News and Views

This is a legislative report from Senator Jeb Bradley (R-3)

After two marathon weeks of discussions between House and Senate members charged with negotiating a budget, early Friday morning a package emerged. Its fate is uncertain as the full House and Senate must pass it before it reaches Governor Lynch for signature. Counting votes before the June 24th Session will be almost as daunting as reaching this compromise — anything can and may well happen.

Let’s first focus on what is in this package and what is not, then on the impact it will have on people and businesses, and lastly how this budget will affect New Hampshire’s future.

Like any compromise, this budget is a mixed bag of good news and bad news. Several very controversial new taxes and tax hikes that had previously been approved by either the House or Senate, were dropped. These include the capital gains tax, death tax, gas tax, insurance premium tax, and a specific increase in business taxes by loss of a tax credit. All of these taxes would have directly undermined New Hampshire’s ability to attract businesses, investors, or visitors to our state. Also dropped from the final package were expanded gambling and a controversial plan to use toll revenue for highway improvements all over the state. Several taxes rumored for late consideration never made the final package including an entertainment tax and a tax on mortgage re-financing.

There are new taxes galore however. The tobacco tax will go up by 45 cents — the fourth hike in five years. Non-smokers may generally be callous to the impact this tax has, but smokers, especially low income people, justifiably believe they are carrying far more than their fair share of the tax burden. This increase will also undermine the cross border advantage New Hampshire has long enjoyed – attracting visitors to purchase tobacco products here and fill our revenue coffers. Convenience stores near the borders will be impacted, and meeting our revenue goals with this tax hike is questionable.

Any gambling winnings will be taxed at 10% including those garnered outside of New Hampshire. Will we be sending auditors to Foxwoods and Las Vegas — or charitable events in New Hampshire — to guarantee tax collection? Under those circumstances, is the $14 million of anticipated revenue farfetched?

The Rooms and Meals tax got increased 12.5%. I have written before that this huge increase will make our states less competitive for tours, vacations, conventions, and weddings. But budget writers slapped this tax for the first time on campgrounds – without a public hearing. Campground owners are outraged at this abuse of process. One owner felt so betrayed by the Legislature not having a public hearing, he told me the only people qualified to serve in the Statehouse are the janitors. Campers arriving this summer may be just as angry when they discover this new “marshmallow tax”. Again, revenue projections may suffer if campers take their marshmallows elsewhere.

Business owners were certainly dinged too. Business owners already are subject to an 8.5% tax on profits as well as a .75% tax on all payroll expenses. Now however, business owners organized as limited liability companies or as partnerships will be subject to an additional 5% tax on any income distributed to an owner. This significant change in the 1923 Interest and Dividends tax was also snuck in at the last minute – again with no public hearing. The estimate is that this change will raise $30 million of new taxes from business over the next two years. This dramatic increase in taxes on small business may prove to the biggest $30 million mistake that New Hampshire could make — as it threatens to undermine New Hampshire’s ability to build new jobs at exactly the wrong time.

The ‘rest of the story’ behind this last minute business tax increase is that it is just the latest step by the New Hampshire Department of Revenue Administration to strangle small business in New Hampshire. Desperate to raise revenue, DRA has recently taken it upon itself to essentially determine how much compensation a business owner may pay him or herself. Should the business owner pay him or herself additional compensation beyond what DRA has pre-determined is allowed, the DRA with bureaucratic hubris will simply assesses the 8.5% Business Profits Tax on this so called excess compensation.

If people are concerned about the Administration in Washington determining pay levels for executives – well it has been happening here in New Hampshire – right under our noses – with questionable legal authority for DRA to determine what is profit and what is income for a business owner.

This attack against successful small business owners, hidden from the light of day behind the audit curtain, is by itself a terrible threat to New Hampshire’s ability to build new jobs here. But now under this budget it gets worse. The business owner will pay a new 5% tax on income on top of the 8.5% tax on the balance of income that DRA has determined is excessive. The Legislature may say it wants to attract business to New Hampshire, but in fact, the Legislature is sending business a strong signal: move to Massachusetts. When tax policy in Massachusetts is more attractive than ours—that is dangerous! The pink slips will follow for NH workers.

It is not just taxes – fees are going up dramatically. Drivers will pay at least $30 to $75 more for registering a car. Boat registration fees double. Condominium registrations will nearly double. There is even a new salt water fishing license fee and a permit to carry a concealed weapon for out of staters skyrockets from $20 to $100 which means people will no longer register firearms in NH and we will likely lose money.

What about property taxes? This budget spreads the pain to them as well as property taxes will climb across New Hampshire by nearly $90 million as this budget downshifts traditional state responsibilities onto the backs of already struggling property owners.

With all these new taxes, higher fees, and soaring property taxes – what happened to spending levels? I have maintained throughout this budget process that spending needs to be reduced to avoid raising taxes on families, small business, and property owners struggling to stay afloat. While this budget did make some last minute cuts to programs and personnel – it was still not enough in my view. Overall spending will still increase 10.5%.

Governor Lynch warned that projected revenue is going to fall to 2004 levels and will be 10% lower than 2008 levels. Business tax revenues alone are currently some 27% below the projections for expected revenue.

But budget writers were still short and desperate for revenue. So despite the Governor’s warning, budget writers magically inflated revenue expectations by $75 million in order to sustain spending. Lastly, $90 million of traditional state expenditures to reimburse school districts for construction projects was moved from the operating budget to the capital budget – meaning this $90 million will be borrowed! Experts have warned that borrowing of this magnitude is unsustainable.

So what does all this mean? Economically strapped New Hampshire residents will have to dig deeper into wallets filled with fumes rather than cash. The business climate will suffer significantly at a time that nearly 50,000 New Hampshire people are out of work and that New Hampshire’s unemployment picture has also darkened relative to other states.

But what has gone under the radar is this budget’s impact on future budgets. Not enough people realize that about $500 million of spending in this budget depends directly upon one time sources of revenue: federal stimulus funding, increased federal Medicaid funding, and a $110 million raid of New Hampshire doctor’s medical liability funds. (Litigation filed against this raid as well as the $75 million magical revenue projections are likely to leave this budget with a gaping deficit.) Can New Hampshire realistically expect future federal largess as Congress stares straight into the white eyes of indefinite trillion dollar federal deficits.

This $500 million one-time spending crater is a ticking time bomb for the next budget. Will the re-financing tax, the entertainment tax, the gas tax, the capital gains tax, the death tax rise from the dead? Will existing taxes on business, hospitality, tobacco, interest and dividends, real estate sales, and communications continue on their relentless climb? Will the state dump more costs onto property taxpayers? Or will it be a sales tax or an income tax—how about both?

That is the bleak future for New Hampshire families, businesses, and property owners unless state spending, which will have grown by nearly 24% in three budget cycles, is not brought under control.

This is a legislative report from Senator Jeb Bradley (R-3)

The legislative session may be winding down rapidly but the greatest issue of all, the budget, is far from being resolved. The budget debate comes against the backdrop of a distressed economy with high unemployment rates and families and businesses struggling to make ends meet. Will the conference committee on the budget make this situation worse?

Unfortunately, despite our Live Free of Die motto, this debate is not between those who would frugally limit government and those who would inexorably allow it to grow. Rather, it could be called the Great Tax Debate as various factions of the legislature seek to add their preferred tax hikes to a budget bursting with higher taxes and fees.

Why is New Hampshire in such a tax predicament? Some would argue the recession and falling revenues to state coffers is to blame. That’s only part of the story however, as Paul Harvey would say ‘the rest of the story’ is that spending in New Hampshire has increased dramatically.

New Hampshire’s current budget allowed total spending of $10.4 billion up from $9.36 billion in the prior budget. The budget the Senate recently passed proposes total spending of $11.6 billion and the House passed budget was only marginally lower. Bottom line: if this spending plan is ratified, total spending will have increased 23.8% over 3 budgets. It is hard to imagine that the average family or business in New Hampshire has seen their income increase by anything approaching that figure…..that is if they have any income left.

What makes these increases even more staggering is that spending is going down in other states around the country. The bi-partisan National Governor’s Association (www.nga.org) recently released a study that highlights an average 2.2% decline in state spending around the nation in 2009. Furthermore, our nation’s governors are recommending additional spending reductions of 2.5% this year. But, not New Hampshire, as there is little disagreement among Democratic conference committee members that total spending should increase by $1.2 billion.

With the exception of a few spending reductions such as closing the Laconia State Prison, the budget debate focuses almost exclusively on new or increased taxes. The House has passed a new tax on capital gains and estates, as well as increases on tobacco products, rooms and meals, insurance premiums, gambling winnings and gasoline. The Senate has passed expanded gambling for additional revenue, as well as increased taxes on tobacco, rooms and meals, and new onerous business taxes. Both budgets have numerous fee increases. Both budgets raid a fund paid into by doctors designed to keep medical malpractice rates in line. The $110 million raid of this fund will trigger an all but certain lawsuit which doctors stand an excellent chance of winning – because in reality it’s their money. More cynically both budgets underfund to varying degrees the state’s historic commitment to assisting towns and cities. So property taxpayers are going to be left out in the cold without a seat in this game of musical tax chairs.

Sound chaotic and controversial? It is and deadlines are looming. The package must first be agreed to by the nine legislators on the Committee of Conference, chosen to resolve the differences between the two budgets. Then both bodies must ratify the final package. But the House previously killed new gambling. Senators don’t like the capital gains and estate taxes. The House wants a gas tax. The Senate is ok with tolls. The Senate wants business taxes, the House would tax insurance premiums. And so it goes — with precious little talk about decreasing the proposed $1.2 billion total spending increase.

The political reality is: neither plan may prevail. So rumors swirl of a third tax stalking horse waiting in the wings. Details are sketchy, but two new taxes are being discussed behind closed doors.

The first tax proposal would apply the Real Estate Transfer Tax to mortgage refinancing. In other words, as people try to refinance to lower mortgage payments in order to keep their homes, the state would impose an additional tax on them. At a time when Washington and states around us are adopting policies to help keep people in their homes, Concord is considering slapping a new tax on a family’s mortgage pain. The Portsmouth Herald astutely proclaimed this idea “completely off the wall.” Amazingly, proponents of this tax have not heard about what is happening in the financial world. The headline in the June 11th Wall Street Journal proclaimed that interest rate hikes (the result of $2 trillion federal deficits) are not only clouding economic recovery but “choking off a refinance wave.” This would be a very painful tax for struggling NH homeowners. It would undermine recovery of housing prices, and would not likely produce the revenue expected.

The second tax in the closet is an attempt to apply the 5% Interest and Dividend Tax to limited liability corporations. This tax would essentially be an income tax on the owners or partners of many New Hampshire’s small businesses. For business owners this is just a new déjà-vu. They already pay a .75% payroll tax on employee salaries called the Business Enterprise Tax. Business owners pay an 8.5% tax on profits. How does adding yet another levy these taxes make New Hampshire attractive for business?

Jim Roche, the President of New Hampshire Business and Industry Association called this proposal “alarming” and went on to say, “at a time when businesses up and down every Main Street in New Hampshire are cutting expenses and making painful lay-off decisions in response to the worst economic malaise since the Great Depression, it is astonishing to witness state policy leaders on the cusp of making matters worse.”

And just for good measure….the proposed hike in the Rooms and Meals tax may not raise enough revenue and could be jacked even higher…. at a time that one of NH’s largest industries, hospitality, must compete against other states for declining consumer spending.

So what about cutting spending? Those like myself who have proposed across the board cuts have been termed simplistic or just the ‘party of no’. Meanwhile despite the spin, these amendments to reduce spending in both the House and Senate have been defeated on a partisan basis. Yet amazingly, when Senator Sheila Roberge and I proposed a specific cut, ending the subsidy on dog racing that costs taxpayers $1 million, that too, was defeated.

There is no question that cutting spending is difficult. But what’s the alternative – a $1.2 billion increase in spending in New Hampshire while other states are cutting spending? Tax hikes to pay for state spending will only undermine New Hampshire’s competitiveness and ability to grow jobs. Spending cuts may be difficult, but are necessary. Spending cuts are also what New Hampshire individuals, families, and businesses are doing to survive. They are not claiming it can’t be done – they don’t have that option. Budget writers in Concord should take heed.