ECONOMIC ANALYSIS

Budget Deficits and Business Taxes in New Hampshire

May 9, 2002

The New Hampshire Banker's Association released a study today on the economic impact of increasing business taxes.

Prepared by:
Dr. Lisa Shapiro, Chief Economist
Mr. Charles Connor, Budget Expert
Ms. Heidi Kroll, Market and Policy Analyst

Download the entire study:
businesstaxes.pdf (46 pages, 394 kb)

Download a PDF version of Dr. Shapiro's PowerPoint presentation detailing the key topics of the study:
businesstaxes-presentation.pdf (165 kb)

Executive Summary

During the last four years, the legislature has enacted and the governor has approved significant increases in the rates of New Hampshire's two principal business taxes. The Business Enterprise Tax (BET), at .75 percent, rose over 300 percent; and the 8.5 percent rate of the Business Profits Tax (BPT) is now among the highest in the country.

The increases were part of the legislature's response to the state's school funding obligations set out in Claremont I and II. The legislature and the governor have been unable or unwilling to satisfactorily resolve New Hampshire's growing budget deficit by drawing on and/or developing other revenue sources or by changing expenditure patterns. The New Hampshire Bankers Association commissioned this study to examine the effect of increased business taxes on the New Hampshire economy, and, specifically, to address the impact of further increasing the business tax burden to meet future state budget deficits.

The business community's share of state grants to New Hampshire communities to comply with the Claremont rulings has grown dramatically, from 16% in 2000-2001, to 33% in the current biennium.

Figure 1
Business Taxes' Increasing Share
of State Grants Disbursed to Cities and Towns
(2000/2001 Biennium to 2002/2003 Biennium)

Click to enlarge

It is likely that state government will continue to consider increasing business taxes in the near future. When the new legislature takes office later this year, it will need to address budget deficits for the current biennium, and also pass a budget for the 2004-2005 biennium, which begins on July 1, 2003. State revenues collected through April, 2002, are significantly less than planned, indicating a deficit for the current biennium in the $80-$100 million range, prior to tapping any one-time revenue and expenditure fixes. Indicators point to an even larger deficit in the next biennium. We forecast about a $100 million revenue shortfall per year in 2004 and 2005.

Figure 2
Annual Deficits Continue to Grow

Click to enlarge

This study addresses the impact on the New Hampshire economy of closing a $100 million annual deficit in the next biennium through increased business taxation. These are some of the possible combinations of tax increases which could be enacted to generate $100 million per year:

• Increase the BPT rate to 12% and retain the BET credit against the BPT
• Keep the BPT rate at 8.5% and eliminate the BET credit against the BPT
• Increase the BET rate from .75 to 1.2
• Some other combination of increased BPT and BET rates and reduced BET credit

The primary methodological approach of the study is use of an econometric model of the New Hampshire economy (built by Regional Economic Modeling, Inc., or REMI), which allows for simulations of the effects of tax increases on economic performance as compared to a control forecast where there are no business tax increases. The state's Economic and Labor Market Information Bureau, for example, used the REMI model for a study forecasting the employment, income, and migration effects of permanently closing the Berlin/Gorham Mills.

Using REMI, the study examines possible scenarios for meeting the projected $100 million annual budget shortfall:

• Scenario A: Either increasing the BPT from 8.5% to 12%, or repealing the credit
• Scenario B: Increasing the BET from .75% to 1.2%
• Scenario C: Collecting one-half the increase from the BPT by either increasing the BPT to 10.3%, or by partial repeal of the credit, and by increasing the BET to 1%

Sensitivity analysis and several other estimates based on a review of other studies validate the results found by the REMI estimates.

The study's key finding is that even a small additional increase in business taxation leads to more than just a small bump in economic performance. Indeed, it creates a significant drag on the state's economy. It will cause crucial reductions in New Hampshire jobs, sales, investment, household earnings and gross state product as compared to a New Hampshire future without further business tax increases.

Further increasing business taxes leads to reductions in the number of jobs across all sectors. The impacts on employment inflicted by further business tax increases are significant and will expand. First year impacts are 1,200 reductions in jobs; by the 10th year, the annual change is about double that, with a 10-year cumulative change estimated at 17,000 fewer jobs, a 22 percent reduction in total job growth over the next 10 years.

For the manufacturing sector, this will accelerate the decline in manufacturing jobs. According to a recent study by Professor Gittell (UNH, 2001), manufacturing employment declined by 4.3% in New Hampshire from August, 2000 to August, 2001. Even without further business tax increases, there are expected to be 3,000 fewer manufacturing jobs in 2012 than in 2003. There are also expected to be fewer construction jobs in New Hampshire in 2012 than in 2003, even without further increases in business taxes. Increasing business taxes further thus eliminates an additional 200-250 construction jobs each year.

Fewer jobs and goods and services sold mean less money in people's pockets. The decline in household earnings (wages, salaries, other compensation, and proprietors' earnings) is immediate and noticeable. The impact grows over time. Over 10 years, the loss is almost $800 million.

The declines in investment, sales, jobs, household earnings and gross state product also lead to a reduction in state and local revenues than what would otherwise be expected without the business tax increases. For example, as businesses invest less and consumers spend less, property taxes and meals and rooms tax revenue do not grow as fast. The estimated reduction (across all revenue sources as an off-set) is about $11 million in 2003, growing to $27 million in 2012, all in 2002 dollars.

New Hampshire business investment, sales, and gross state product are all reduced from levels which are forecasted without business tax increases. If New Hampshire enacts additional increases in business taxes, by 2012 the state's economic growth is forecasted to be .2 percent less. Should another recession or significant slowdown occur, those reductions will put New Hampshire into deeper negative growth and into a slower recovery from a recession.

These results support recent statements by New Hampshire's chief revenue and economic development officials.

Download the entire study:
businesstaxes.pdf (46 pages, 394 kb)

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