1. 1 “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.” New Hampshire in Recovery January 7, 2011 Dennis Delay ddelay@nhpolicy.org Board of Directors Todd Selig, Chair Mike F. Buckley John D. Crosier, Sr. William H. Dunlap Sheila T. Francoeur Stephen J. Reno Stuart V. Smith, Jr. Brian F. Walsh Kimon S. Zachos Donna Sytek, Immediate Past Chair Martin L. Gross, Chair Emeritus

2. 2 4 Themes NH is half way home to Recovery Manufacturing is most important. Reasons for a structural deficit State revenue forecast

3. 3 Anecdotal evidence from the Fed Bank of Boston, December 1, 2010 New England continues to expand gradually. Contacts in manufacturing, software and IT services, staffing, and commercial real estate seem more upbeat. Retailers continue to give mixed reports. Residential real estate markets remain soft. Labor demand is improving somewhat, with most contacted sectors undertaking modest net hiring. Some firms report raising prices or wages and complain of selected increases in non-labor costs, but most say they are holding their prices and wages stable. The outlook for 2011 is slightly more optimistic than last time, with somewhat less reference to downside possibilities.

4. 4 NH is Half Way Home

5. 5 NH Job Recession and Recovery

6. 66 The History (and Future) of State Budgets In One Slide

7. 7 4 Themes NH is half way home to Recovery Manufacturing is most important. Reasons for a structural deficit State revenue forecast

8. 8 Manufacturing is Important to New Hampshire.

9. 9 Manufacturing is the most important export industry in terms of employment size, tourism is second. Source: INHS Tourism Satellite Account FY2008

10. 10 Manufacturing’s higher wages means it lends more support to GSP from sales outside of the state. Source: INHS Tourism Satellite Account FY2008 Manufacturing is 4 times larger than Tourism

11. 11 NH Manufacturing; Support for Public Services New Hampshire Manufacturers paid over $100 million in combined State Business Profits and Business Enterprise Taxes in FY2008. Manufacturers also pay state and local property taxes, unemployment insurance taxes, etc. Creating 100 new manufacturing jobs in New Hampshire results in an additional 138 indirect and induced jobs in the rest of the New Hampshire economy, and adds (per year) –$11 million in earnings, –$18 million in Gross Domestic Product (GDP), –Generates $1.2 million in state and local tax revenue.

12. 12 How Do NH General Fund Revenues Change with the NH Economy?

13. 13 The Great Recession reversed the forecast variance.

14. 14..and this Recession has been very hard on revenue

15. 15 4 Themes NH is half way home to Recovery Manufacturing is most important. Reasons for a structural deficit State revenue forecast

16. 16 What is a “Structural Deficit”? A “structural deficit” is a situation where, with no change in tax laws or public services, tax revenues do not increase as fast as expenditures.

17. 17 Does New Hampshire Have a Structural Deficit? “New Hampshire can be characterized as having a long-term structural deficit in the sense that for a given scope of programs and revenue system, expenditures grow automatically faster than revenues.” KPMG Peat Marwick February 13, 1992

18. 18 State Revenues, Expenditures, and Gross State Product

19. 19 State Revenues Grew Because of New Taxes and Non-Tax Sources

20. 20 Taxes on Volume [Per Unit] (Gas Tax) or Ad Valorem (Meals and Rooms)

21. 21 NH Volume (per unit) taxes don’t keep pace with economy.

22. 22 A NH volume (per unit) tax with rate changes.

23. 23 NH Ad Valorem (value based) Taxes move with the economy.

24. 24 Some Ad Valorem (value based) Taxes Show Lots of Variance!

25. 25 Two Thirds of NH Revenue Does Not Grow with Economy, or Is Unstable

26. 26 Structural Deficit: So What? Recognize to scale back on state activities OR recognize the necessity to raise tax rates or add new taxes to maintain a constant level of services. Results in more detailed review of all state programs every biennium because there is always a looming shortfall. Creates regular atmosphere of crisis and stress. Reduces possibility of surpluses for investment in desirable one-time projects. Makes long-term strategic planning more difficult. Should not be used as a political weapon to bludgeon the other political party.

27. 27 2010 New Hampshire State Revenue by Type (Millions $)

28. 28 4 Themes NH is half way home to Recovery Manufacturing is most important. Reasons for a structural deficit State revenue forecast

29. 29 NHCPPS Model Showing Revenues on Target

30. 30 NHCPPS Model for BPT

31. 31 NHCPPS Model for BET

32. 32 NHCPPS Model for Meals and Rooms

33. 33 NHCPPS Model for Interest and Dividends

34. 34 NHCPPS Model Results

35. 35 NHCPPS Model Simulations

36. 36 Upcoming Budget Problem? Size of that is still hard to determine … $250 to $680m depending on a variety of assumptions. What will the economy do? –The Center’s revenue estimation model suggests that revenues will increase by approximately 3.5% from 2012- 2013. What will the federal government do regarding enhanced federal dollars? –The 2011 budget as passed (again) this past spring includes $124 million in federal revenue enhancements. Will this ‘spigot’ be turned off? What will the NH legislature do? –A series of state budget changes/reductions (most of which affect local aid) will end effective July 1, 2012, increasing state obligations by $93 million. –Education funding plan will increase state obligations ($100m). –What kind of spending changes will be introduced?

37. 37 “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.” Board of Directors Todd Selig, Chair Mike F. Buckley John D. Crosier, Sr. William H. Dunlap Sheila T. Francoeur Stephen J. Reno Stuart V. Smith, Jr. Brian F. Walsh Kimon S. Zachos Donna Sytek, Immediate Past Chair Martin L. Gross, Chair Emeritus New Hampshire Center for Public Policy Studies www.nhpolicy.org All of our reports are available on the web: www.nhpolicy.org