We Need to Cut Spending Before We Can Cut Taxes
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By Charles M. Arlinghaus
From the Print Edition of the Union Leader
The only way to cut taxes and bring jobs to New Hampshire is to not cut taxes yet. Balancing the budget and righting the disastrous fiscal ship of state is essential to put New Hampshire in a position where we can cut taxes. Today, we can’t.
Tax policy has long been a tool for economic development in New Hampshire. Our economic activity is significantly influenced by our tax advantages compared to our neighbors. Every time Massachusetts or Maine raises its taxes, we benefit. My colleague Grant Bosse likes to refer to Massachusetts Gov. Deval Patrick as chairman of the New Hampshire economic recovery coalition. Every time Patrick raises taxes south of the border, he should get a thank you letter from the New Hampshire economy.
New Hampshire enjoys a significant advantage in attracting jobs as the only state in the country with neither a general sales nor a personal income tax. It makes us overall one of the ten most attractive states in the country according to the Tax Foundation. However our business taxes are among the worst in the country – the same tax foundation survey ranks us 50th in the country for business taxes.
Taxes are essentially a price on economic activity. Higher prices generate less activity and lower prices generate less activity. Coming out of a recession, there is probably no activity we want less of so raising any taxes will almost certainly be off the table.
Coming out of the last recession, then-Gov. Craig Benson thought it critical to oppose raising any taxes whatsoever. As a result the total number of increases to any fee no matter how small had declined to nine very minor changes (the “special commission to perform marriage fee” is an example), the low water mark of recent history. By the way, that didn’t stop Benson from leaving the state with an $83 million surplus. In contrast, the last two years saw more than 60 increased taxes and fees, some minor and some major, a recent record.
The current legislature seems united in sending a message to business that New Hampshire is done raising taxes. The debate, refreshingly, has shifted not to whether or not to cut taxes but when to cut taxes and which taxes to cut.
I want to cut taxes, notably the business profits tax which has risen to a discouraging 8.5%. However, the first step in cutting taxes has to be to get the state’s fiscal house in order. Over the last two budgets general and education spending, the part of the budget supported by general taxation, increased by $600 million while revenues were flat. The current imbalance in the two-year budget is $820 million.
Even with modest economic growth, state legislators are going to need to find $666 million to cut from current spending. Until they find that $666 million, a tax reduction would be premature. Taxes do encourage economic activity and a cut would have a somewhat dynamic effect on revenue if more jobs were created and more activity generated. However, the dynamic effect is quite muted in the first few years.
I am hopeful the legislature will focus on finding $666 million in spending reductions because the problem is much larger than most people think. In the post-World War II history of the state, the budget declined over its two years only once: Steve Merrill’s second term saw a 2% decline in the first year and only a 1% increase in the second year for a net decline. So, in the last 66 years we’ve managed to actually reduce spending only once and then by about 1%. This year, legislators need to reduce the budget by more than 12%. After debt, retirement, and some other obligations are accounted for, the typical department will need to see an almost 20% reduction in its spending.
That task, while not insurmountable, is daunting. Until that mountain can be climbed, a better approach to tax reductions might be to have any tax changes take effect in the second year of the budget when we will have a better idea about revenues in a still uncertain economy.
New Hampshire needs to gets its fiscal mess under control so it can lead the region in job growth when jobs start growing. The first step in that process is to make significant changes to bring spending back in line with revenues. As a state, we need to focus on that first task to put ourselves in a position to start lowering taxes and attracting jobs.
Charlie Arlinghaus is President of the Josiah Bartlett Center for Public Policy, a free-market think tank based in Concord, NH.
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