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Wednesday, June 3, 2009

Charlie Arlinghuas: The Senate's budget is so bad it should be scrapped


The recession may have made the state's budget situation worse, but today New Hampshire's Senate wants to retaliate by passing a budget that will make the recession worse. The horrible experiment senators hope to embark on makes few concessions to difficult fiscal times, goes out of its way to attack businesses and the potential jobs they could have brought when recovery starts, and just for good measure kicks students out of charter schools.

There's no doubt that the recession has hit New Hampshire's budget hard. Tax revenues for the fiscal year that ends June 30 are down 5 percent over the prior year. This is the first time we've had a drop in regular revenues since 1995.

Going into the budgeting process, everyone predicted an austere budget with reductions in spending. In the middle of a recession, increasing taxes on anyone seemed unlikely. We were all wrong on both counts.

The budget made some difficult decisions, but cutting spending was not among them. There are three or four ways to measure spending, and by all of them this budget shows a substantial increase. In the current fiscal year, the state will spend about $1.48 billion (not including the liquor commission, which is being moved off budget from our general fund). Next year, we'll spend $1.57 billion, an increase of about 6.7 percent, or double the rate of inflation.

Fifteen years ago, Gov. Steve Merrill was also faced with a revenue problem. He chose not to spend more, but to actually reduce spending for the first time in the modern history of the state. Without that reduction, the state would have been forced to raise taxes.

Raising taxes is what the proposed budget does. When people are hard hit by a recession, asking them to pay more in taxes is adding insult to injury. Just as bad, significant increases in business taxes reduce the incentive for companies to move jobs to New Hampshire.

The Senate budget sensibly eliminated the job-destroying capital gains tax the House had passed. Strangely, though, senators decided to do something even worse that will send warning flags to businesses everywhere. They passed a "temporary" increase in the Business Enterprise Tax.

When the BET was created, it was an attempt to make business revenues more stable. Businesses don't pay both the profits tax and the enterprise tax. One is credited against the other so businesses aren't double taxed. The Senate eliminated the credit, increasing the marginal rate of business taxation almost 10 percent.

Businesses react to tax changes even more than individuals do. They don't have to expand jobs or locate in New Hampshire. Whether they believe the Senate's promise that the tax hike is temporary or not, they will avoid territory that increases taxes. We should care because we want to attract more jobs as the economy recovers, not drive them away.

It is difficult to imagine a tax increase more carefully designed to scare off businesses and jobs than this one. The House must fight it when the two budgets are merged to create the final one.

As long as we're talking about stupid taxes, the governor just proposed a doozy. He has few opinions about the budget, but he's releasing a trial balloon for a brand new real estate refinancing tax. Currently, the state taxes you when you sell your house. The governor wants to tax homeowners when they refinance, too. Even if you manage to get out of a bad mortgage, the state's going to hit you on the way out. House Finance Committee Chairman Marjorie Smith, D-Durham, argues that this would "take a bad tax and make it worse." Well said.

Finally, we come to a strange proposal stuck into the budget. Senate budgeters are concerned about charter schools. Last year they stopped any new ones from opening. This time around, they want to cap the number of students at 850. The problem is that current charter school enrollment passed 1,000 late this year. So existing schools can't grow as kids move from one grade to another, and schools will have to hold a reverse lottery to see who gets kicked out. Does that sound like a good idea?

So the budget will increase the education trust fund by 7 percent, but cut charter school spending by 58 percent. Also, despite that $120 million increase in education funding, we're cutting special education aid by $20 million.

If senators pass this monstrosity, they will have to negotiate substantial and irreconcilable differences with the House before final passage. The House should take one look at it and run. It's time for a do-over.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

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