable to work, absent, or disabled.  Adults not caring for dependent children are ineligible for TANF.

Furthermore, as the name of the program suggests, the cash assistance available to children and families through TANF is intended to be temporary.  Under federal law, an adult cannot receive cash assistance through TANF for more than 60 months during his or her lifetime.  This sixty-month time limit does not apply to child-only recipients or to the receipt of non-TANF benefits such as Medicaid, food stamp benefits, or child-care subsidies.[i] States may use federal funds to extend the time limit for up to 20 percent of their TANF caseloads.  States may also choose not to impose time limits by using state-only funds to pay for assistance beyond the federal limits.  In 2011, the average amount of time that a family received financial assistance through New Hampshire’s TANF program – Financial Assistance for Needy Families – was 19.5 months.[ii]

Adults receiving TANF benefits must meet work participation requirements as well.  Federal law requires that half of the families receiving TANF in a state be engaged in some kind of work related activity for 20 to 30 hours per week.  If a state fails to meet this standard, it may face federal penalties.  Work participation activities in New Hampshire include, but are not limited to, employment, volunteer work- placement with local businesses and non-profits, vocational education and training, obtaining a GED-high school equivalency diploma, and life skills training classes to address balancing work and family issues as well as barriers to getting and keeping employment.

New Hampshire’s TANF Program:  Financial Assistance for Needy Families

• New Hampshire’s TANF program is called Financial Assistance for Needy Families (FANF) and provides cash assistance to families with dependent children.  The state maintains four different eligibility categories within FANF, but each category provides the same level of cash assistance.  Changes in a family’s circumstances, such as the age of a parent or child or the presence of a disability, may cause it to move from one FANF category to another.  The four categories are as follows:
• The New Hampshire Employment Program (NHEP) provides financial assistance to poverty-level families with dependent children and has mandatory work participation requirements.  NHEP provides employment and training services to clients such as vocational assessments, job training, work experience and vocational education.
• The Family Assistance Program (FAP) provides financial assistance to households where the adult in the family has a permanent disability, is over the age of 60, or has long-term obstacles to employment, such as chronic illness, domestic violence, or ongoing homelessness.  Importantly, more than 97 percent of FANF recipients under FAP are children, approximately half of whom have no parent present and are living with a caretaker relative.  This component of FANF has no work requirement.
• The Interim Disabled Parent Program (IDP) provides financial assistance to households in which the adult or their spouse is disabled and unable to participate in work activities.  The program serves adults with short-term disabilities and provides the state an opportunity to assess whether the family unit can be moved into the NHEP program.
• The Families with Older Children (FWOC) program provides financial assistance to families that include a child who is between the ages of 18 and 20 and who remains a full-time high school or basic education student.



As the figure above suggests, most FANF cases are either child-only FAP recipients or parents in the mandatory work participation NHEP program who are also caring for their children.  As a result, nearly three in four of all FANF recipients in New Hampshire are children.[iii] Of note, approximately one-third of FANF recipient children live with a caretaker relative, like a grandparent, and without either parent.

FANF Caseloads Have Fallen Over Time

In 2010, the average monthly FANF caseload in New Hampshire was approximately 11,000 people, representing roughly 5,400 families across the state.[iv]  As the figure at right illustrates, the number of people receiving FANF was considerably lower in 2010 than it was a decade ago, despite the severity of the 2007-2009 recession and the prolonged recovery from it.  Between 2000 and 2010, the monthly average of FANF recipients peaked at 14,465 in 2002 and declined to a low of 9,070 in 2008, before rising sharply in response to the economic downturn.[v]

FANF Benefit Levels Insufficient to Meet Basic Needs

The cash assistance that a family receives under FANF is very modest.  In 2011, the average monthly cash benefit was roughly $507, while the maximum a family can receive per month ranges from $539 for one person to $738 for a family of four.[vi]

By law, the Commissioner of the Department of Health and Human Services is charged with determining the level of FANF benefits “so that recipients shall be allowed to subsist compatibly with decency and health,” but must do so within the limits of appropriated funds and applicable federal regulations.[vii]  Still, current FANF benefit levels may fall well short of such a “decency and health” standard.  In 2011, the federal poverty guideline for a family of two was $14,710; in other words, to attain just a poverty level of subsistence, a family would need a monthly income of roughly $1,226.  Yet, the monthly FANF payment standard for a family of two was $606.[viii]

Comparing FANF benefits to the costs faced by the typical New Hampshire family puts their inadequacy in even starker relief.  For instance, in 2011, the median gross monthly rent statewide was $984.[ix]  Even assuming that a family of two on FANF received the maximum monthly food stamp benefit of $367, it would find it exceptionally difficult not simply to pay for rent, but to purchase the basic items that food stamps do not cover, such as diapers, clothing, or transportation.

 Proposed Legislation Would Limit TANF Benefits for Some Families

At present, the New Hampshire House of Representatives is considering legislation – HB 1658 – to prohibit any increase in the monthly cash assistance a family receives from FANF should a child be born to that family.  Under current law, if a FANF recipient’s family size increases by one person, the amount of assistance the family receives rises by $67 to $81 per month, depending on the family size.  The proposal would exclude children born within 10 months of initial enrollment for benefits or born as a result of rape or incest.  In FY 2011, there was an average of 6 live births per month that would be subject to the proposed family cap.  As a result, just 0.1 percent of FANF families who receive benefits in a given month would be subject to this change.

A Small – and Declining – Share of States Cap Family Benefits Under TANF

As of 2010, only 15 states – Arizona, Arkansas, California, Connecticut, Delaware, Indiana, Massachusetts, Minnesota, Mississippi, New Jersey, North Carolina, North Dakota, South Carolina, Tennessee, and Virginia – had a family cap that prohibited any increase in cash assistance grants for additional children, while two states – Idaho and Wisconsin — have flat benefit levels, regardless of family size.[x]  However, the number of states with a family cap policy appears to be shrinking.  Since 2003, Illinois, Maryland, and Nebraska have repealed the family caps they previously had in place.[xi]

Proponents of imposing a family cap on FANF benefits in New Hampshire have argued that such a policy may deter FANF recipients from having additional children.  Yet, research about the family caps employed by other states suggests that they may not achieve that result.  One study found “no systemic effect of the family cap on fertility rates among women aged 15 to 34 … If this empirical study result is correct, then the widespread adoption of the family cap as a state welfare policy appears ineffective at best and misguided at worst.  Women are not responding by having fewer additional births.”[xii]  Another research review concluded that “even the family cap policy, which was designed for the sole purpose of reducing additional births, had no significant association with subsequent nonmarital childbearing.”[xiii]

New Hampshire’s Poorest Families Already Bearing the Brunt of Budget Cuts

Resources for FANF families are becoming more scarce as a result of New Hampshire’s fiscal crisis.  As part of its efforts to balance the FY 2012-2013 budget, the Legislature placed new restrictions on funding for community mental health centers and created waitlists for programs serving different disabled populations.  Moreover, it completely eliminated one element of FANF, the Unemployed Parents (UP) program.  UP had previously provided employment training services and financial assistance to two parent families in which one parent was unemployed or underemployed, but, by terminating $3.5 million in state funds for the program, the Legislature chose to leave  approximately 300 families struggling to enter the workforce or to keep a job without cash assistance.[xiv]

Conclusion

New Hampshire’s Financial Assistance to Needy Families (FANF) program is a vital economic lifeline to more than 5,000 families across the state struggling to make ends meet.  Most of the individuals who receive benefits under the program are children, but, for those families in which a child’s parent is present, the rules for participation can be quite stringent.  Families must have extremely low incomes, meet education or work requirements, and can only receive benefits for a limited period of time.

Nevertheless, policymakers are considering imposing additional restrictions upon the families that depend on FANF to try to achieve some degree of economic security.  Legislation now before the New Hampshire House of Representatives would bar mothers who give birth while participating in FANF from receiving additional cash assistance related to their newborn children.  Very few families – perhaps as few as 0.1 percent of all families participating in FANF – would be affected by such a prohibition. However, given the current level of FANF benefits in New Hampshire, such a prohibition is likely to create even greater economic hardship among those families who would be subject to it.

---

[i] In New Hampshire, parents and children of families eligible for Financial Assistance for Needy Families (FANF) cash assistance are categorically eligible for Medicaid.  Additionally, if an entire family is receiving FANF cash assistance, then the income and resource tests for the food stamp program are satisfied.  Finally, FANF families are given priority for child-care subsidies over other, non-FANF eligible families.

[ii] New Hampshire DHHS/DFA TANF Snapshot Report from Data Warehouse

[iii] NHFPI calculations based on data from US Department of Health and Human Services, Administration of Children and Families, Office of Family Assistance/ TANF Case load Data for FFY 2010.   Retrieved at: http://www.acf.hhs.gov/programs/ofa/data-reports/caseload/caseload_current.htm

[iv] Ibid.

[v] Ibid.

[vi] New Hampshire DHHS/DFA TANF Snapshot Report from Data Warehouse, November, 2011; Division of Family Assistance, Desk Reference, Financial Assistance for Needy Families, Maximum Income Limits, 10/11 p.1.

[vii] RSA 167:7

[viii] Division of Family Assistance, Desk Reference, Financial Assistance for Needy Families, Maximum Income Limits, 10/11 p.1.

[ix] “2011 Residential Rental Cost Survey,” New Hampshire Housing Finance Authority, June 2011, p.1 & 13.

[x] Welfare Rules Database; Table IV. B.1, Family Cap Policies, Urban Institute; retrieved at http://anfdata.urban.org/wrd/maps.cfm  Connecticut still allots an increased $50 per month for an increase in family size, which is approximately half of the usual award increase relative to family size.

[xi] Jodie Levin-Epstein, Lifting the Lid Off the Family Cap: States Revisit Problematic Policy for Welfare Mothers, CLASP POLICY BRIEF: CHILDBEARING AND REPRODUCTIVE HEALTH SERIES, BRIEF NO. 1, Dec. 2003, at 1, 4, http://www.clasp.org/admin/site/publications/files/0166.pdf; Rebekah J. Smith, Family Caps in Welfare Reform:

Their Coercive Effects and Damaging Consequences, 29 HARV. J.L. & GENDER 151, 154 (2006); Christopher Dinkel, Welfare Family Caps and the Zero-Grant Situation, 96 Cornell Law  Review, 365, 374 (2011)

[xii] Kearney MS (2002, August) Is there an Effect of Incremental Welfare Benefits on Fertility Behavior?  A Look at the Family Cap.  Working Paper 9093.  Cambridge MA:  National Bureau of Economic Research.

[xiii] Ryan, S., Manlove, J., & Hofferth, S., (2003, November) State level welfare policies and subsequent non marital childbearing.  Paper presented at the Annual Association for Public Policy Analysis and Management Research Conference, Washington, DC.

[xiv] HB2 as adopted by both bodies, pages 91-92.  RSA 167:77e and RSA 167:79(I)(b)amended.  Div III House to Gov detail change, 4-4-11, row 50.  All Categories, C of C to House Detail Change, 6-20-11.  Description in Department of Health and Human Services, House Budget Reduction Options, SFY 12-13, March 9, 2011 Division III Budget Reductions, page 20.

]]> http://www.nhfpi.org/research/capping-assistance-would-affect-few-but-add-to-economic-hardship-for-some-children.html/feed 0 http://www.nhfpi.org/research/state-tax-policy/testimony-before-the-commission-to-study-business-taxes.html http://www.nhfpi.org/research/state-tax-policy/testimony-before-the-commission-to-study-business-taxes.html#comments Mon, 06 Feb 2012 16:32:41 +0000 AnneSaunders http://www.nhfpi.org/?p=1790 The legislative Commission to Study Business Taxes met Monday, February 6, to receive public input on its draft report recommending changes to New Hampshire’s tax system. Taken together, the recommendations would mean a substantial revenue loss for the state.  Had the recommendations been in place for the current biennium, they would have reduced state revenue by a conservative estimate of $100 million. This kind of revenue loss would likely require major cuts to public services, including infrastructure and education that are critical to attracting new businesses. NHFPI Executive Director Jeff McLynch testified that the proposals may hurt economic growth, not help.

His testimony follows:

Chairman Olbricht, Senators, Representatives, Members of the Commission, thank you for the opportunity to appear before you this morning.  My name is Jeff McLynch and I am the Executive Director of the New Hampshire Fiscal Policy Institute (NHFPI), an independent, non-partisan organization dedicated to exploring, developing, and promoting public policies that foster economic opportunity and prosperity for all New Hampshire residents, with an emphasis on low- and moderate-income families and individuals.

I am here today to urge you to oppose the draft report that has been submitted for your approval, for several reasons.

First, taken together, the recommendations contained in the report would entail a sizable reduction in the amount of tax revenue New Hampshire collects.  By extension then, they would significantly diminish the state’s ability to provide public services, such as education and infrastructure, that businesses across the state rely upon to remain competitive.  Importantly, a substantial body of economic literature suggests that the quality of the workforce and infrastructure in a state has more of an influence over businesses’ location and expansion decisions than the level of business taxation.



ACCESS PDF VERSION

Second, the recommendations fail to acknowledge not only that, on the whole, the level of business taxation in New Hampshire is already lower than in most states, but also that the single largest component of the collective business tax bill in New Hampshire is the property tax.  Indeed, to the extent that reductions in the Business Profits Tax or Business Enterprise Tax lead to a drop in the amount of aid the state directs to local governing bodies, they could force an increase in taxes for some companies.

Third and finally, some of the specific changes in law envisioned in the report, such as a move towards single sales factor apportionment, could actually create a disincentive for some businesses to locate in New Hampshire and thus impede, rather than foster, economic growth.  Of note, states that have chosen to adopt single sales factor have been no more successful in terms of promoting employment growth than states that follow a different approach to apportionment.

Commission’s Recommendations Would Lead to Substantial Revenue Losses and Diminish Ability to Provide Services on which Businesses Rely

To expand upon my first point, if the bulk of the Commission’s recommended changes in tax policy were put in place for the entirety of the FY 2012-2013 biennium, it is likely that New Hampshire would experience a revenue loss totaling in excess of $100 million.  More specifically, based on the Department of Revenue Administration’s methodology in assessing similar legislation in the past, lowering the rate of the Business Profits Tax (BPT) from 8.5 percent to 7.5 percent would reduce the amount of BPT collected in FY12-13 by roughly $75 million.  In addition, conforming to the federal Internal Revenue Code, as the report suggests, means that all of the changes in the federal corporate income tax that have been made since 2000 would be incorporated into New Hampshire’s tax system.  Chief among these federal changes is the creation, in 2004, of a deduction for domestic production activities.  According to the US Congress’ Joint Committee on Taxation, that deduction is expected to reduce federal corporate income tax collections by $8.4 billion in federal fiscal year 2011 or by roughly 4 percent.  A similarly sized reduction in BPT revenue would mean a loss of close to $26 million over the FY12-13 biennium.  Other recommendations, such as the extension of the Business Enterprise Tax (BET) carryforward and the elimination of any limit on the Net Operating Loss carryforward, would produce still further revenue losses.

Of note, the commission’s report, in its current form, fails to assess the magnitude of these revenue losses.  It does allow that revenue losses will occur and suggests that, in light of the state’s current fiscal circumstances, the recommendations it contains may be impractical in the near term.  Nevertheless, it is imperative to understand the amount of revenue that will be lost to such changes in tax policy, as revenue losses will invariably entail tradeoffs.  These are tradeoffs that will most likely take the form of further spending reductions; accordingly, they are tradeoffs that will have a direct bearing on how attractive a location New Hampshire may appear to businesses.

Recent experience illustrates the danger of proceeding without sufficient information.  Earlier this year, the Legislature enacted changes in statute that will allow taxpayers to carry forward, for ten years rather than five, a credit for any BET that they may have paid that they can use to reduce their BPT liabilities.  When the legislation was initially adopted, little information was publicly available from the Department of Revenue Administration (DRA) about the impact the change would have on future revenue streams.  Yet, a subsequent analysis from the DRA indicates that the revenue loss arising from the change could range from $32 million to $47 million annually, once fully implemented.

Importantly, efforts to reduce business taxes, as they will likely need to be paired with spending reductions to maintain budget balance, may ultimately hamper economic growth in New Hampshire.  The reason for such an outcome is that, as economic research has demonstrated, factors other than business taxes are more important in determining where businesses locate, invest, and expand.  Robert Lynch, Professor of Economics at Washington College in Maryland, notes that:

“…differences in tax burdens across states are so modest that they are unlikely to outweigh the differences across states in the other costs of conducting business.  These other “costs of conducting business” are the most important factors affecting business investment decisions and include the cost and quality of labor, the proximity to markets for output (particularly for service industries), the access to raw materials and supplies that firms need, the access to quality transportation networks and infrastructure (e.g., roads, highways, airports, railroad systems, and sewer systems), quality-of-life factors (e.g., good schools, quality institutes of higher education, health services, recreational facilities, low crime, affordable housing, and good weather), and utility costs.”[i]

States, of course, can help to reduce these costs, but only if they have the resources to do so.

Timothy Bartik, Senior Economist at the Upjohn Institute, puts this relationship even more succinctly, concluding that:

“If …state and local tax cuts are financed by cutting public services, the result may be lower business activity.”[ii]

Business Taxation in New Hampshire is Already Lower than in Most States

Although tax policy may not be as critical a factor in business decision making as the uses to which a state puts the resources generated by such tax policy, it is nevertheless useful to understand how tax policy in New Hampshire compares to other states.

During its deliberations, members of the Commission and witnesses before it have made references to publications and reports that portray New Hampshire’s business tax climate in a negative light, focusing largely on the statutory tax rate under the BPT and how it ranks relative to the corresponding corporate income tax rate in other states.

Yet, at least one study that examines the effective tax rates faced by businesses generally finds that business taxation in New Hampshire is lower than in most states.  More specifically, since the early 2000s, Ernst & Young, in conjunction with the Council on State Taxation (COST), “a nonprofit trade association consisting of nearly 600 multistate corporations,” has produced a report each year that explores trends in the taxes paid by businesses at the state and local level.  In the latest version of this report, for FY 2010, Ernst & Young finds that, in the aggregate, the state and local taxes paid by businesses amount to 4.4 percent of private sector gross state product in New Hampshire, below the national mark of 5.0 percent and less than at least 33 other states and the District of Columbia.^[iii]

Another recent study produced by Ernst & Young, again in collaboration with COST, concludes that New Hampshire had one of the lowest levels of taxation on new investment in the nation in 2009.^[iv]  It calculates that business taxation in New Hampshire reduces the 30 year rate of return on five different types of capital investment by 5.4 percent in the aggregate – only six states had lower effective tax rates under its methodology.

To be sure, the studies published by Ernst & Young and COST may have their limitations and methodological shortcomings.  For instance, in determining the overall level of business taxation, it includes unemployment insurance taxes, even if the final incidence of those taxes is upon a firm’s workers.  Still, they may be more indicative of where New Hampshire stands relative to other states than a simple comparison of statutory tax rates.

The series of Ernst & Young / COST studies reveal one other important fact about business taxation in New Hampshire.  By their accounting, the state’s two principal business taxes – the BPT and the BET – comprise approximately 21 percent of businesses’ total state and local tax bill.  Not surprisingly, given the overall structure of New Hampshire’s tax system, property taxes make up a far larger share of what businesses pay to help finance the operations of state and local government.  In fact, for FY 2010, the Ernst & Young / COST study calculates that property taxes constitute 52 percent of the state and local taxes paid by businesses operating in New Hampshire.

Consequently, efforts to reduce the BPT or the BET are unlikely to yield the intended economic results.  As mentioned previously, any state revenue loss arising from a reduction in the BPT or BET would likely force further cuts in spending.  To the extent that additional spending reductions at the state level lead to a further decline in aid to cities, towns, and school districts, property tax increases may occur.  If that proves to be the case, then, depending on the specific BPT or BET change written into law, individual firms or companies may not see their total tax bills shrink and could well see them grow.

Some Recommendations May Lead to Higher Taxes for Some Businesses and Individuals and May Create Disincentives to Locate in New Hampshire

 Some of the Commission’s specific recommendations may yield other unintended consequences.  For instance, the Commission urges the Legislature to study a move away from the state’s current apportionment formula, which “double weighs” the sales companies make in New Hampshire in determining their income subject to taxation here.  However, switching a so-called “single sales factor” apportionment formula, which makes in-state sales the sole factor determining taxable income, may actually deter companies from establishing operations in New Hampshire or encourage them to leave.

The reason for this potential “disincentive” effect is that increasing the prominence of in-state sales in New Hampshire’s apportionment formula may lead to a tax increase for some businesses, particularly those that have the bulk of their operations in other states, but that make a large proportion of their sales in New Hampshire.  Data contained in DRA’s annual tax expenditure report suggest that this has already occurred with the state’s switch from an equally-weighted apportionment formula to one that “double weighs” sales.  Overall, the Department notes that, after accounting for amended and adjusted returns, the change to a “double-weighted” formula is likely a net revenue loss for the state.  Still, its data show that, among those tax returns filed in calendar year 2010, 5,859 experienced a tax increase due to the “double weighted” formula.  Their total tax increase, in turn, was $15.3 million.

Accordingly, if New Hampshire were to adopt a so-called “single sales factor” apportionment formula, businesses currently in state – or those weighing a move here – which would pay higher taxes because of the change may seek to take advantage of existing federal nexus rules.  These rules would permit them to locate their operations outside of New Hampshire and use out-of-state sales people to make sales into the Granite State without becoming subject to its business profits tax.

In sum, then, I urge you to oppose the draft report before you today.  It would significantly diminish New Hampshire’s ability to provide the public services that businesses across the state rely upon to remain competitive.  It fails to acknowledge that business taxation in New Hampshire is already quite low relative to other states and it may ultimately create disincentives for businesses to remain in, or relocate to, New Hampshire.

Once more, I thank you for the opportunity to testify and would be more than happy to answer any questions you may have.

[i] Lynch, Robert G., Rethinking Growth Strategies:  How State and Local Taxes and Services Affect Economic Development, Economic Policy Institute, 2004, p. 6.

[ii] Bartik, Timothy J., “Solving the Problems of Economic Development Incentives,” Growth and Change, Spring 2005, p. 142.

[iii] Cline, Robert, et. al., Total State and Local Business Taxes, Ernst & Young Quantitative Economics and Statistics Practice, March 2010.

[iv] Cline, Robert, et. al., Competitiveness of State and Local Business Taxes on New Investment, Ernst & Young Quantitative Economics and Statistics Practice, April 2011.

]]> http://www.nhfpi.org/research/state-tax-policy/testimony-before-the-commission-to-study-business-taxes.html/feed 0 http://www.nhfpi.org/research/testimony-regarding-education-tax-credits.html http://www.nhfpi.org/research/testimony-regarding-education-tax-credits.html#comments Mon, 23 Jan 2012 20:16:32 +0000 AnneSaunders http://www.nhfpi.org/?p=1830 The House Committee on Ways and Means met Monday, January 23, to receive public input on legislation that would create a tax credit for businesses that contribute to private scholarship organizations. The money would be used for subsidies to students attending private, religious or home schools.

House Bill 1607 would be costly for state officials to implement and would divert scarce public resources to private interests. In particular, state aid to public schools would likely be cut even though there is no evidence students receiving subsidies to attend non-public schools do any better than their public school peers.

Executive Director Jeff McLynch urged the committee to oppose the legislation. His testimony follows:



ACCESS PDF VERSION

Chairman Stepanek, Representative Almy, Members of the Committee, thank you for the opportunity to appear before you this afternoon.  My name is Jeff McLynch and I am the Executive Director of the New Hampshire Fiscal Policy Institute (NHFPI), an independent, non-partisan organization dedicated to exploring, developing, and promoting public policies that foster economic opportunity and prosperity for all New Hampshire residents, with an emphasis on low- and moderate-income families and individuals.

I am here today to urge you to oppose HB 1607, a bill to create an education tax credit as part of New Hampshire’s Business Profits Tax (BPT).

HB 1607 would be costly for state officials to implement and would divert business tax revenue from public services to private interests. In particular, state aid to public schools would likely suffer, even though there is little evidence that students receiving subsidies to attend private school do better academically than their public school peers.

More specifically, HB 1607:

Would lead to a sizable reduction in funding for public services generally and likely for public schools in particular

As you know, the aim of HB 1607 is to create a new credit as part of the Business Profits Tax for contributions companies make to private scholarship organizations.  While it is unclear how many students may receive tuition subsidies from such organizations, the bill does stipulate that no more than $15 million in tax credits may be granted in fiscal year 2013, the first year of the program.

Given the current fiscal climate in New Hampshire, this means that the state will almost certainly have to reduce spending on a dollar-for-dollar basis, up to the maximum amount of credits granted, to keep the budget in balance.  At the time the fiscal year 2012-2013 budget was adopted, the Office of the Legislative Budget Assistant’s Surplus Statement showed a Revenue Stabilization Balance of $11 million at the end of the biennium, contingent upon the receipt of $10 million in proceeds from the sale of property at the Lakes Region Facility.  Given that finding, as well as the disappointing trend in revenue collections through December of last year, it seems unlikely that surplus funds alone could compensate for the revenue loss associated with the new credit.

HB 1607 does not specify any spending reductions, but companion legislation in the Senate, SB 372, does provide that, should a student leave a public school to attend a private institution as a result of a tuition subsidy received under the program, the school district he or she previously attended will lose the adequacy aid associated with his or her attendance.

However, since a large and growing share of the tuition subsidies distributed under the program may go to students who never attended a public school, this provision may not be sufficient to keep the state budget in balance over time.

What’s more, the revenue loss associated with HB 1607 and, by extension, the spending cuts it would force, may grow larger over time.  The bill would allow the maximum amount of credits granted to rise by 25 percent in any fiscal year in which the amount of contributions made to scholarship organizations in the prior year exceeds 90 percent of the total tax credits issued.  Consequently, depending upon the level of contributions to scholarship organizations, the state could see annual BPT revenue fall by $20 million or more within five years time.

Would divert scarce public resources to families that already have the financial ability to enroll their children in private schools

In its current form, HB 1607 would allow students currently attending private schools or receiving instruction in their homes to receive half of all tuition subsidies issued in the first year of the program.  More importantly, the bill would gradually increase that allotment, so that by 2017, it would permit every tuition subsidy for which a corresponding tax credit is issued to flow to students already attending private schools or who never attended a public school in New Hampshire.

Moreover, HB 1607 mandates that each scholarship organization provide an average tuition subsidy of $2,500 per year.  This sum is well below the average cost of attending private school in New Hampshire. Information compiled by this past fall’s education tax credit study committee fall indicates that the average cost of attending a religious elementary school in New Hampshire was roughly $5,200 annually and the average cost of attending a religious secondary school was nearly $7,700.  For secular elementary and secondary schools, the average cost of attendance was higher still:  $15,700 and $24,700 respectively.[i]

Many low and moderate income families will remain unable to pay these tuition bills even with a $2,500 subsidy and those families that can are less likely to need the subsidy to begin with.

Thus, it is likely that HB 1607 will, in time, largely subsidize decisions that many families would already have made without the tax credit and, by extension, direct millions of dollars in public funds to families that already have sufficient means to send their children to private schools.  Indeed, data from the 2010 American Community Survey indicate that the median income for New Hampshire families with children attending private schools is over $97,200, 25 percent higher than the median income for families with children attending public schools.[ii]

Ignores research that finds little meaningful difference in performance between students who receive subsidies to attend private schools and their counterparts who remain in public schools.

In July 2011, the Center on Education Policy (CEP) published a major review of a wide variety of studies produced over the past decade on the impact of publicly-funded voucher programs on student achievement.  Entitled Keeping Informed about School Vouchers, it concluded that, based on assessments of programs in Cleveland, Milwaukee, Washington, DC and elsewhere, there is “no clear advantage in academic achievement for students attending private schools with vouchers.”[iii]  CEP further notes that, “while some studies have found limited test score gains for voucher students in certain subject areas or grade levels, these findings are inconsistent among studies, and the gains are either not statistically significant, not clearly caused by vouchers, or not sustained in the long run.”[iv]

In light of such research, a major diversion of public funds to private schools is, at best, difficult to justify, particularly when such a diversion could lead to a loss of assistance to public schools in excess of any savings they may realize from a drop in attendance.

Would impose new and substantial responsibilities upon the Department of Revenue Administration (DRA) at a time when the Department already faces serious staffing challenges.

Under the provisions of HB 1607, DRA would be charged with, among other duties:

• Developing, verifying, and updating the list of scholarship organizations that could receive and distribute funds eligible for the tax credit;
• Notifying the relevant scholarship organizations in those instances in which students receive subsidies from multiple organizations;
• Monitoring and investigating potential violations of the statutes and regulations governing the tax credit, and;
• Compiling quarterly reports on the number of students applying for scholarships eligible for the tax credit, the amount of subsidy they receive, and the schools they attend.

As the aggregate amount of tax credits that businesses could receive would be capped at a prescribed dollar amount each year, the Department would presumably also be required to determine whether that cap had been reached and, if so, to calculate the amount of credit each business could claim.  Of note, HB 1607 fails to detail how the Department would allocate credits under such circumstances.

Accordingly, the fiscal note accompanying HB 1607 states that the bill “would place considerable administrative, auditing, and information technology related burdens upon the Department that could not be implemented at the current level of staffing and funding.” Yet, as written, the bill provides no additional resources to the Department to carry out these duties.  What’s more, the fiscal year 2012-2013 budget approved by the Legislature last June reduces funding for the Department by close to $2.5 million.  As result, the Department has laid off 14 of its 44 auditors in the past six months, a move that will likely reduce the amount of audit revenue the state collects.

In sum, I urge the Committee to recommend HB 1607 inexpedient to legislate, as it would fail to improve education for New Hampshire’s children, but would require substantial cuts in public services and create new and costly oversight responsibilities for the Department of Revenue.

Once more, I thank you for the opportunity to testify and would be more than happy to answer any questions you may have.

 

---

[i] Committee to Study the Implementation of an Education Tax Credit Plan in New Hampshire, Meeting Report, September 21, 2011, p. 1

[ii] Economic Policy Institute analysis of data from the 2010 American Community Survey, Minnesota Population Center IPUMS extract

[iii] Center on Education Policy, Keeping Informed about School Vouchers:  A Review of Major Developments and Research, Washington, DC, July 2011, p. 3.

[iv] Ibid., p. 9.

]]> http://www.nhfpi.org/research/testimony-regarding-education-tax-credits.html/feed 0 http://www.nhfpi.org/research/statement-of-executive-director-jeff-mclynch-on-legislative-briefings-on-new-hampshire-economy.html http://www.nhfpi.org/research/statement-of-executive-director-jeff-mclynch-on-legislative-briefings-on-new-hampshire-economy.html#comments Tue, 13 Dec 2011 20:54:06 +0000 Jeff McLynch http://www.nhfpi.org/?p=1749 CONCORD — The New Hampshire Fiscal Policy Institute released the following statement today:

As state lawmakers meet this week to examine the condition of the New Hampshire’s economy and its ramifications for state revenue, they should remain mindful of the consequences that the current state budget has had for individuals and families across the state.

From the loss of hundreds of jobs at hospitals and medical centers across the state, to greater barriers to access to health care for thousands of Medicaid patients, to ever higher tuition at our universities and community colleges, the budget crafted by the legislature has made New Hampshire a less desirable place to live or to do business, said Executive Director Jeff McLynch.

“Should revenue collections for the fiscal year 2012-2013 biennium fall short of expectations, policymakers should not rely on further spending cuts. Rather, they should take a more balanced approach that seeks to generate additional revenue and forestall further cuts to critical services,” he said.



ACCESS PDF VERSION

In particular, he noted mounting evidence that the decision to lower the state’s tobacco tax is likely to result in the loss of millions of dollars in revenue. To date, tobacco tax collections are 6.9 percent – or $7 million – below their anticipated levels for the current fiscal year. Moreover, the number of packs of cigarettes sold in New Hampshire over the past six months has fallen 21 percent from the same period a year ago.

“In light of these trends, policymakers should consider ending the tobacco tax reduction as soon as possible, rather than waiting for the trigger mechanism written into law to repeal it during the summer of 2013,” he said.

]]> http://www.nhfpi.org/research/statement-of-executive-director-jeff-mclynch-on-legislative-briefings-on-new-hampshire-economy.html/feed 0