Archive for the ‘Tax Revenue’ category

Great Expectations

June 6, 2017

“Take nothing on its looks; take everything on evidence. There’s no better rule.”        

    Mr. Jaggers to Pip,  in Charles Dickens’ “Great Expectations”

Optimism in the U.S. economy has been high for most of 2017.  Consumer and small business confidence are both higher than they have been in a decade  and according to the Business Roundtable the CEO’s of America’s largest corporations haven’t been this optimistic in eight years.

Sentiment

From survey data alone the U.S. economy appears to be booming.  But the hard, quantifiable data (1.2 percent GDP growth in the first quarter of 2017) tells a story of more tepid growth.  The degree of divergence between soft (survey and sentiment data) and hard economic data is striking and either consumer and business sentiment will lead to higher rates of growth or sentiment will begin to wane – something has to give and my money is on the latter.

The divergence between sentiment and actual economic performance can be especially problematic for lawmakers crafting state budgets.  With so much economic optimism it is easy for those urging caution in budgeting (based on expected revenue) to be the skunks at the garden party. I don’t know who has the best revenue estimates on which to base NH’s next budget but the trends I see (and present later in this post) urge caution in assuming current levels of consumer and business optimism will be matched by revenue growth.

Still, the economic recovery remains on track (albeit at a modest pace by historical standards) and it has a better than 50/50 chance of becoming the longest expansion in U.S. history by lasting into the middle of 2019.

Length of recovery

The current expansion is getting old but expansions don’t die of old age; something kills them (think the savings and loan crisis in the 1980s, the dot com bubble in the early 2000s, and the mortgage and financial crisis of the recent recession).  Right now, the economy does not seem to be harboring the kinds of excesses and imbalances or overindulgence that have presaged sharp slowdowns or recessions in the past. There are some areas of concern; at more than 20 times earnings, stock market valuations (depending on which index is used) are well above the 15-17 time earnings that is the historical average, but this is not at the “irrational exuberance” stage.  Economists tend to write-off or disbelieve negative economic data as statistical anomalies or due to temporary factors prior to slowdowns and lately a bit more of that has been occurring than I am comfortable with.  But even as there are some unflattering economic indicators that should be acknowledged they are still too new to be trends.  No one is saying the “r-word” and the best we can say today is that we are one day closer to the next recession.

There is no more important task for policymakers than estimating revenues. Underestimating state government revenues results in more needs being unmet than is desirable, while overestimating revenues can lead to difficult and painful spending cuts in later years. So why should NH lawmakers be cautious in their revenue estimates in a time of optimism and apparent abundance?   As Dickens (Mr. Jaggers) would say “take nothing on its looks; take everything on evidence.”   In the case of state government revenue the “looks” are reports of a booming economy and high confidence while the “evidence” is real trends in revenue growth.   Analysis and empirical evidence are not currently in favor as tools for governing, at least at the national level, but the great majority of lawmakers in NH value data and evidence and do their best to employ rigor in the budgeting process.  But a focus on monthly revenue reports and numbers can sometimes make it difficult to separate the signal from the noise in the revenue trends. In addition, while it is important to note how actual revenues compare to “planned” revenues on a monthly basis, revenues can meet “planned” expectations at the same time they are signaling a weakening trend.  Thus it is possible that lawmakers can be optimistic that revenues meet or exceed expectations in any month at the same time revenue growth is slowing.  Which is the more important trend?  When I look at the larger trends in state revenue collections from NH’s nine largest sources of own source, general revenue, I see a slowing growth trend even as revenues have generally met monthly expectations.  The chart below shows the year-over-year percentage change in annualized (sum of prior 12 months) state revenue collections.

Annualized NH revenues

Examining NH business tax collections reveals a similar trend of a declining rate of growth.   The chart below shows the rate of change in annualized (sum of the prior 12 months) business tax collections, along with the trend in rate-adjusted revenue to control for the impacts of rate changes on growth rates.

Annualiz NH Business Taxes

The growth rate of meals and rental tax collections in NH (more commonly called meals and rooms) has also slowed.  The chart below shows annualized growth in spending on meals and rooms in NH.  Because the data shows spending on meals and rooms rather than tax collections the data is free from any changes related to tax rates.

Meals and rooms trend

Many factors influence rooms and meals and hospitality expenditures in the short-term (weather, gasoline prices, etc.) but the most fundamental factor that determines longer-term (longer than month-to-month) trends in meals and rooms expenditures are employment and earnings trends in the state and New England region.  Employment continues to grow but at a somewhat slower rate as the nation and the region confront full-employment and labor shortages. Wage growth is occurring but prices are also rising and as the figure below shows, real (inflation adjusted) earnings growth has been trending downward in the U.S. and New England (the same is true for NH).  The result is that the rate of growth of consumer expenditures, in almost all expenditure categories, has slowed.  The chart below presents an estimate of trends in the growth of real earnings (employment times the average hourly wage times average number of hours worked and adjusted for inflation) in the U.S. and New England.  The earnings of New England residents and their ability and willingness to spend have a significant impact on several NH revenues.

Real Earnings Growth

The relationship between spending on meals and rooms in NH and real earnings in New England (lagged) is evidenced in the graph below.

M&R and NE Earnings

I don’t know who is more accurate in estimating revenues in the current debate over the state’s next budget.  There is a case to be made for different expectations.  As long as policy decisions are made based on some empirical interpretation of trends in the economy and revenues rather than an ideological push for more or less spending I think the state will be fine regardless of what lawmakers decide.  I am frequently in error but rarely in doubt and I’ve presented one of what are many interpretations of revenue trends in NH.  Despite what I see as a lot of unmet needs in the Granite State, the trends highlighted in this post urge caution in pillorying anyone who argues for fiscal restraint at a time of so much economic optimism.

The Business Tax Discussion NH Should Have

June 23, 2015

What to do about New Hampshire’s business taxes is near the top of lawmaker’s agenda in the Granite State. Many policymakers are concerned that the business tax climate is contributing to a fundamental erosion of New Hampshire’s business climate that is reflected in lackluster employment and revenue growth. Reports that NH has recently outperformed  New England and the U.S. in gross state product (GSP) growth highlight the disconnect that can occur between economic metrics of output (GSP) and measures that more directly affect individuals in their daily lives, such as employment and wage growth. Better than regional or national average growth in GSP is good but state-level GSP numbers are relatively imprecise and should not obscure the fact that employment, wages, and state revenue growth have all been disappointing in NH by the standards of the past few decades. Sustained, disappointing employment and revenue growth since the end of the recession have prompted well-meaning lawmakers in NH to consider a number of policies to accelerate growth in the state.

NH and US emp Growth

Business Taxes Seen as Key

Business tax rates impact business decisions but I don’t believe they are the fundamental factor behind NH’s disappointing economic performance. Lawmakers should consider “what to do about business taxes” but that consideration should go well beyond current tax rates and regulations. Lawmakers should also be concerned with the long-term prospects (revenue yield) of business taxes because business taxes are the largest source of general revenue supporting state government.  New Hampshire’s fiscal structure is fundamentally tied to the performance of the state’s business taxes.  As importantly, lawmakers should be concerned with how NH’s business taxes will interact with key economic and demographic trends to influence the state’s future economic performance. The chart below shows combined quarterly business profits and business enterprise tax collections on an annualized basis and illustrates that nearly six years post-recession and more than seven past their high mark, business tax revenues in NH have not fully recovered. Some of the failure of revenues to rebound following the recession is a result of changes in the state’s business tax rules and some is the result of total private sector wages and salaries (the largest portion of the BET tax base) that declined in  2009 and 2010. Whatever the reason it highlights concerns about the viability of business taxes as the primary source of support for state government. I don’t believe that either raising or lowering rates is likely to improve the performance of business tax revenue enough to alleviate those concerns or even result in revenue gains that match those seen in the first half of the 2000s.

NH Business Tax Revenue

The Business Tax Burden in NH

Using tax rates to measure burdens over time is not a true measure of the impact that business taxes have on companies. Comparing state business tax climates using rates is problematic because of the various provisions of each state’s tax code that affect nominal rates. Here I assess business tax “burdens” using an economic measure – business tax collections as a percentage of private sector gross state product (GSP). This metric documents the state’s business tax burden placed on the total value of private sector goods and services produced in a state. Even using this measure of “burden” is problematic because it does not include all of the taxes, fees, and charges that may apply to a business in each state. Nevertheless, when it comes to addressing the primary sources of tax burden and the ‘headline taxes” that are identified with a state’s business climate, it is a better measure than looking at just business tax rates.

As the chart below shows, as a percentage of GSP, business tax burdens have nearly doubled in New Hampshire since the early 1990’s. Much of that is the result of the addition of the Business Enterprise Tax in 1993, as well as increases in the BET’s rate from 0.25% to 0.50% in 1999, to 0.75% in 2001. But some is also the result of increases in the rate of the business profits tax (BPT) which began the time period shown at 8.0% (from FY 92 through FY 93), dropped to 7.5% in FY 94 and hit a low of 7.0% (from FY 95 through FY 99) and finally rose to its current rate of 8.5% in FY 02. Importantly, the chart also shows that business tax revenue as a percentage of private sector gross state product has fallen since the recession and is now at a level seen at the beginning of the last decade. Again, changes in rules and a decline in wages and salaries both play a role in that decline. For comparison purposes the chart also shows the percentage of GSP that corporate income taxes take in Massachusetts, however, as noted, a number of other taxes are applied to or affect business in addition to corporate income taxes.

Taxes as a pct of GSP

What’s Ailing the NH Economy?

I don’t believe there has been a substantial, fundamental erosion of the ‘business climate” in NH. Slow labor force growth is by far the largest factor contributing to New Hampshire having gone from a leader to a laggard in job growth. That labor force issue is much broader and more complicated than the simplistic and too often noted “young people moving out-of-state.” The chart below shows that labor force growth has slowed more in NH than nationally in recent decades. Where once NH enjoyed a significant advantage in labor force growth, the state now lags the nation as a whole. Above average labor force growth is what allowed NH to have exceptional job growth in the 1980’s and much of the 1990’s.

lf growth 3 time periods

Labor force growth (largely via in-migration of skilled, educated individuals and families from other states) provided NH with a resource advantage for decades. Slow labor force growth is now capping the amount job growth that is possible in the state. Some believe the state’s labor force would experience stronger growth if more job opportunities existed in NH and that simply reducing business taxes will make that happen. While that is true to a degree, today, businesses rarely locate where there is not clearly a sufficient supply of needed labor. A sharp rise in help-wanted advertising in NH in recent years even as private sector employment growth has remained relatively constant and disappointing (chart below) shows that in the near-term at least, demand for labor does not necessarily increase its supply.  Significantly, the chart also shows that after a rapid rise in help wanted advertisements that was not accompanied by a noticeable increase in the rate of private sector job growth, help wanted ads have begun to decline in what may be a sign that employers, because of labor supply constraints, are increasingly looking  elsewhere for labor.

help wanted june 2015

The demand for labor does generally increase the supply of labor but when the supply is growing slowly everywhere (especially in the Northeast where NH has typically attracted much of its increase in labor force), supply will respond accordingly. Increasingly businesses follow labor rather than the other way around and they do not rely on their demand to increase labor supply.  Looking ahead, population and demographic projections show that both nationally and in NH, the working age population (defined here as age 18-64) will show almost no growth over the next 25 years. Competition for labor among businesses will become more intense and to keep and attract a labor force businesses will have to offer more than just the promise of a paycheck. I would argue that states and communities will also have to offer more (in terms of amenities – natural, social, civic, cultural, and services) to attract and retain the labor force needed for employment and economic growth. Evidence of the importance of amenities to labor supply (and employment growth) can be seen in the differential employment growth between some of NH’s regions such as the Seacoast (which has had higher population, labor force, and employment growth and which has several high amenity communities) and other regions of the state.

New Hampshire can improve its business taxes and business climate but whatever reforms are enacted, alone, are not going to overcome demographic and labor force imposed constraints on employment growth in the state. Lawmakers should, however, seek to assure that business taxes do not worsen key constraints on the NH economy moving forward.

The Longer-Term Problem

NH’s combination of a traditional tax on the profits of business profits (the business profits tax or BPT), along with its “business enterprise tax” or BET (on the combined compensation, interest, and dividends paid by businesses) may well exacerbate some of the disadvantages the state’s economy will face as a result of national and state demographic trends, making it more difficult for NH to overcome key constraints on employment growth in the state.

Reducing business tax rates that many see as too high is a near-term solution to a longer-term problem. The longer-term problem is slow or no labor force growth nationally and in NH in the coming decades that will limit profit growth everywhere but which will also place additional burdens on NH businesses. The labor force problem and NH’s reliance on business taxes will present NH businesses and state government with challenges that are unique to the state.

Wages and salaries are generally lower for comparable positions in NH than they are in Massachusetts. At one time it was easy to justify that wage differential because of large differences in the cost of living between the two states. Today, the cost of living differential between the two states has narrowed and NH is considered a high cost-of-living state. The U.S. Bureau of Economic Analysis (BEA) produces a “regional price parity index” Regional Price Parities (RPPs) measure the differences in the price levels of goods and services across states for a given year. RPPs are expressed as a percentage of the overall national price level (100). As the chart below shows (apologies for the poor quality – I lifted it directly from a BEA publication), NH (seen in red) has become a high cost state (largely because of housing costs), nearly as costly as Massachusetts.

price parityIn a state (NH) with living costs that are increasingly comparable to Massachusetts, workers in NH can be expected to seek wages nearly comparable to wages available in Massachusetts. For the most part, however, NH employees do not receive wages comparable to wages in Massachusetts and that contributes to some of NH businesses inability to hire needed workers and to NH’s modest job growth, despite increased job openings in the Granite State.   It may also be a contributing factor to NH’s significant drop in its unemployment rate with only modest job growth (the unemployment rate is a residency-based measure that considers only whether or not a resident of NH has a job or not, regardless of where that job is located).  Little or no growth in the labor force in the coming decades will increase competition for workers and will put more pressure on NH businesses to narrow wage and salary differentials with other, higher-cost states, if higher-skill jobs located in NH are going to grow. The catch 22 is that higher wages increase the BET liability of businesses at the same time they can reduce profitability (if productivity isn’t rising along with wages). A growing disconnect between the profitability of businesses in NH and the tax burden placed on them is not likely to be an incentive for businesses to compete for labor in a era when it is ever more scarce.

Higher wages would not be a problem as long as productivity increases justify wage growth. When workers produce more they should see higher wages. Productivity growth has been modest over the past decade and shows little sign of accelerating. Thus increasing wages will likely mean slower profit growth for businesses in NH and elsewhere. I think we have seen the high mark nationally for corporate profitability for some time. But in NH, the higher wages needed to attract labor will also increase the business enterprise tax (BET) liability of companies. If profitability is indeed more modest because of faster wage growth and modest productivity growth, the BET liability of NH businesses relative to their business profits tax (BPT) liability will increase. An ad valorem tax on a resource (labor) in short supply with a rising price and that is paid regardless of the profitability of a business may increase (or cushion from decline) state revenue for a time but it also seems like a disincentive for businesses to pay the wages necessary to compete for labor and to hire in New Hampshire over the longer term.

New Hampshire’s tax structure has never really been a boon or an advantage for business but it has been attractive to large numbers of individuals and families over the years and it contributed to growth in the state’s labor force via inter-state migration into NH. Growth in key demographic groups within the labor force – skilled individuals with higher levels of educational attainment  and regardless of their age ( two wage-earner, college educated, married couple families with children characterized the typical inter-state migrant to NH) made New Hampshire a much more attractive place for businesses to operate. The in-migration of “talent” fueled the state’s transition to a more sophisticated, technology dependent economy. But there is less state-to-state migration everywhere today and national and regional population, demographic, and labor force growth make it much less likely that NH will continue to realize those benefits from its fiscal structure. In the coming decades as competition for labor increases because of limited growth in the labor force, stronger wage growth will be needed to attract a limited pool of labor. Taxing compensation (as NH’s BET does) will increase tax liabilities for many NH businesses even as higher wages limit their profitability.

It is time for a discussion of NH’s business taxes, but that discussion needs to involve a lot more than just tax rates, credits, and how the rules apply to publicly traded companies.

“Honest Brokers” and Revenue Estimates

May 14, 2013

Unlike the federal government, states can’t easily budget and spend more money than they take in revenue so revenue estimates play a much more important role in state budgeting than they do  in federal budgeting.  I don’t know how anyone can accurately forecast revenues when the revenue yields are based on negotiations, lawsuits or other non-economic variables but that seems to be the basis  of much of the disagreement among budget writers in New Hampshire. When a comparatively large percentage (compared to many other states) of your revenues are derived from a “Medicaid enhancement tax”  and “tobacco settlement”  money budget writing can become even more politicized than usual.

I don’t pretend to know what these non-traditional sources of revenue will yield in the coming years but I get a sense that those who do are fitting their forecasts to their meet their budgetary goals.  I  don’t think revenue forecasting is that difficult as long it is based on real economic data and trends and it minimizes the use of assumptions about changes in the performance of the economy.   I make forecasts with assumptions all the time but  minimizing their use  in revenue forecasts will mean that even if the forecast is wrong, it won’t appear as though the error resulted from a desire to “coax” a specific result from the forecast.   In January I presented my outlook to the NH House Committee on Ways Means.  At that time I said I thought revenue growth from major, “own-source” revenues would average about 2% each year of the biennium and that businesses tax revenue growth would be a bit higher, but with even modest economic improvement could average 5-6% annual growth.  Now, several months later, based on recent revenue performance, and making  no assumptions about significant changes in economic conditions, I see growth at about 3% in FY 2014 from the eight largest sources of general revenue, and just under 5% in 2015.  Those numbers don’t count the “non-traditional” revenue sources but I think they are important in reflecting the fundamental underlying growth in the state’s economy and a better assessment of  general revenue trends.

NH General revenue forecast

Clearing out some old boxes from my attic  I came across a number of old college tests and papers.  One was from a graduate school class on public finance where I argued that all federal budgeting and budgeting  debates should proceed from a common economic and revenue forecast.  I also found one from an undergraduate class on the philosophy of Marxism in which I wrote phrases like “man should never be a means to end but only an end in himself ” so clearly I was prone to a lot of bad and muddled thinking back then.  In the 1990’s I wrote a column in a publication arguing for a non-partisan revenue estimating committee in NH.  That was a pretty good idea  and it did happen – although my prompt had nothing to do with it –  and it was enacted largely absent the “non-partisan” aspect (or at least “unbiased”).  I still think a true, non-partisan, representative revenue estimating panel would be a good thing for NH, not to bind any actions but simply to serve as a baseline scenario that any policymakers who wishes to deviate from would have to offer solid reasons for doing so.  Some group in the budget debate has to serve as the “honest broker”  but the honest broker role won’t happen if the group is loved too much by some or hated too passionately by others.   The current estimating panel has some of the best and most qualified people I know to do revenue estimating .  It just doesn’t have the  credibility among many policymakers that it could have  if  no one loved or hated it too much, but instead almost everyone complained a little (or a lot) about  it.  It is too bad because we are still going to need an “honest broker” when the NH House and Senate begin negotiations on the next budget.

Getting What You Want But Not What You Need

April 10, 2013

Business taxes are about one-quarter of NH state government revenues and an even higher percentage when you take out sources such as the statewide property tax which is largely an accounting fiction that really does nothing to support state services.  That is a higher percentage than any state with the exception of some states that get oil, gas and mineral extraction revenues.

When business taxes are that important to a state’s fiscal health it better make sure that it takes care of its businesses and its business climate because if and when they go south (or south and west just as more people have) it becomes very difficult for the state to produce a budget.   The chart below shows how NH’s “own source” general and education fund revenue from the nine largest sources of revenue (exclusive of the statewide property tax) have grown comparatively since 2003.  I think the chart shows how important trends in business tax revenues are to overall revenue trends in the state.  The bad news is that revenues from the business profits and business enterprise tax are still more than 20 percent below peak.  The good news is that they are growing.

Growth in Own Source Revenue

The chart also says a few other things to me.  First, a strong and dynamic business climate is the best fiscal policy for the state.  Second, if you are going to cut business taxes you had better be certain that it is a good way produce a strong and dynamic economy because if not, the fiscal health of the state will suffer.  Third (and related), if revenues rise in response to cuts in business taxes great, it will be evidence of a stronger economy and healthier state finances, but if revenues  fall you better be sure that the service and spending reductions that result don’t affect those things that most contribute to a strong and dynamic economy because economic growth (and thus revenues) will be at risk for falling further.   All businesses want lower taxes and it that is the quickest and easiest way for policymakers to demonstrate how much they love  businesses.  But businesses also need and want a lot of other things to prosper and, like lowering taxes, they aren’t shy about asking for them.  Unfortunately, in a state so dependent on business tax revenues businesses getting what they want can sometimes make it more difficult to get what they need.

NH lawmakers, like lawmakers in most other states, want prosperity and opportunity for residents .  Most  also recognize that a strong and dynamic economy is the way to assure that.   So unless you are big financial institution, a big oil company, or just about any business or industry that is prefaced by “big,”  it’s a pretty good time to be in business because almost everyone wants to show you some love, they just can’t agree on how to demonstrate it.  Right now a lot of ideology and little evidence is being brought to bear on the question of “what policies are most helpful in producing a strong and dynamic NH economy.”   That makes it a lot harder to see that we all have a common interest in a strong economy and even more difficult to agree on what to do about it.

Funding Roads and Bridges to Perdition

March 25, 2013

Gasoline taxes, road tolls and highway infrastructure spending are issues at the forefront of a lot of heated debates in state legislatures across the country.  I am going to write about the issue a couple of times this week.   Some lawmakers want to raise sales or other taxes to pay for infrastructure and others want to increase gasoline taxes and other “user fees” to pay for it.   The highway infrastructure spending and revenue issue can illustrate classic principles of sound fiscal and economic policy so it is too bad that the debates have generally taken the “low road” by framing the issue almost entirely as either one of “who wants to raise taxes and who doesn’t,” or “who wants to makes roads and bridges safe and who doesn’t”.

User fees are a good thing and it is sound fiscal policy to have the users of roads pay for them via gasoline taxes, road tolls, and other fees that reflect an individual’s usage of roads and bridges.  When general revenues are used to pay for roads and bridges people who don’t necessarily use them wind-up paying for a portion of highways and subsidize the usage of roads of those who travel them a lot.  When you subsidize something you can bet you are going to get more of it than you would have gotten without the subsidy and in this case that means more travel on roads which, of course, means there will be more need for roads and spending on roads and that means more subsidy and that approach is surely a road to perdition.

It was nice to see New Hampshire rank high in a recent report (issue brief) by the Tax Foundation on the percentage of  highway spending that is funded by user fees like gasoline taxes, tolls and other fees.  Unfortunately, in making good points about user fees, the Foundation draws the wrong conclusion about the data it uses to make them.  That happens a lot when you use bivariate analysis to draw conclusions in a multivariate world.  Instead, using multivariate (regression) analysis on the data, it becomes clear that it is less the use of good principles of fiscal policy that results in states paying for a higher percentage of the costs of highways with user fees, than it is a function of the volume of federal government grants they receive.  So a cursory look at the Tax Foundation’s report can give NH a sense of superiority in fiscal policy over many states (while I generally think that is true about NH it is not so much in this case),  and especially over Vermont because that state funds just under 20% of its highway spending with user fees compared to NH’s 42%.  The real reason those percentages are what they are is that Vermont receives about 64% more federal highway funds per capita than does NH ($220 to $134 in 2010). The chart below shows the simple relationship between the percentage of highway spending in a state that is funded by gas taxes and user fees and the amount of federal highway funding per capita in each state.

User fees and Fed funds

States like NH that fund a higher percentage of highway expenditures with user fees do generally receives lower amounts of highway funds from the feds (the data point slope downward to the right).  There are even more intervening variables, like the amount of federal highways (by mile) and as a percentage of all highways that are in a state but still, by far, the amount of federal highway funding per capita is the best predictor of the volume of highway spending per capita in each state. The amount of motor vehicle-related user fees per capita were a distant second but still significantly related to highway spending.

Fed Highway per capita

Almost everyone agrees that NH’s (and every other state’s) roads and bridges are in need but I don’t think the debate is ever going to be about the wisdom of user fees versus general revenues in paying for highway infrastructure.  It is too bad because if it were we just might reduce the need for more spending in the future.

Betting on Gambling Assumptions

March 5, 2013

The gambling debate in NH is as hot as it has ever been as the NH Senate just passed a casino gambling bill.  Since I have no dog in the fight (or more appropriate to the debate – no pony in the race) I’ll use this blog to add my $.02.   I think the issue will be decided largely on the basis of something other than the impact casino gambling would  have on state revenues, but to the extent that fiscal impacts are a part of  policymaker’s decision process I’d like to see them have access to the best information and tools with which to make their decision.   Public policy analysis is not physics, there aren’t formulas with constants that govern  behaviors today the same way they did one million years ago.   Policy research is mostly social science that relies on a combination of disciplines like economics, sociology, and demography, and others.  The goal of policy analysis isn’t to prove anything or have something published in an academic journal (a fact usually lost on academics)  it is to improve the information in the debate and to marginally improve the decision-making process.  Policy research is best when it not only provides information, but also when it increases policy maker’s understanding of the issue and how even small changes in policy proposals might affect the ultimate impact of a proposal.   A lot of lobbyists want to provide the one “answer” to what will be the impact of this or that proposal or what will be its fiscal costs or benefits.  A lot of lawmakers want a single “point estimate” of impacts as well, when in fact there is always a range of likely impacts (some more likely than others) and usually they depend on a set of assumptions.   I’ve done a lot of policy research and I never assume anyone will agree with any of the assumptions I include in my policy models so I always design them for policy makers to insert their own assumptions in order to calculate the impacts of policy proposals.  That both increases the confidence policy makers have in their decision-making by helping them understand the sensitivities of estimates to different assumptions and the key determinants or levers that produce different impacts, and it reduces concerns that my analyses are using unrealistic assumption or “cooking” the numbers.  But what it really does is provide a ‘tool” for policy makers to use rather than giving them my “answer” to any policy question.  I usually do have my preferred answer but it doesn’t do any good unless lawmakers can see that it isn’t just “my preferred answer” bu the result of some pretty sound empirical analysis, even when it can be interpreted differently.  Invariably I offer to make my models available to policy makers but to date at least, only a few have every taken my up on it.

With that long preface I’d like to suggest that all sides of the gambling debate make their models and assumptions available and allow policy makers to get a better understanding of the sensitivities of their estimates to different assumptions.  My friend Dennis Delay at the NH Center for Public Policy Studies  is about the best there is at shooting straight and trying to develop the best estimates possible but while he does the analysis I don’t think he does all of the report writing so I would like to see more attention in their analysis of gambling to demonstrating likely impacts under a range of assumptions because it seems that not everyone agrees with theirs.  I haven’t seen any detailed analyses by gambling proponents and think they need to provide their assumptions and models for estimating revenues and impacts as well if they want lawmakers to adopt their proposals (they may have done this I just haven’t seen any analysis).

To demonstrate how important assumptions are in estimating revenues I developed a small model of gambling revenue in NH (not including any social costs).  The model results presented below assume one casino in Southern NH with 5,000 slot machines (or video lottery terminals) but any number of slots can be entered as a variable.  The base for state revenues (on which a state tax would be applied) is estimated using  per slot machine revenue data from Connecticut Casinos for the most recent year (2012).  This seems like the most similar market but again, a different per slot figure can be entered into the model to yield different results.  In addition, different tax rates and different impacts from Massachusetts casinos can be entered into the model.  I’m not trying to estimate revenues here but I am trying to highlight just how important model assumptions can be in determining fiscal impacts and until all sides show how their estimates are affected by their assumptions I think it is hard for lawmakers to make reasoned decisions based on fiscal impacts.  As the chart below shows, estimated state revenues vary greatly when even a few assumptions change.  The “Y” or left, vertical  axis shows estimated state revenues, and the “X”  or bottom, horizontal axis shows increasing tax rates from left to right.  Each colored line on the graph shows estimated state revenue at each tax rate and each  colored line represents a different assumption about the impact on revenues depending on how much casinos in Massachusetts affect casino revenues in NH.

Sensitivity of Revenue Estimates

Finally, I would like someone to articulate and provide some data on how  casinos in NH would perform in a competitive market depending on the type of experience they provide.  That seems to me to be a question best answered by the industry.  I think it is important in understanding the impacts of an increasingly competitive gambling market and the data I have looked at suggest that, at least in Nevada (see below), casinos have derived an increasing share of their revenues from rooms, meals, beverages, retail and shows.  Entertainment seems to play a larger role in the business models of casinos in that state and I wonder if that will be true in NH or in Massachusetts and what are the implications if it isn’t in either, both, or if it is in just one state.

Sources of Casino Revenue

Ideologically Uncomfortable Economic Growth in New England

January 11, 2013

State government revenues in NH have grown more slowly over the past few years than almost every other state in New England and there aren’t any signs on the horizon that revenue will grow substantially over the next biennium.

General Revenue Growth

Some of that is the result of policy decisions that looked to reduce taxes in NH in order to increases economic growth, some is the result of other states willingness to expand or raise taxes, and some of it is the result of the fact that NH’s economy has been growing more slowly than most NE states with the exception of Rhodes Island and Maine.  How much of the slow revenue growth is attributable to a weaker economy and how much is attributable to policy changes is difficult to discern.  In some cases it is easy, the cigarette tax was reduced and produced less revenue (almost exactly the amount that I forecast) but more generally, slower growth (or declines) in revenues will occur in a weak economy regardless of policy changes.   Even without a definitive answer to that question we can still learn something from the fiscal and economic experiences of NH and neighboring states over the past few years.

Because it seems that it  is all ideology all the time in public policy debates these days, lets filter the revenue and growth debate through the ideological prism that characterizes most legislative bodies and public debate today.  For some in NH, it is bad enough that both Massachusetts and Vermont (that would be two-thirds of the Holy Trinity of New England socialism if socialists were allowed to believe in the Holy Trinity) have enjoyed stronger economic growth than NH over the past nearly two years.  But it is even tougher to accept that each of these states can enjoy faster growth than NH at the same time they are seeing stronger growth in revenues, and maybe even at a time when they took steps to keep revenues from falling too far, because to ideologues on one side, more revenue has to mean slower economic growth and the only way to get stronger growth is to cut revenues.

NE emp growth

The other end of the political spectrum will argue that the collecting more revenue has allowed these states to invest in more of what their economies need to grow, but there hasn’t been a whole lot of “investing” by state and local governments anywhere in recent years and each of these states has taken some steps to reduce the size and scope of state government expenditures in recent years.  The reality of course, as it almost always is, is somewhere in that wasteland (according to ideologues) known as “the middle”.   The stronger revenue growth of some states is largely a function of stronger economic growth and not necessarily the “investments” those revenues allowed but it can also be said that their generally higher levels of taxation have not disadvantaged their economic performance in relation to NH with its lower level of taxation.  Some of NH’s slow revenue growth is the result of policy decisions but most is related to an economy growing more slowly than neighboring states.  If there is anything to learn from recent economic and revenue trends it is that taking less in revenue  does not, in itself, guarantee stronger growth and that more revenue doesn’t always stifle (although it could) economic growth.  I know business taxes in NH remain high, but that has been true for as long as almost anyone can remember.  It didn’t keep NH from growing faster than any other state in the region for most of 30 years so I doubt it is the singular reason why we are growing more slowly now.  That doesn’t mean it isn’t an issue that should be addressed, it just means that its not likely the only answer to NH’s problem of slower economic growth.  For all of us non-ideologues, I hope lawmakers look to broaden the range of issues in the policy debates over how best to strengthen NH’s economy.


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