Business profit tax rate dispute delays New Hampshire budget
New Hampshire Gov. Chris Sununu’s veto of a $13 billion two-year budget just before the June 30 deadline centers largely on concerns the Democratic spending plan will set the state on a path toward higher taxes.
Sununu vetoed a fiscal plan backed by the Democratic-controlled legislature that would phase out business tax cuts enacted in 2015. In anticipation of the Republican governor’s objection, lawmakers passed a continuing resolution that keeps the state operating at its current spending levels until Oct. 1.
“By putting our booming economy at risk and by building spending expectations that are unsustainable, this budget relies on bad financial management practices,” said Sununu in his June 18 veto message. “I stand ready to work with the Legislature to develop a budget that keeps our state on our current successful path.”
The last New Hampshire budget to be vetoed was in 2015 under Democratic Gov. Maggie Hassan, when the Republicans controlled both chambers of the state legislature. A compromise budget forged in September 2015 included a series of business tax cuts to be phased in over the next few years.
Sununu wrote in his veto message that New Hampshire had the highest business taxes in New England four years ago and that legislative action to provide tax relief to employers has boosted the state’s economy. The last two-year budget plan approved in 2017 brought in the scheduled business profit tax rate down to 7.9% in January from 8.2% and is soon set to move down to 7.7%. Democratic leaders want to maintain the 7.9% rate arguing that this would produce $90 million in revenue to balance the budget.
“New Hampshire has built a thriving economy that is the envy of the Northeast, a result of our 2017 efforts to lower the tax burden on employers and engage in smart regulatory reform,” said Sununu, who was elected governor of the Granite State in 2016 during an open election after Hassan opted to run for U.S. Senate. “The Legislature’s proposed budget for fiscal years 2020 and 2021 reverses this winning formula.”
State Sen. Lou D’Allesandro, D-Manchester, who chairs the Senate Finance Committee, said Sununu let the business tax rates overshadow a budget that provided much of what he had proposed. D’Allesandro stressed that the Democrats worked hard to comprise with the governor such on a spending plan would have provided the most municipal aid in more than a decade.
“He has put a line in the sand on the business tax which is crazy because there are so many other things in the budget that are important,” D’Allesandro said. “It’s a very shallow reason to veto a $13 billion budget that had so many good things and things that he wanted.”
D’Allesandro said he hopes a compromise budget plan can be forged by early September since school districts need clarity on how much state aid they will receive for the 2019-20 school year. Sununu was urged by legislative Republicans to oppose the Democratic-backed budget plan that was passed in a party-line vote since Democrats lack enough votes in the Senate or House to override a veto.
“This budget is unbalanced and built on inflated revenues that will lead us into structural deficits in the short-term,” House Republican Leader Dick Hinch, R-Merrimack, said in a statement. “It spends one-time revenues on the growth of government, which will hurt us now and in future budgets.”
Sununu’s veto references a previous New Hampshire budget approved in 2009 that resulted in what he described as “catastrophic” results with critical program cuts and state layoffs because of “unrealistic” expectations for future revenues. He also noted the legislature’s two-year fiscal plan would set up spending exceeding revenues by $93.4 million in year two driven by Education Trust Fund expenditures that overspend by $81.5 million.
“Singing a budget with this massive deficit would force the next legislature to choose between massive tax increases or major spending cuts,” Sununu said. “Unlike Washington, our state does not and should never pass unbalanced budgets.”
New Hampshire was one of seven states that began the 2020 fiscal year on July 1 without an adopted budget. Moody’s Investors Service noted in a July 3 report that late budgets are unlikely to affect state bond payments since states have provisions to ensure debt service payments are made and operations are maintained at current funding levels during delays. However, localities that rely heavily on state funding may be vulnerable to “fiscal stress” during a late budget and especially if the delay is pronounced, according to Moody’s.
The State of New Hampshire hasn’t been that active with borrowing in recent years issuing $63.4 million of general obligation bonds in 2018 and $66.5 million of GOs in 2017, according to Refinitiv data. New Hampshire has ratings of Aa1 from Moody’s, AA-plus from Fitch Ratings and AA from S&P Global Ratings.
Moody’s analyst Joshua Grundleger said New Hampshire has strong credit conditions after strong revenue growth bolstered the state’s reserves after previously grappling with several years of narrow fund balances. The state’s rainy day fund reached its highest level of $110 million at the end of the 2018 fiscal year following six straights years of deposits.
“Their reserves are improving and their revenues continue to grow,” Grundleger said. “Overall their fiscal situation is relatively strong.”
New Hampshire’s revenue is mainly generated by property taxes since the state has no sales or income tax, which Grundleger notes is positive from a credit standpoint because of less volatility with revenues. He said the low-tax environment has also aided New Hampshire in attracting new residents and business in recent years which should also position the state for a positive economic future.