Lawmakers hear some good news about state revenues – and reasons for concern

Business taxes, the state’s largest source of revenue, were $2.3 million higher in April than planned but they are $11.1 million below where they were last year at this time, according to the Department of Administrative Services. (Getty Images)

Lawmakers got some good news this week. State revenues were about $142 million ahead of projections as of May, despite lower than planned revenue from tobacco, real estate, and business enterprise taxes. 

The House Ways and Means Committee heard some concerning news too in an economic briefing Tuesday on the first 10 months of the fiscal year, which ends in June. The briefing also included the Department of Revenue’s most recent monthly revenue update, this one for April.

Among those concerns is the two revenue sources that saw the biggest growth can’t be counted on going forward. Also, lawmakers have passed or are considering bills that would cost $138 million to implement, which is unusual in a non-budget year, Chris Shea, the state’s deputy legislative budget assistant, told the committee. That includes money toward a new prison and a bill that would increase education funding by $61 million in 2025 and more the following two years.

And, pending lawsuits involving education funding and alleged abuse at the former Youth Development Center could cost the state millions. A jury that heard the first YDC case awarded the victim $38 million last week, though the state is arguing the amount should be just $475,000 based on the way jurors counted the incidents of abuse. 

“We’re not super excited about (fiscal years) ‘26 and ‘27,” Shea said, referring to the next two-year state budget. “I don’t think you’re going to see the same revenues you’ve seen the last couple of budget cycles. There’s going to be harder decisions being made.”

The New Hampshire Fiscal Policy Institute echoed that in its analysis this week of state revenue, warning of potential trouble ahead for the next governor and lawmakers as they craft the next budget.

Major revenue sources are declining

Business taxes, the state’s largest source of revenue, were $2.3 million higher in April than planned but they are $11.1 million below where they were last year at this time, according to the Department of Administrative Services. 

The department said much of that decrease is due to an increase in tax refunds stemming from a policy change and a decrease in tax returns and extensions. Lindsey Stepp, commissioner of the Department of Revenue Administration, said she expects the impact of that change, which limited how much money businesses can hold with the state, to taper off going forward.

Still, NHFPI saw reason for concern in its analysis.  

Corporations are seeing less profit growth than they did in the initial months after the pandemic, a trend it expects to continue. Quarterly tax payments for the first three months of the year were down compared to last year, an indication, the analysis said, that businesses are anticipating less taxable economic activity in New Hampshire this year.

Lawmakers have also reduced the tax rates on businesses. NHFPI said that has likely cost the state more than half a billion dollars since fiscal year 2015.

Tax revenue from tobacco for the first 10 months of the year lagged $17.9 million, or 10.1 percent, behind lawmakers’ plan. Stepp told lawmakers that’s due to a change in tobacco use. 

More people are shifting from traditional cigarettes to e-cigarettes, which are taxed at a much lower rate, she said. A single e-cigarette is taxed at 50 cents or $4, depending on whether it is a single use or refillable pen. An equivalent amount of cigarettes carries about a $35 tax, she said.

Rep. Susan Almy, a Lebanon Democrat who serves on the House Ways and Means Committee, said it could be time to revisit the state’s tobacco tax. That may soon be underway. The House has sent a bill to the Senate that would create a commission to study the way e-cigarettes are marketed and taxed.

Additionally, Stepp said, the state is no longer seeing the increase in flavored cigarette sales it did after Massachusetts banned them now that people can order them online. Her department is expecting that trend to continue.

Taxes on real estate sales are also declining, with a drop of $22.5 million, or nearly 13 percent, compared to last year at this time. A couple of things appear to be driving that, according to the Department of Administrative Services: real estate sales are down, as is the value of the property that has been sold. 

Stepp told lawmakers her department is projecting current revenue to continue. 

Biggest revenue jumps won’t continue

The interest and dividends tax was the biggest contributor to the state’s surplus, according to NHFPI, with April revenues of $31.3 million, nearly 57 percent ahead of plan, and yearly revenues $56.7 million ahead of the year’s projections.

That tax ends next year, a repeal Democrats have unsuccessfully tried to reverse. 

Committee member Rep. Nicole Leapley, a Manchester Democrat, raised concerns about the economic briefing focus on 2025, when the tax ends, and not the impact of that revenue loss.

“I plan on living in New Hampshire after 2025, so we’re facing a cliff that we’re not talking about today,” she said. “And we’re not really going to talk about it until we look at the budget for the future.”

A second contributor to the surplus will continue but could decrease.

The state has collected nearly $80 million in interest payments on its cash reserves this year, which is nearly $55 million, or 212.6 percent, more than projected in the state’s revenue plan. April alone brought in nearly $50 million more than planned.

NHFPI attributed this to two sources, one of which will not continue. 

The interest payments are beyond expectations because the state has considerably more in operating cash at the end of March than it did in March 2019: $2.13 billion compared to $578 million. Some of that cash is pandemic money, which must be spent by December 2026. 

Prior state surpluses also make up some of those cash reserves. As those surpluses decline, so could interest payments, especially if interest rates drop. 

In the NHFPI analysis, research director Phil Sletten noted that overall April revenues largely looked good. He caution lawmakers against counting on that to continue into next year. 

“Long-term concerns remain due to the strengths and weaknesses among the individual state revenue sources,” he wrote. “With the current surplus and revenue growth generated in large part by interest on temporary cash holdings and a significant tax revenue source that will be repealed soon, policymakers may face challenges maintaining the services funded in the current state budget as they formulate the next one in 2025.”

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