ROCK A BYE BUDGET: A LULLABY

By Jeb Bradley 7/7/10

The Democratic authors of New Hampshire’s budget and its current $300 million deficit have accelerated into full spin campaign mode. They are chanting across New Hampshire that tough decisions were made, the budget is balanced, taxes are low, and the economy will recover.

Democrats are hoping to lull voters to sleep until November so nobody realizes the budget cradle is about to fall.

What did the budget package do and what are its authors not telling you?

First and foremost, overall state spending increased dramatically from $10.4 to $11.5 billion, or 10.5% on top of a similar 11.2% increase in the previous budget.

Second, 38 taxes or fees were raised in this budget on top of 29 in the previous budget. Some of the most notable hikes were the LLC Income Tax on small business owners, the Camping Tax, higher Rooms and Meals Taxes, more cigarette taxes, a tax on gambling winnings, higher boat and car registration fees, and higher highway tolls. Many Democrats also tried to implement a capital gains tax, an estate tax, remove a key business tax credit, and raise the gasoline tax. They also shortchanged cities and towns by nearly $100 million which has the perverse impact of raising homeowner’s property taxes. The LLC and Camping Tax proved so toxic to the NH economy even those who proposed them without a public hearing, capitulated and joined Republicans in repealing them.

Third, this budget relies on unprecedented one-time money which according to the non-partisan Legislative Budget Assistant approaches $800 million. These one-time dollars include unspecified sale of state assets, unsustainable amounts of abnormal borrowing, and federal stimulus funds exceedingly unlikely to ever be replicated. In fact, $48 million federal dollars that New Hampshire budget authors relied upon to fill the current $300 million hole has been tabled by Congress.

Fourth, due to one-time money the next budget confronts a much more daunting deficit. Having already voted for and implemented 67 separate tax and fee hikes in the current and previous budgets and having tried to pass several more notable tax hikes, it’s no wonder why Democrats are trying to lull voters to sleep.

If Democrats control the Legislature in 2011, voters can expect they will have the Tax-Man on speed dial.Facing unprecedented budget deficits, they are likely to call for income and sales taxes – perhaps both.

With 50,000 of our neighbors recently unemployed in New Hampshire the stakes for economic recovery in November could not be higher. The key question for voters: does New Hampshire succumb to Democrat’s yearning for income and sales taxes?Or do we restructure and shrink state government to make it less costly?

Voters deserve choices. So what might less costly government involve.

According to the Kaiser Family Foundation, New Hampshire has the 10th most costly Medicaid system in the nation, 38% above the national average.Implementing managed care as many other states have – Blue and Red – and reducing costs to the national average, could save nearly $300 million. Our current fee for service Medicaid structure encourages over-utilization. States that have implemented managed care have saved money and maintained quality. It can be done here too.

Legislatively mandated changes to education funding will cost state taxpayers $140 million in the next budget.But 123 communities will lose funds and the statewide property tax will return with vengeance for 42 communities. Maintaining the existing formula saves $140 million until a Constitutional Amendment that allows targeted state aid to communities most in need can finally be presented to voters.

Budget reform is long overdue. Currently department heads must submit budget proposals which maintain existing services – a built-in prescription for ever-more costly government. The law should be changed to require department heads to also propose a 5% budget reduction so that the Legislature can set priorities and achieve savings.

Other ideas for savings include consolidating human resource functions across departments, consolidating contracting for human service providers, and increased home confinement for non-violent offenders.

Structural reforms are necessary to protect taxpayers including a line-item veto for governors and protection from frivolous legal challenges for voter approved local tax caps.  Further we should look to states like Indiana to achieve significant savings in health care costs for public employees.

“A Wish – A Prayer – And A Credit Card”

So said the Concord Monitor in their June 13th Editorial titled “Not a State Budget to be Proud Of.”How did the Democratic controlled New Hampshire Legislature get into such a predicament?

Spending has jumped by 10.5% while revenues fell through the floor --- $102 million behind the estimate for the first eleven months of this fiscal year.Leading the revenue plunge are business taxes – off $43 million, rooms and meals taxes ---off $20 million, and interest and dividends taxes --- off a whopping $27 million. With the economic recovery anemic at best, revenues are not likely to improve any time soon.

On top of that, the effort to simply expropriate $110 million from a doctor’s medical liability fund (JUA) was deemed to be an unconstitutional taking of private property.All of which created a budget deficit estimated at $300 million by June 2011 when books close – up from a $220 million projection just in April.

Governor Lynch recently called a ‘Special Session’ of the Legislature to confront this alarming deficit – about 10% of the state’s General Fund. The package that emerged from the Special Session includes unprecedented borrowing and one-time revenue sources, uncertain receipt of federal funds, and unspecified sale of State property:The Credit Card.

The non-partisan Legislative Budget Assistant projects one-time revenue sources in the original budget and in the recent deficit package exceed $1 billion. Even excluding the $110 JUA raid and a $50 million reduction of funds that traditionally has gone to cities and towns to lower property taxes – this combined budget package relies upon a whopping 27% of one-time revenue for the General Fund.Nearly $200 million of that amount is unprecedented borrowing for operating expenses rather than capital investments such as buildings or bridges. Much of the balance of one-time revenue was federal stimulus funds.

Even stimulus funds may have reached their limit.Americans, fearful of a Greece-like debt crisis have sent Congress a message.Several incumbents have lost or barely survived recent primaries so Congress has yet to authorize more state aid. Thus $48 million of even more one-time federal money Legislators counted on is in limbo. Whoops – the check is not in the mail even though desperate Legislators are declaring it will be.

The deficit package also relies on unspecified sale of State property. While this idea may make sense, in a very soft real-estate market how likely is the State to receive reasonable value?When this idea was first proposed several weeks ago the estimated revenue proceeds were $50 million. Like magic, the revenue projections just jumped to $60 million. Presto: revenue grows when Legislators simply deem the real estate market has improved.

What about cuts? There were some cuts totaling $52 million but only 1.6% of the General Fund. This so-called $300 million deficit fix in reality is limited cuts, huge borrowing, and one-time revenue --- some of which may not even be real.

Where do all these maneuvers leave the budget? The authors claim the budget is now balanced, precisely what they predicted a year ago before it became a $300 million deficit. For the budget to balance now, they are counting on the unlikely prospect of revenue recovery.

The Prayer:what all the borrowing and one-time revenue does is allow the budget’s authors to cynically claim it is balanced for political purposes in November and pray they avoid the voter’s wrath for their spendthrift ways.But next year---facing nearly a billion dollar one-time revenue shortfall, New Hampshire will confront a fiscal train wreck.

While spending soared and the deficit grew, the numerous tax hikes over the last four years have hurt struggling families, besieged small businesses, while leaving New Hampshire less competitive for job growth or able to confront this looming deficit. In the previous budget, 29 taxes or fees were hiked.In this budget, 38 taxes or fees were raised including the job killing LLC Tax -- nothing more than an income tax on small businesses.The LLC Tax turned out to be so toxic to both small businesses and the Democrats who voted for it, that it was repealed. Even with the repeal, New Hampshire still has the worst corporate tax laws in the nation according to the non-partisan Tax Foundation.

Other warning signs from the Tax Foundation for our State include one of the highest levels of state debt per capita, being only slightly below the national average for state and local tax burden, and having among the higher levels of property taxes in the nation.

All these new taxes and warning signs in terms of national rankings are against the recent backdrop of 50,080 New Hampshire people being unemployed and the national pace of job growth anemic at best.

Four short years ago when change came to both Concord and Washington, the unemployment rate in New Hampshire was 3.6% and 26,865 people were unemployed. In April, the unemployment rate had soared to 6.7% and 50,080 were out of work.Having the worst corporate taxes and a Legislature willing to levy an income tax on small business owners is no way to get people back to work.

There are those legislators -- and now candidates -- who want to ignore the taxes, spending hikes, and deficits of the last four years and claim their stewardship of New Hampshire has been responsible. They point to other states in worse shape than New Hampshire, but ignore the fact that these other states have even higher levels of spending and taxation. Comparing New Hampshire to even more profligate states is no way to govern or help struggling families and small businesses.

The Wish:many of these same folks have always wished for income and sales taxes. Next year they will likely propose an income tax and a sales tax to close the budget hole they created. There could not be a clearer choice in November or a more important election for our State’s future.

FLIP A COIN:A NEW WAY TO BALANCE THE BUDGET

HEADS & TAILS MEAN NEW TAXES!

By Jeb Bradley

In what can only be called a bizarre turn of events in the statehouse last week, a coin flip was needed to break childish chest thumping between the Democratic House and Senate Leadership.At issue was how to begin negotiations over dueling pieces of legislation purporting to reduce a dangerous and growing budget deficit. The Department of Revenue estimates the deficit is $290 million. Just in April Governor Lynch pegged the deficit at $220 million. But Republicans on the House Ways and Means Committee believe it could reach $360 million.

With that stark reality echoing through the State House, a coin flip was necessary to determine the size of the negotiating table and initiate diplomatic talks. Mercy! Please!

How did we get here? In June 2009 the Legislature passed and Governor Lynch signed a budget that proposed to increase total state spending by $1.1 billion or 10.5% according to the non-partisan Legislative Budget Assistant. This increase was on top of an increase in the prior budget of $1 billion or 11.2%.

Almost immediately revenue underperformed expectations despite 43 new or increased taxes and fees.Next, the State was blocked by the Supreme Court from raiding $110 million from a fund paid into by physicians for medical liability coverage.Revenue continues to implode.In April -- one of the most important months -- the Business Profits Tax was off 27%, and the Business Enterprise Tax was off 21.5%. These are not only two of the largest taxes but also a barometer of future economic weakness. Rehiring has slowly started to occur with the unemployment rate inching downward to 6.7% but 50,080 people remain unemployed. The discouraging tax numbers are symptomatic of continuing economic pain that working families and small business owners are facing. Now that pain has metastasized in Concord.

But that’s not all.The Interest and Dividends Tax – another barometer of economic health was off 26.7%, the Communications Tax off 16.2%, and the Rooms and Meals Tax off 4.5%.The few hopeful signs among the tax revenue carnage were slight increases in liquor, beer, and tobacco sales. Whether that’s hope is questionable.

The first year of the budget will conclude on June 30. This means that as the budget deficit explodes the ability to fix it diminishes like sand in an hour glass -- each passing day lessens the time to deal with a growing problem. Republicans warned that this is precisely what would happen a year ago. But now, confronting the results of decisions made a year ago, tempers of top Democratsare fraying, accusations are flying, and coin flips are a proxy for leadership.

The House position is a potpourri of borrowing, shifting costs to cities and towns, limited spending cuts, and increased taxes.Tax hikes include more levies on tobacco, a new tax on electricity, hikes in taxes on insurance premiums, and a new estate tax. The tax hikes exceed $25 million, new costs to cities and towns of $20 million, borrowing of $65 million, and spending cuts of $34 million.

The Senate relies on the same borrowing which restructures $40 million of existing debt and turns $25 million of operating expenses for UNH into future debt.While borrowing $65 million maybe be an alluring antidote to short term pain, New Hampshire’s borrowing will soon be unsustainable and a costly long term migraine.

The Senate cuts total $32 million – like the House barely 10% of the overall deficit.The Senate continues to load costs onto property taxpayers -- though less than the House. The Senate raises taxes on tobacco products but avoids other tax hikes.Instead the Senate relies on $80 million of licensure fees from new gambling and $50 million from the sale of unspecified state assets.

Regardless about how one may feel about gambling, the recently released gambling study warns that appropriate regulatory infrastructure must be in place before proceeding. If the Governor relents from his veto threat and the necessary time is taken to get the regulations right, garnering the $80 million licensure fee in this budget cycle is highly questionable.

The $50 million sale of state assets is almost laughable as the only detail provided is a study committee to make it happen. Toss in the $65 million of unsustainable borrowing and the Senate has produced almost $200 million of what can easily be termed voodoo budgeting.

While hard to believe it actually gets worse -- in fact much worse.After being stung by criticism from local officials who have strenuously objected to Concord Democrats cost-shifting of nearly $100 million to property taxpayers, Democratic leaders have offered a fig leaf. Only problem is that this fig leaf is a frontal assault on one of the largest group of employers in New Hampshire – the hospitality industry.

Legislative leaders would give communities the ability to tax rooms and meals over and above the 9% statewide tax. This local option is just more happy tax talk. Towns would be pitted against each other and our state would be far less competitive for tourism, conventions, functions, tours and weddings to say nothing of working families in our state who would pay more to eat out.

I have been flooded with calls from restaurant and hotel owners many of whom are barely surviving the recession and the recent increase in the Rooms and Meals Tax from 8 to 9%. They tell me diners are much more price conscious, curtailing orders, and tipping wait-staff less. These small business owners believe this tax may be the straw that breaks their backs.

Small business owners are also appalled that like the LLC Tax and Camp Ground Tax, they had little chance to comment on the Local Rooms and Meals Tax.The LLC Tax and Camp Ground Tax led to a raucous revolt.Even the Democrats, who voted for those taxes without a public hearing, now disavow them as loudly as possible. These same Democrats now confront their inability to cut the spending they voted to raise just a short time ago and are reduced to flipping coins to determine what to do next.

The rest of us know where this is heading --- Welcome to NEW TAXSHIRE.

Can You Believe It?

Unfortunately, Yes We Can!

Joe Castiglione, the inestimable radio play-by-play announcer of the Boston Red Sox, has called two World Series victories. When the last out was recorded, Joe finished his play-by-play with words that rang through all of New England: “Can You Believe It?”

The “unbelievabilty” of the Red Sox winning two World Series has passed, but the unbelievability of what is happening in Concord and Washington continues to grow – the polar opposite of Red Sox Nation’s joy.

In Washington, spending escalates unchecked, the deficit hemorrhages red ink, and the overall debt frighteningly approaches unsustainablity. The 2009 deficit was $1.42 trillion. It is likely to grow in 2010 and is estimated to average nearly a Trillion Dollars for the next ten years. The total debt hit $12 Trillion, an eye popping $39,000 for every American man, woman, and child. 

Taxes are also set to go through the roof. Unless Congress acts before year’s end, each tax bracket for individual Americans will climb, the marriage penalty reappears, and small business expensing provisions disappear. Taxes on investment income – particularly tough on seniors, will jump precipitously and the death tax will come roaring back. In 2013 a new .9% increase in the Medicare payroll tax goes into effect as well as a 3.8% tax on investment income. In 2014 a federal tax on health insurance will be added to the tax-soup. Meanwhile, Washington is abuzz with talk of a staggering new Value Added Tax.

All of this is against the backdrop of the Unemployment Rate hovering near 10%.

The view from Concord is similar. Spending increased by 23% over the last two budgets and the State now faces a $220 million deficit despite nearly draining the so-called Rainy Day Fund. The next budget gets even worse as one-time federal money disappears and the deficit explodes past $600 million. These deficits are despite the 38 new or increased fees and taxes including the job-killing income tax on small business owners known as the LLC Tax. Now Governor Lynch is proposing new taxes on tobacco products and higher property taxes as the State shifts ever more costs to cities and towns.

While Congress and Concord flounder with deficit spending and taxes, 52,508 of our New Hampshire friends and neighbors are out of work and scant progress has been made to reverse the hardship of job loss.

Just when one would think conditions could not get much worse --- they have.   Despite the overwhelming need to create jobs for Americans, Washington has spent the last year concentrating on health care reform. Unquestionably, insurance reforms dealing with pre-existing conditions, insurance cut-offs during illness, and life-time limits were overdue. However, what Congress produced is “reform” that will cost at least $1 trillion over ten years, drive up costs for states, reduce choices for consumers, increase taxes, cut Medicare for seniors, increase insurance costs, further increase the deficit and debt, and lead to more government take-over of health care in America.

Given health care reform problems, the flawed political process used to pass it, and the significant majorities of Americans fundamentally opposed to the federal legislation, why would New Hampshire Democrats eagerly follow their Congressional brethren and attempt to pass New Hampshire’s version of health care reform? Unbelievable perhaps, but that’s precisely what Concord Democrats are proposing.

In a little noticed move late last week a non-germane amendment was scheduled for a hearing on Tuesday April 27th to ostensibly be added to legislation that had previously passed the Senate: SB-455. This amendment will give the New Hampshire Insurance Department (NHID) virtually carte-blanche authority to adopt any and all rules to implement health care reform in New Hampshire per the federal legislation. This type of unfettered authority for the NHID would leave the Legislature almost totally devoid of any say over health care policy in New Hampshire – an almost unprecedented transfer of power from elected officials to an unelected government agency.

Federal health care reform is now the law of the land. But, before Concord Democrats kowtow to an all knowing federal government and cede control of health care policy to the Insurance Department, consider the following: 

The most significant federal mandate --- that states show progress creating so-called health exchanges --occurs in January 2013. Exchanges must be implemented by January of 2014. This amendment does not need to be jammed through now without proper scrutiny, and --- if even necessary --- can and should be fully vetted in the next Legislature.

Furthermore, the NHID would have authority to commit taxpayers to more generous Medicaid benefits than required under the federal law. This decision must be left to elected officials more accountable to taxpayers.

Twenty one states have joined the lawsuit challenging the constitutionality of key provisions of health care reform. Shouldn’t New Hampshire wait for the outcome of this challenge before simply blessing the new federal law?

Lastly, national elections will be held in just six months. There could well be a political shift in Washington that may dramatically impact the status of the federal law. Yet, another reason to wait!

Regardless of whether the new federal law is good or bad or some combination– it is simply unfathomable that Concord Democrats would transfer all implementation of the law to an unelected bureaucracy.

Governor Lynch had previously – and correctly -- spoken out against unfunded mandates in the federal law that will substantially increase costs to New Hampshire taxpayers. Now however, executive agencies indicated these new costs are apparently acceptable. 

Just as apparent, Concord Democrats are simply falling into line and embracing whatever decree and judgment Washington orders.

Thus Concord Democrats are hoping to slip this unprecedented amendment through quickly with at best cursory review. Given their record on taxes, spending, deficits, and a faltering economy it’s no wonder they would want to push this through before anyone notices.

Governor Lynch has finally weighed in on the budget crisis with his proposal for balancing a $220 million deficit. Let's re-visit how we got here, and place it in the context of the overall economy.

While there have been glimmers of economic hope, New Hampshire citizens continue to struggle. The national unemployment rate crested at 10.1% in October. Since then the national rate has inched downward to 9.7% while unemployment in NH has continued to climb. Our October rate was 6.8% and 50,483 people were unemployed.February, the last month for available numbers in NH, the unemployment rate had climbed to 7.1% and 52,875 people are unemployed.Ominously, a recent study indicated that NH lost more jobs per capita to China, especially in technology than any other state.

In the past, NH led national economic recoveries, so why now are job losses in New Hampshire growing? Can it be the 38 new or increased taxes and fees implemented by the Legislature in June 2009? It's likely that tax levies on business owners have undermined the incentive for small businesses to locate or expand in New Hampshire.Aggressive and constant Department of Revenue audits on small business owners have resulted in imposition of the business profits tax on a significant portion of a business owner’s salary. This 8.5% tax combined with the 5% LLC Tax on the same stream of business owner salary has created a deadly job-killing 13.5% tax on business owners and the jobs they create.

The non-partisan Tax Foundation recently ranked NH’s corporate tax system the worst in the nation. While hard to believe, the business climate in Massachusetts is better than New Hampshire’s – a dangerous condition which illustrates why our unemployment rate has continued to climb while the national rate has declined.

The good news in Governor Lynch’s budget proposal is the assumed repeal of the LLC tax. Finally -- reluctantly, Democrats in Concord who voted for the LLC Tax, despite not being vetted in a public hearing, and defending it as merely closing a loophole, have seen the light.It’s a small miracle that Democrats finally realized that increasing so many job killing taxes in the face of rising unemployment is not a prescription for helping working families and creating jobs. Perhaps they realized that the November elections are right around the corner and voters are angry!

The LLC tax is not the only tax harming our economy. The so-called camping tax --- also enacted without a public hearing --- may take the foolishness cake.Supporters claimed this tax would raise $7 million over the two year budget.But so far it has raised only $500,000 in the first year which includes most of the camping season.

On a bill I sponsored to repeal this tax, campground owners testified at a public hearing that they are losing business as campers avoid New Hampshire. Unfortunately, the Democratic leadership laid the repeal bill on the table in the Senate – never to be seen again.Thankfully, Representative Herb Richardson’s bill which also repeals the campground tax, survived the water torture of the House Democratic leadership’s effort to kill it. Rep. Richardson's effort succeeded and the legislation is on its way to the Governor’s desk. Governor Lynch probably realized that the paltry $500,000 raised is more than offset by campers avoiding NH and thus not contributing to state revenue raised from sale of gasoline, meals, tobacco, wine, beer, and liquor. So his budget proposal eliminates the camping tax thus enhancing the tourist economy – one of our biggest sources of jobs and state revenues.

Governor Lynch also proposed a number of across the board cuts – precisely what Republicans had recommended when the budget’s 10.5% spending increase was adopted. Had those cuts not been summarily rejected 10 months ago, today’s problems would not be as dire.Nevertheless the Governor has begun the process of reeling in the excessive spending with cuts to the courts, attorney general’s office, health and human services, education, corrections, environmental services, and information technology. An additional 30 to 35 people will lose jobs on top of nearly 300 jobs that have already been cut.

Some troubling aspects of the Governor's proposal are the $25 million of operating expenses at UNH that will be bonded – on top of the recent bonding of school building aid. Continued bonding in this manner isn’t sustainable. The cigarette tax will increase for the 5th time in 6 years. Much of the competitive advantage NH enjoys over neighboring states will evaporate, so revenue growth may not match expectations. Lastly, the budget proposal’s assault on property taxpayers continues as retirement costs, revenue sharing and some education programs will be downshifted to cities and towns.

Here is an idea the Governor should consider rather than socking property taxpayers with more costs.The Regional Greenhouse Gas Initiative (RGGI) fund may have approximately $15 million in it by the end of the budget. Currently these funds are disbursed to different entities such as UNH, Dartmouth, and Stonyfield Farms to reduce carbon emissions. Consider this however: UNH has been paying golden parachute bonuses for years to top administrators, Dartmouth College has an endowment, while Stonyfield is one of NH’s most successful corporations.Surely property tax relief, at a time when 52,875 people are unemployed and countless more NH citizens are struggling, is a higher priority for scarce resources.

Governor Lynch’s proposal may resolve this current budget crisis through a patchwork of spending cuts, one time fixes and accounting maneuvers, but the state will continue to lurch from crisis to crisis because we are avoiding long overdue restructuring of state spending for Medicaid, education funding, retirement and healthcare costs. These big ticket items unless reformed –quickly – will produce a more profound future crisis -- a likely income or sales tax and erosion of well-paid jobs. We have an opportunity – indeed an obligation to confront and resolve these growing fiscal problems before it is too late. If not, perhaps this blog should be re-titled from Budget Blues to Budget in the Red.