1

The Economic and Revenue Trends and Outlooks for New Hampshire

Presentation to The Committee on Ways and MeansJanuary 8, 2013

Brian GottlobPolEcon Research

bgottlob@poleconresearch.com

2

Topics for Discussion

• Some Disclosures, Caveats, and Advice

• NH’s Economic Conditions

• The Revenue Outlook for the Biennium.

• Some Factors That Affect Key Sources of NH Revenue

• “Unknowns” - Hospital Lawsuits, Medicaid etc. Will Have a Large Impact But I Will Not Address Those Issues

3

Year-Over-Year Revenue Growth From Eight Largest "Own Source" General Revenue (2 Qtr. Moving Average)

-15%

-10%

-5%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10 11 12 13

The Past Four Years Have Been Among the State’s Worst on Record for Revenue Growth

Shaded Areas = Recession

4

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

U.S. Emp. Growth Rate

MA Emp. Growth Rate

NH Emp. Growth Rate

NH

NH

Growth is Slower Everywhere but New Hampshire No Longer Leads the Pack in New England

5

During the 1990’s NH’s Private Sector Job Growth Looked More Like a Fast Growing State in the South or West than that of a

Northeastern State

% Change in Private Sector Jobs 1992-2002

0%

10%

20%

30%

40%

50%

60%

70%

80%

Haw

aii

Co

nn

ecti

cut

New

Yo

rkD

CP

enn

sylv

ania

Illi

no

isO

hio

Rh

od

e Is

lan

dA

lab

ama

Ind

ian

aM

isso

uri

Mic

hig

anW

est

Vir

gin

iaIo

wa

New

Jer

sey

Mas

sach

use

tts

Mis

siss

ipp

iW

isco

nsi

nL

ou

isia

na

Was

hin

gto

nT

enn

esse

eK

entu

cky

Cal

ifo

rnia

Ark

ansa

sV

erm

on

tS

ou

th C

aro

lin

aM

ain

eM

ary

lan

dN

ort

h C

aro

lin

aK

ansa

sD

elaw

are

Min

nes

ota

No

rth

Dak

ota

Ala

ska

Neb

rask

aW

yo

min

gO

kla

ho

ma

Ore

go

nS

ou

th D

ako

taV

irg

inia

New

Ham

psh

ire

Mo

nta

na

New

Mex

ico

Tex

asG

eorg

iaF

lori

da

Idah

oC

olo

rad

oU

tah

Ari

zon

aN

evad

a

Source: U.S. Bureau of Labor Statistics, PolEcon calculations

NH

VT ME

6

But Since the Recession of the Early 2000s, NH and Almost Half the States Have Seen Little or No “Net” Private Sector Job Growth

% Change in Private Sector Jobs 2003-2011

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Mic

hig

anO

hio

Rh

od

e Is

lan

dN

ew J

erse

yM

issi

ssip

pi

Ind

ian

aIl

lin

ois

Cal

ifo

rnia

Mai

ne

Ala

bam

aM

isso

uri

Del

awar

eW

isco

nsi

nT

enn

esse

eC

on

nec

ticu

tK

entu

cky

Ark

ansa

sF

lori

da

Ver

mo

nt

Geo

rgia

Mas

sach

use

tts

So

uth

Car

oli

na

Mar

yla

nd

Min

nes

ota

New

Ham

psh

ire

Lo

uis

ian

aK

ansa

sP

enn

sylv

ania

No

rth

Car

oli

na

Ore

go

nN

evad

aIo

wa

Wes

t V

irg

inia

Neb

rask

aC

olo

rad

oV

irg

inia

New

Yo

rkH

awai

iA

rizo

na

New

Mex

ico

Ok

lah

om

aW

ash

ing

ton

Idah

oM

on

tan

aS

ou

th D

ako

taA

lask

aU

tah

Tex

asW

yo

min

gN

ort

h D

ako

ta

Source: U.S. Bureau of Labor Statistics, PolEcon calculations

NH

7

NH is Near the Bottom of All States in Job Growth Over the Past 12 Months

% Job Growth November 2011 to 2012

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

No

rth

Dak

ota

Uta

hH

awai

iT

exas

Ari

zon

aO

kla

ho

ma

Co

lora

do

Mo

nta

na

Idah

oK

entu

cky

Lo

uis

ian

aIn

dia

na

Oh

ioM

inn

eso

taC

alif

orn

iaS

ou

th C

aro

lin

aW

ash

ing

ton

Geo

rgia

No

rth

Car

oli

na

Mas

sach

use

tts

Vir

gin

iaN

evad

aO

reg

on

Flo

rid

aA

rkan

sas

New

Yo

rkT

enn

esse

eIl

lin

ois

Ver

mo

nt

Iow

aP

enn

sylv

ania

Mic

hig

anA

lab

ama

So

uth

Dak

ota

Neb

rask

aM

isso

uri

Mar

yla

nd

New

Jer

sey

Wy

om

ing

Wis

con

sin

Kan

sas

Del

awar

eM

ain

eM

issi

ssip

pi

Co

nn

ecti

cut

NH

Ala

ska

Rh

od

e Is

lan

dN

ew M

exic

oW

est

Vir

gin

ia

NH

MA

VT

8

-0.3%

0.0%

0.3%

0.5%

0.8%

1.0%

1.3%

1.5%

1.8%

2011 2012 2013

U.S. Emp. Growth

NH Emp. Growth

MA Emp. Growth

NH’s Job Growth Trend Has Moved in the Wrong Direction in 2012

Year-Over-Year % Total Non-Farm Job Growth (3 Mos. Moving Average)

NH

MA

U.S.

9The Long-Term: Current Demographic Path Shows the Number of Working Age

NH Residents Will Peak Late This Decade –Potentially Slowing Economic

Growth, Wealth Creation & Revenue Growth

NH Working Age Population (Age 20-64)

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

'80 '85 '90 '95 '00 '05 '10 '15 '20 '25 '30

Projections

Source: U.S. Census Bureau, PolEcon

10Much of the Focus of the Fiscal Implications of Demographics Deals

With Spending – The Impacts are Likely to be as Strong on Revenues.

“Back-of-the-Envelope” Estimates of How Slow Growth in Working Age and Higher Growth in Older Population Will Affect Some Key Sources of State Revenues

• Income Tax (Negatively)

• Interest & Dividends (Somewhat Positively)

• General Sales Tax ( Mostly Negative)

• BET (Negatively)

• BPT (Mostly Neutral to Somewhat Negatively)

• Selective Sales (Mixed)

• Property Tax (Mostly Neutral)

11

The NH Leading Index Dipped Further Into Negative Territory

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

07 08 09 10 11 12

ME Private Emp.

NH Private Emp.

MA Private Emp.

VT Private Emp.

Despite “Holding the Line” on Revenues, NH’s Private Sector Job Growth Rate is Well Below MA and VT. This Doesn’t Mean Raising Revenue Will Increase Emp. But Neither Does it Mean More Revenue Always Slows Employment

Growth

MA

VT

NH

ME

12

Growth in Annualized State General Revenue (Index Jan. 2008 = 100)

80

90

100

110

120

2008 2009 2010 2011 2002 2013

NH ME MA VT

Whether Because of Stronger Economic Growth or Adjustments to Revenue Sources and Rates, Other NE States Have Recovered to

Pre-Recession Levels of Revenue While NH Has Not

NH

MA

VT

ME

13

Year-Over-Year Quarterly NH Emp. Growth & Revenue Growth From Eight Largest "Own Source" General Revenue (2 Qtr. Moving Average)

-15%

-10%

-5%

0%

5%

10%

15%

20%

03 04 05 06 07 08 09 10 11 12 13

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Yr-to-Yr Revenue Growth

Yr-to-Yr NH Emp. Growth

Absent Policy Changes (Rate and Other Changes to Sources), Emp. Growth (Not the Unemp. Rate) is the Best Indicator of Likely

Revenue Growth

14

The NH Leading Index Dipped Further Into Negative Territory

-40

-30

-20

-10

0

10

20

30

40

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

NH

Ind

ex V

alue

-6%

-4%

-2%

0%

2%

4%

6%

% C

hang

e in

Em

p. O

ver

12 M

os. P

rior

NH Leading Index

NH Emp. Growth Rate

PolEcon’s NH Leading Index is Signaling Stronger Employment Growth Ahead

15

Year-Over-Year Revenue Growth From Eight Largest "Own Source" General Revenue & PolEcon Leading Index )

-15%

-10%

-5%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10 11 12 13

-35

-25

-15

-5

5

15

25

Yr-to-Yr Revenue Growth

NH Leading Index Value

The NH Leading Index is Also a Reasonable Predictor of Revenue Growth. The Index Suggests Revenue Growth Should Have Been Higher Over Much of the Past

Few Years – The Effects of Policy Changes (Fixable) are One Reason But Structural NH Economic Issues (Not So Fixable) are Another

16

NH Businesss Tax Revenue (BPT+BET) Seasonally Adj. at Annual Rates

$200

$250

$300

$350

$400

$450

$500

$550

$600

$650

$700

02 03 04 05 06 07 08 09 10 11 12 13 14

Actual

Current Path

Moderately StrongerEconomic Growth

PolEcon Forecast

With Current Levels of Economic Growth, Business Taxes Would Increase About 3% Annually and With Even Modest Improvement in NH’s Economy–That Rate of Revenue Growth Would Double

Shaded Area = Recession

17

Annualized Revenue From NH's Eight Largest "Own Source" General Revenues

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

$1,700

$1,800

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Actual Revenues

Current Path

Improved EconomicConditions

The Current Path of Revenue Growth Calls for Minimal Revenue Growth (Just Over 2% Annually) From the 8 Largest Sources of General Revenue. A

Moderately More Optimistic Scenario Calls For Growth of About 4-5% Annually

Forecast

18

The End of the Payroll Tax Reduction Will Cost NH Residents an Estimated $650 Million, Reducing

Consumer Expenditures and Taking an Estimated $12 Million From General Fund Revenues

19

FHFA Prurchase Only Home Price Index (Each Area's Peak = 100)

60

65

70

75

80

85

90

95

100

105

02 03 04 05 06 07 08 09 10 11 12 13

U.S. NH MA

Through QIII 2012, the Federal Housing Finance Agency Repeat Sales Index Shows NH Prices Haven’t Yet Begun to Rebound

MA

NH

U.S.

20

According to the Federal Housing Finance Agency, Only Two States Had Lower Year-Over-Year Price Appreciation in 2012 Than Did NH

QIII 2011 to QIII 2012 Yr. Over Yr. Home Price Appreciation

-5%

0%

5%

10%

15%

20%

25%

Mai

ne

Rh

od

e Is

lan

dN

ew H

amp

shir

eN

ew J

erse

yN

ew Y

ork

Illi

no

isC

on

nec

ticu

tW

isco

nsi

nP

enn

sylv

ania

Ala

ska

Mas

sach

use

tts

Ind

ian

aN

ew M

exic

oN

ort

h C

aro

lin

aW

est

Vir

gin

iaT

enn

esse

eM

ary

lan

dM

isso

uri

Ken

tuck

yIo

wa

Vir

gin

iaA

lab

ama

Ver

mo

nt

Neb

rask

aK

ansa

sO

hio

So

uth

Car

oli

na

Lo

uis

ian

aW

ash

ing

ton

Mis

siss

ipp

iW

yo

min

gO

kla

ho

ma

Ark

ansa

sM

inn

eso

taS

ou

th D

ako

taM

on

tan

aH

awai

iT

exas

Ore

go

nG

eorg

iaD

elaw

are

Co

lora

do

Mic

hig

anC

alif

orn

iaF

lori

da

Uta

hN

evad

aN

ort

h D

ako

taId

aho

Ari

zon

a

Source: Federal Housing Finance Agency Home Price Appreciation Index, Issued November 27, 2012

NH

21

Job Growth (Along With Pop. Growth) Affects Home Sales and Home Price Appreciation – NH’s Slow Job Growth Hampers

Housing Recovery, Home Prices, and thus the Real Estate Transfer Tax

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-3% -2% -1% 0% 1% 2% 3% 4% 5% 6%

2012 Job Growth

QII

I 20

11 t

o Q

III

2012

Hom

e P

rice

A

pp

reci

atio

n

NH

22

When Households & Business Spend More on Energy (Because of High Oil, Gasoline or Electricity Prices, Discretionary Income is

Lowered, Affecting the Many NH Revenues That Depend on Them

$252

$410

$567

$721

$874

$1,025

$1,174

$1,321

$1,466

$1,610

$1,752

$1,892

$2,030

$206

$336

$464

$591

$716

$840

$962

$1,082

$1,201

$1,319

$1,435

$1,550$1,663

$111$180

$249$317

$384$450

$516$580

$644$707

$770$831

$892

$0

$500

$1,000

$1,500

$2,000

$2,500

$90 $95 $100 $105 $110 $115 $120 $125 $130 $135 $140 $145 $150

Mil

lion

s

Oil Price

ME NH VT

How Much Moe State Residents Spend on Energy by Price of Oil

23

A Large Portion of NH Revenues Depend on “Discretionary Spending.” Anything that Affects Discretionary Spending Will Affect NH Revenues. The Only Way to Measure the Impact of

High Oil and Gasoline Prices on Different Revenue Sources is to “Seasonally Adjust” Revenues to Account for the Patterns of

Higher and Lower Revenue That Normally Occur Throughout the Year for Many Revenues (Example: Some Revenues Always Spike in the Summer When Visits to NH are Higher etc. – That is the Same Time When Gasoline Prices Typically Spike – Does

That Mean Higher Gasoline Prices Lead to Higher Revenues?

No!!!

24

Example: When Gas Price Spikes Monthly Cigarette Sales (on a Seasonally Adjusted Basis) are Reduced

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2004 2005 2006 2007 2008

-50%

-30%

-10%

10%

30%

50%

70%% Change in Cigarette Sales over Same Month Prior Year (3 mos. Moving Average)

% Change in NH Gasoline Prices Over Same Month Prior Year (3 mos. MovingAverage)

25

Example: Higher Gasoline Prices Lower Real (Inflation Adjusted) Restaurant Sales

NH Gasoline Prices & Growth in Real (Infl. Adjusted) Meals Receipts

105

110

115

120

125

130

135

140

145

2002 2003 2004 2005 2006 2007 2008 2009

Mil

lion

s

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Real (Inf. Adj.) Seasonally Adj Meals Receipts(3 mos. Moving Avg.)

NH Gasoline Prices

26

The Cigarette Tax is an Example of the Pitfalls and Misinformation (i.e. “NH Loses Money When it Raises the Cigarette Tax Rate”) The Ways and Means Committee Must Confront and Which Hampers Reasoned Policy Debates

Cigarette Tax Revenue and Changes in Tax Rates

$0

$50

$100

$150

$200

$250

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

$.62 Fed Tax Hike& $.45 NH Hike

$.25 NH Tax Hike

$.28 NH Tax Hikes

$.28 NH Tax Hike

$.08 NH Tax Hike$.05 NH Tax Hike

$.10 Fed Tax Hike& $.15 NH Hike

$.10 NH Tax Cut

27

The Tobacco Tax, Because of Rate Adjustments, Helped Keep NH’s Major “Own Source” General Revenues From Falling Even

More Dramatically

NH Revenue Growth 2008 to 2011

($200.6)

$66.4

($134.2)

($250.00)

($200.00)

($150.00)

($100.00)

($50.00)

$0.00

$50.00

$100.00

NH "Own Source"Revenue Growth (8

Largest GeneralRev. Sources)

Growth of TobaccoTax

NH "Own Source"Revenue Growth

(Less Tobacco Tax)

28

Conclusion and Some Editorializing:

• Expect modest revenue growth 2-4%

• Demand sound empirical evidence from advocates and be wary of ideological claims

• Try to keep a record of accurate and inaccurate policy advocates – expect accountability

• NH can weather the storm, if we don’t hamstring ourselves

• Historically NH has avoided fiscal meltdowns because of balance and compromise (even with large political majorities)

• The “Left” had to accept that NH state government would provided “needed” services but few “wanted” services and the “right” had to accept that the tax price (via rates and sources) would sometimes have to be adjusted to fund services

• Today we have less balance and willingness to compromise and thus there is a potential for a larger crisis