Posted tagged ‘taxes’

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.

Gasoline Taxes, Prices, and Price Differentials

March 27, 2013

Policymakers often assume that sales and excise taxes are the primary reason for variations in the price of goods and they too often assume that consumers consider differences in tax rates across jurisdictions when making purchases rather than differences in the total price (tax plus non-tax price) of a good.  A good example was the $.10 drop in NH’s cigarette tax in 2010.   Some thought the decrease would be a beacon to NH for consumers.  But the decline did nothing to lower the price of cigarettes in NH because manufacturers increased their price by an equivalent amount immediately after the tax decrease (effectively capturing the revenue that would have gone to the State of NH).  I did a fair amount of gloating in an early post as the revenue numbers reflected my predictions. Consumers saw no price break and no major changes occurred in other states so no increases in competitive advantage for retailers occurred in NH (retailers saw no benefit) and the longer-term trend of declining smoking rates (along with a things like higher gasoline prices and fewer visitors to the state) were the primary determinants of sales trends, and thus lower revenues.

The demand for gasoline, like cigarettes, is relatively inelastic so it takes a surprisingly large price increase to change consumption very much but differences in prices among  locations may shift the location of some gasoline sales where consumers can conveniently choose where to make their purchases.  I can buy gasoline as easily in Maine as in NH and with a little more effort I can also buy in MA.  I often can get gasoline as or even a bit cheaper in MA than in the town where I live,  but I can’t get gasoline cheaper in Maine.  I can also get gasoline  cheaper if I drive a few miles to towns just north and south of me, or even to a gasoline station on the other side of town.   These price differences are often $.10 per gallon and occur among retailers of similar types – i.e. gasoline stations with a convenience store, the same brand convenience store selling the same brand of gasoline.   Nevertheless, when I look at the average price of gasoline between neighboring states (with some exceptions like California where environmental regulations have large retail price impacts), the differences in price appear  to be strongly related to differences in state tax rates (r=.82).  Comparing statewide average prices and tax rates for gasoline masks much of the variation in pricing that occurs within states and even within communities.  That is one reason why I think policymakers focus so much on tax rates as the primary reason for price differences.

State Gasoline Prices

Despite all of the attention to gasoline prices and proposals to raise or lower gasoline taxes over the past decade there has been surprisingly little research on the retail price impacts (or “pass-through” effects) of changes in gasoline taxes.  That may be because changes in gasoline taxes are relatively small (usually a few cents) compared to the much larger price changes that occur as a result of  supply/demand issues and variations in the world-wide price of oil.  The chart below shows how gasoline prices in NH have changed since 2004 and it also shows the theoretical price if the state had no excise tax on gasoline.  The red line shows the theoretical prices because, like cigarettes, retail prices may or may not be reduced by an equivalent amount if the gasoline tax were lowered.

Monthly NH Gasoline Prices

The theory of tax incidence suggests that sales and excise taxes should be fully passed on to consumers in competitive markets with constant marginal costs.  Less than full “pass-though” is expected in markets with increasing marginal costs, while the pass-through rate may be less than, or greater than, one-hundred percent in markets that are less competitive.  In addition, tax increases in one state may lead to higher prices across the border as stations there face greater demand.  A study examining a temporary reduction and reinstatement of a 5% gasoline tax in Illinois (sorry I can’t find the reference)  found that that when the 5% tax was eliminated, prices declined by 3% and when the tax was reinstated prices rose by 4%.

Politicos are looking to score big points for their positions on gasoline taxes.  There was a time when whatever marginal changes lawmakers made to gasoline taxes may have meant a lot to changes in prices at the pump.  Right now, and in the future, changes in world-wide oil markets are likely to overwhelm  any impacts from changes in state taxes and  together with the uncertainty over the degree of pass-through, make any predictions about the economic impacts of gasoline tax hikes nearly impossible.

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.

Raising Issues With Raising the Gas Tax

January 28, 2013

“With the Patriots headed to the Super Bowl, now is not the time to increase the beer tax.”   Either the Governor strongly identifies with us commoners or there was going to be one heck of a Super Bowl party at the Hassan household.   I hope our Governor’s positions on important fiscal issues are more considered than her sports predictions and  I wonder  how she feels about raising the gas tax in New Hampshire now that many Patriots fans are more likely than they were a couple of weeks ago to go driving to ski, shop, or hike next Sunday.

No doubt revenues from NH’s gasoline tax and its road tolls are stagnant or declining.  Higher gasoline prices have reduced discretionary driving and prompted greater fuel efficiency in our choice of automobiles and a steep recession further dampened gasoline consumption.

NH gasoline sales

No doubt there are a lot of transportation infrastructure needs that are clamoring for state revenues that are not likely  to increase organically.  Gasoline sales (and the revenues derived from them) will not rebound to levels seen early in the past decade.  Beside greater fuel efficiency, the volume of traffic at key border locations (I93, I95, Everett Tpk.) has declined by 7.4% between 2004 and 2011.  Traffic volume at toll booths on these roads, however, declined by just 3.9% during the same time period (chart below).

Border traffic

Of course the implications for gas tax and road toll revenues are significant, but those trends follow trends across the nation.  When I look at the data, the smaller decline in toll booth traffic than in overall border traffic suggests to me  that commuting is being less affected than is more discretionary travel.  That has even more profound implications for longer-term trends in NH’s general revenues because they depend so heavily on discretionary travel and discretionary spending.   One measure of how important discretionary travel is to NH is the fact that the state ranks fourth in spending per capita on gasoline.

Gasoline Exp per capita

Like beer or cigarettes, its not that we drink or smoke that much more than residents of other states, its that our numbers are increased by the high volume of visits the state receives.    I appreciate that the implications of the gas tax in terms of infrastructure investments is an important discussion to have.  I also think a discussion of the implications of a higher gas tax on the larger revenue issues facing the state ought to be evaluated.  That evaluation needs to be more thoughtful than the typical arguments made by opponents of any excise tax increase (“if we raise the gas tax we will lose not only gasoline sales but a billion dollars in potato chip and chewing gum sales”).  I don’t know whether the gas tax should be raised and I don’t know what the impact of an increase would be in a larger economic and revenue context but  I do know that higher gasoline prices affect a number of revenues because I have analyzed that in the past.  That isn’t reason enough to drop the idea of raising the gas tax, but it is reason enough to discuss it in a broader context than just the funding of infrastructure.  Maybe I’ll get that chance when my invitation to the big Super Bowl party in Exeter arrives, I’m eagerly off to the mailbox now to look for it.

Striking an Economic Strategy With Maslow’s Hammer

January 22, 2013

The great psychologist Abraham Maslow is famously quoted as saying:  “When the only tool you have is a hammer you tend to see every problem as a nail.”   Maslow gave us all too much credit. When we (NH) have a hammer and know how great it is, we not only treat everything as a nail, we actually perceive everything to be a nail.  We (me included) develop a blindness to “non-nail” problems and creative problem solving takes a back seat to picking up that hammer and smashing the problem.

NH’s relatively low state and local tax burden, especially compared to other states in the Northeast, has and should continue to provide the state’s economy with significant competitive economic advantages.  In an era where “talent” – skilled, well-educated individuals are the resource businesses are most in need of, our state’s fiscal structure has been a magnet for higher-skill, more highly-educated and more mobile individuals and families.  So why does it currently not appear to be offering a competitive advantage (based on job growth and population migration data)?   The question is whether our fiscal system will be enough of an advantage in today’s economy to assure the kind of growth and prosperity the state became accustomed to over much of the past several decades.  Based on the screams of joy I heard last week, the answer for many in NH is a resounding yes.  The news that Massachusetts’ Governor Patrick is proposing to raise income tax rates in that state has been greeted by many in New Hampshire as if the cloud that is NH’s slow job growth is about to be lifted.  Once those new Massachusetts tax rates are enacted NH’s schools and students will perform better, our electricity prices will drop, our young people will choose to enroll in the  newly affordable colleges in NH,  and our communities will be safer, cleaner and offer more and better services at ever lower prices.  For too many in our state,  the future of  NH’s economy is largely determined not by what we do as a state, but by the mistakes that other states make.  I’m no Doc Rivers or Bill Belichick but I don’t think their game plan is ever solely predicated on the other team’s mistakes.   Great states, like great teams, can succeed even when the other “team”  is playing their best.

The monthly state job growth numbers for December, released late last week, continue a disappointing trend that should have NH businesses, policymakers, and citizens asking whether Maslow’s hammer is the only tool to use in shaping an economic strategy for NH’s future.

Annualized Emp. Growth

In the case of economic policy in NH, the “nail” is the high taxes which we have been pounding with our hammer for decades.  For the most part,  NH has successfully pounded that nail well below the surface.  As the chart below shows, state and local taxes as a percentage of personal income in NH are well below the U.S. and neighboring state averages.  Occasionally the nail it pops-up but is usually driven down.  Note that while it did rise for a time during the recession, this was a result of a slow and declining income growth rather than a rise in taxes.

State and Local Tax Burden

The problem is that our love of the “hammer’  as our primary economic tool appears to result in us using a longer and longer nail set in an effort to achieve the same levels of economic success as we have in the past.   Governor Patrick’s proposal to raise Massachusetts’ tax rates may benefit NH, I hope it does, but if it increases the use of our hammer, to the exclusion of other tools,  the benefits may be illusory.  A low tax burden is a great asset but the skilled, well-educated, individuals that drive economic success for the most part (it is certainly not unanimous)  also want the amenities and services that people free from want generally like to enjoy – things like good schools, civic, cultural, social, natural  and recreational amenities.  People want to pay as little as possible for these amenities for sure (and in many cases they expect them for free), but they want them nevertheless.  I think NH’s advantage is really been about providing ‘value” as much as it is about providing just a low tax burden.  As long as we can provide the services and amenities that people want, at a tax price lower than other places, we should be a magnet for the kind of individuals that will help our state thrive.

Our state’s hammer is and will continue to be a great tool, but not for every job, and not if it is used indiscriminately.  Every increase in a tax or raising of a fee isn’t an end to the “NH advantage.”  It wasn’t during the 1980’s or 1990’s when the state was growing remarkably even as taxes and fees with tinkered with (and even one or two major changes) by both Republican and Democratic administrations.  The key is knowing the true economic consequences of changes to different fiscal policies, which ones really hurt or help the economy and which ones have little impact  and by how much.

I like NH’s hammer and I have argued how it has been a great tool in helping us build a house that withstood the ill winds that blew through the Northeast region for decades.  I hope NH’s basic fiscal structure doesn’t change.  But we have become so comfortable wielding our hammer that in our casual over-reliance on it we may just be pounding on the thumbs of those who would live in the nice house with which it was built.

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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