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Wednesday, October 21, 2009

Live Blogging the Tax Summit- Dennis Delay

Dennis Delay- Research Consultant for the New Hampshire Center for Public Policy Studies

Delay presented a breakdown of unrestricted fund revenues sources for 2008.

Among the major sources:
Business Profits Tax 17%
Business Enterprise Tax 10%
Statewide Property Tax 16%
Liquor Revenue 6%
Net "Medicaid Enhancement" 5%
Tobacco Tax 7%
Interest and Dividends 5%
Real Estate Transfer Tax 5%

Several other sources were each less than 4% of the unrestricted revenue stream. This does not include restricted sources such as highway tolls or gas taxes. Delay says most states have one or two taxes that dominate their revenues, while New Hampshire has a distributed revenue stream.

Delay says that the many goals of a tax system often compete with each other. He also spoke about horizontal and vertical equity, and says that the tax structure should be fair, but that "people have very different ideas of what is fair!"

Delay argues that tax systems should not distort economic activity. Broad bases and low rates such as the BET and Statewide Property Tax are good examples. High tax rates on narrow bases create incentives to avoid or evade taxes, creating "deadweight loss". But sometimes, lawmakers want to influence behavior through the tax code, such as discouraging smoking through high tobacco taxes.

Delay argues that adequacy of New Hampshire tax system to keep up with demand for services received relatively little weight in policy debates. He points out that New Hampshire's state taxes jumped from around 2.5% of state GDP to over 4% in 2000, following the Claremont Education Lawsuit, and have settled at just under 4% now. This is well below both the national and New England averages for size of state government as a percentage of the economy.

Delay spoke extensively on volatility, and said lawmakers should realize that revenues and expenditures do not increase at constant or predictable rates. He says business taxes can grow along with the economy, but are much more volatile.

On tax compliance, Delay says that taxes should be easy and inexpensive to adminsiter, but that this consideration is a stepchild in tax policy discussions.

He then summarizes the main arguments on three main sources of taxation:
  • Property taxes are stable, but people must pay them even when their income declines, creating a sense of unfairness.
  • Progressive income taxes usually grow faster over the long run and are in many people's minds fairer, but they are less stable than flat rate taxes.
  • Sales taxes on limited items (excluding food and medical) make the sales tax more costly and eaiser to avoid.
Delay outlined what he described as New Hampshire's "Structural Deficit", a where with no change in tax laws or public services, tax revenues do not increase as fast as expenditures. This permanent shortfall at the beginning of each budget year forces lawmakers to find new or one-time revenue sources to pay for spending.

Delay compares the growth of general fund revenue streams since 1990, which have increased from $562 million to $1.48 billion. That's an average annual increase of 5.5%. But Delay points out that new taxes and fees bring in $305 million a year, with increased rates accounting for another $80 million, meaning that old revenue sources only grew on average by 3.8% annually.

Delay's presentation relies heavily on line graphs, showing state spending and GDP over time. He's linked the report at www.nhpolicy.org.

Delay urged lawmakers to recognize the need to either scale back state activities or raise tax rates or add new taxes to maintain a constant level of services. He says the looking shortfall results in a more detailed review of state programs each biennium, and creates a regular atmosphere of crisis and stress.

Delay says this reduces the possibility of putting surpluses into valuable one-time projects, and makes strategic planning more difficult. He says the structural deficit should not be used as a political weapon to bludgeon the other political party.

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