Presentation to the Senate Ways & Means Committee

In the end we picked two new taxes that are based on ability to pay, which is more important than ever in a recession. The capital gains tax is extremely easy to administer, and allows us to provide much-needed relief to the lower-income payers of interest & dividends tax. The estate tax is in our state constitution, and is simply de-coupled from the federal tax; the administrative apparatus is mostly already present. Both will raise larger amounts of money in a better time, which means that they will help to resolve our long-term structural deficit problem. If passed into law, I plan to start work on enhanced rainy-day fund provisions to limit spending from them in good years in order to save for the bad ones.

Two smaller measures were taken to try to shore up revenues. The insurance premium tax is due to decrease another half point during the next biennium, losing the state revenues that will not be made up, and it seemed wise to freeze it until the economic climate improves. The tobacco tax has been under assault from new products that are not cigarettes but are light in tobacco and often flavored to appeal to youth, and several of these are still untaxed; we finally found a way to exclude the adult-only premium cigar category and bring these cigarette equivalents into the tobacco tax. The taxed non-cigarette products, by error of omission, have not seen their tax rate rise during the last three tobacco tax increases, making them economically attractive; we added a provision to bring them up to the current tax rate. Both these measures should reduce illegitimate erosion of the tobacco revenue – as vs the legitimate erosion from smokers quitting altogether.

The House also passed to you a gambling winnings tax for the General Fund, the increase in the road toll for the Highway Fund, and several additions to fees for dedicated funds in Safety and Environmental Services. These and details on the other taxes added or revised are described in this packet, since there is not time today to take you through everything. I presume you will be listening to the House Public Works & Highways committee on the road toll.

The end result of House revenue changes is still insufficient – partly because new taxes need lead times to begin collection. We estimate $209 million in new General and Education Trust Fund revenue has been added, less than the Governor had planned. This brings the revenue total for the next biennium to $4.33 billion, or almost 6% below the current one. I am well aware of what that means for our state’s citizens, but without resorting to broad-based taxes this is the best we could do.

Rep. Susan Almy, Chair

Index:

p.3 Capital Gains Added to Interest & Dividends Tax

p. 4 Estate Tax De-coupling

p. 5 Tobacco

p. 6 Insurance Premium Tax Rate Reduction Freeze

p. 7 Rooms, Meals and Car Rentals; Liquor Commission Discounts; Gambling Winnings Tax

p. 8 Road Toll

p. 9 Various Dedicated Fund Fees

p. 10 Continuation and A Note on Process
Capital Gains Added to Interest & Dividends Tax

Sections 189-194 Adds capital gains, as reported on Schedule D of the IRS 1040 form, to the interest & dividends tax; increases the joint exemption for both to $5000 per person, or $10,000 for a couple (the elderly and other exemption add-ons remain at $1200); and directs filers to use their 2009 Schedule D capital gains to estimate their quarterly payments for CY10.

Adding capital gains allows us to provide a long-deferred increase in the I&D exemption level: the cost of this is $9.8 million, which we could not otherwise forgo. That increase will free thousands of low/middle-income retirees from an income tax on their fixed incomes at a time when these incomes are under maximum pressure. Although cases can be imagined where a tax on a capital gain would eat into basic survival income – since we cannot spread the calculation out across all revenue sources as would be done with an income tax – they are much rarer than in the case of interest and dividends, which are usually the sole resort of those with less money to invest.

In good times, according to the IRS’s SOI tables for NH, the capital gains addition would have brought in $150 million a year in new revenue – revenue which would go a long way to eliminating our structural deficit, if we are rigorous about reserving some of it in a larger rainy day fund for times like these. Looking at the Massachusetts, New York State, and Congressional Budget Office projections for their capital gains losses during this recession, H W&M and DRA took our estimate for this tax during these two years down to $50 million a year, after accounting for the cost of the raised exemption. This is considerably more than the national loss rate in the 1970’s recession. The tax would not be collected until the second half of FY10, so the estimate is for $75 million for the biennium. The provision for mirroring the federal CY09 for quarterly estimate purposes both allows us to collect revenue in FY10, and the taxpayer not to be unpleasantly surprised by a bill for 5 quarters of tax in April 2011.

The intent of the committee and of the DRA is that the tax on capital gains would only be levied once; we are exploring whether this needs more specific language in an amendment. If tax is paid on gains by a business as part of the BPT, the business owner will not pay on it in his/her personal taxes. Schedule D exempts up to $500K for sale of primary residence by a couple, and assures that the person pays only on gains net of that year’s losses. If the person has a net capital loss for the year, but positive interest & dividends, as written the provisions will not allow the loss to be taken against the I&D; but the exemption for that I&D is considerably enhanced over today.

Interest & dividends is supposed to be a tax on “unearned” income – that is, only earned via investment. Today, the largest pot of “unearned” income for the wealthy is capital gains, and it belongs in this tax. Taxing primarily those who have least is not good social policy or tax policy.

Estate Tax De-coupling

Sections 181-185 Decouples from the federal estate tax, which withdrew the NH share of federal revenues about 6 years back, and charges an 8% rate on the amount over $2 million, net of all federal estate deductions (spousal, small business, farms, charitable contributions, etc). Valuations for most capital assets are based on current fair market value, net of financing; farm valuation is based on current-use value. A $3 million estate belonging to a single individual with no deductions would pay a 2.67% rate on the entire value. For those exceeding federal exemption levels, the tax would be a deduction on the federal return.

Based on SOI data for the federal estate tax, the tax in NH is likely to affect about a hundred estates a year and bring in up to $30-35 million in normal times, but is being estimated at $10 million now after a very conservative correction for the stock and realty markets. Couples that use estate planning can effectively double the exemption by dividing assets into separate trusts. That is calculated in to the revenue estimates. The federal exemption increased to $3.5 million this year; Congress is under the gun to re-enact the current law before next year’s crash and sunset, but we do not know yet what floor they will choose. Most states have already de-coupled or are in process; the Vermont House is said to have voted last week to set their exemption back to $2 million.

NH has had an estate tax, or provisions for one, since the 18^th century; it is explicit in our Constitution. It balances tendencies towards oligopoly. Although some estate lawyers claim this will lead retired wealthy clients to shift their residency to Florida, UNH Economics Prof. Karen Conway and her associates have done extensive research on movement of the wealthy elderly for estate and other tax purposes, and found to their surprise that it was insignificant. The sub-committee estimated from her work that we could expect 3% at the very most to shift residency. The Congressional Budget Office a few years back studied the impact of the much higher federal tax on family farms and found the federal deductions had successfully protected every transfer. We have an analysis available of the lack of meaningful impact on transfer of family-owned car dealerships, the only potential problem brought up at the House hearing other than the issue of moving to Florida. The main proponents of the repeal of our old legacy & succession tax are in favor of this estate tax, as it treats all citizens fairly.

This tax and the capital gains tax will both grow with the recovering economy and help deal with our long-term structural deficit. We cannot continue to balance our budget only on the backs of businesses, real estate and addictions.

An estate attorney has volunteered some amendments that would ease administration for both DRA and lawyers; they are being studied by DRA and its recommendations should be considered.

Tobacco

Sections 2-3 Tobacco tax increased 35¢, with floor tax

Sections 176-177 Tobacco tax extended to all but premium cigars (no floor tax)

Section 178 Rate on non-cigarette tobacco products raised from 19% to 48.59% of wholesale sales price (no floor tax)

The federal increase of 61.67¢ per pack on April 1 is expected to reduce our tobacco tax revenue by the same amount as we gain back by adding 35¢ to our cigarette tax. The floor tax is used to avoid massive buying just before the effective date. Our neighbors all add a sales tax on to the tobacco tax, resulting in effective rates that are now about $1 to $1.50 higher than ours and will, if they do not increase their rates, result in tax differences of 65¢ to $1.15 on a $5-$6 product. MA is the highest. The DRA revenue estimate used is about $1-$1.5 million above that we gained by using Tobacco-Free Kids calculations.

We do not currently tax the cheap, chocolate/orange/etc-flavored cigars and cigarillos that are sold through pharmacies, convenience and grocery stores. The survey evidence is that as many adolescents are illegally smoking “cigars and cigarillos” as are smoking cigarettes now; and yet we know smoking a premium cigar makes an early tobacco user sick. The premium cigars are sold in small numbers to a carefully limited clientele of adults, and their market is such that if we tax them, they will leave the state, as they did Massachusetts. The non-premiums are an easy alternative to cigarettes, which makes it good tax and health policy to add them to the tobacco tax. The cigar stores helped us craft a definition that excludes premium cigars. Without sections 176-178, we will continue to lose more smokers to non-taxed products. It will not bring in much money, but it will prevent money being lost in the cigarette tax. We do not believe a newly taxed product should pay the floor tax.

Three terms ago the DRA asked to separate the cigarette tax from the other-tobacco-products (OTP) category, so that they could be relieved of having to do a price survey every year. The result was that the Legislature forgot about the OTPs. We raised cigarette taxes three times, and the OTPs are still paying the 2003 rate. As a result they are more attractive to young people seeking to begin smoking, and draw people seeking to avoid the cigarette tax. It is a fairly big hike all at once, so we did not include a floor tax, and did not return to raise it again to the level that will be in effect for cigarettes if the 35¢ increase passes.

The total expected from these changes is $30.6 million above our current-law estimate for FY10, and $26.2 million for FY11. The second-year reduction is both loss of floor tax and normal background reduction in smokers. The major reduction in smokers from the federal legislation is taken in the end of FY09 and built into the baseline FY10 estimate.

Insurance Premium Tax Rate Reduction Freeze

Sections 179-180 Freezes the reduction for the property & casualty insurance premium tax at the current 1.5% for two years, saving $16 million during the period it will take our regular revenues to recover (although only $5 million this biennium due to the way it is collected), and requires a full report on the program to H & S W&M committees in 2010.

This measure was enacted in 2006 to attract/retain insurance jobs in the state. The insurance companies now claim it would not have lost us jobs, and has gained us less than ten to date. Every business, town, and family is putting purchases and capital projects on hold during this recession. For NH to go forward at this time with the last .5% of revenue losses with no prospect of immediate return is folly. Any rational business should be able to understand that, and make allowances for the state having frozen the rate decrease.

The insurance premium tax reduction once complete at 1% will cost the state $16 million a year (the last .5% frozen over two years saves us $5.1M in '11, $8.8M in '12 and $1.9M in '13, due to the timing and method of collection). It was passed with the claim that it would bring in 750 jobs to the state of NH over the years, and that it would prevent the loss of 700 jobs in Keene at Peerless. The proponents’ paid analysis explicitly said that the revenues lost would never be made up by the increased jobs and related activity - and that a large part of the revenues recovered would be local property taxes, not state revenues. If this tax reduction works as the sponsors' analysts projected, we will be paying $18,700 per year for each job we will have created in the state, or $9,350 forever for each job gained and retained. But it is not working as projected.

At the Ways & Means hearing on HB627, which can be heard on the web, the representative of Liberty Mutual, which has bought Peerless, specified that they never threatened to move the 700 jobs out of the state; if the bill had not passed, they might over the course of time have moved a couple of jobs out every few years. The representative of Acadia, which is the one domestication completed to date, said that when the bill passed they already had an office of 54 people in NH, in addition to offices around New England, and that upon re-domesticating they added 8 jobs in NH. The reality is that getting the tax benefits of domestication does not require adding jobs, unless it is one person in a new office. It only requires the approval of the Insurance Commissioner.

The original legislation sent reports only to the Fiscal Committee, which has no House W&M member, and sent them monthly, so that proper oversight is difficult. H W&M requests a full report for us and you next year in the second section.

Once the recession is over we can have the debate about whether committing this much money to attract this few jobs was rational policy or not for the long run. Right now we need to retain as much of our revenues as we can to make the budget viable and avoid losing jobs the state funds.

Rooms, Meals and Car Rentals

Section 7 Increases the Rooms & Meals tax from 8% to 8.75%

Except for car rentals, it seems unlikely this increase will lower demand. Other tourist destinations have resort taxes and fees well over 10%, and Massachusetts already enjoys a tax advantage against us on meals. People pick places to eat on the basis of quality, ambience, speed, closeness to work or recreation, and general price range, not specific amounts. Car rentals are a small and complex part of this tax and have never performed as we expected. The largest car rental agent in the state came to testify that he would have to pull some of his stores over the border to neighboring states if the tax went up further; we did not have time to explore this. Increased R&M revenue is shared with the municipalities we have had to short-shrift in the budget. The increase is projected to bring in $39.5 million during the biennium.

Liquor Commission Discounts

Section 116 Repeals the 6/31/09 sunset of the flexibility in agency discounts provided the Liquor Commission in HB 30 last year. The LC estimates they will make an extra $6.3 million for the biennium from this.

Gambling Winnings Tax

Sections 4-6 Establishes a 10% tax on all winnings $600/>, by anyone winning within NH and any NH resident winning outside NH, and requires all NH gambling establishments to register and report such winnings and collect the tax

The Governor’s Office estimates $8 million/year, I believe on the basis of NH-resident IRS filings. However, the IRS exemptions vary by type of game and odds (see below), and if we impose reporting/collecting requirements on NH’s bingo/poker/racing establishments, they will have to set up new systems for the state tax unless we adopt the federal exemptions. For the smaller operations this would be onerous. Also, at least half of the eligible amount won by residents is probably won in out-of-state venues, and the DRA is not at all sure they can get those venues to collect for us or report to us. If they do not, we will be imposing the tax in a letter sent on the basis of the IRS tapes about 18 months after the winnings have been gained and used. House Counsel has discovered that some states do double-tax legally (taxing a resident’s winnings in a neighboring state when they also have to pay a tax there), since they are different jurisdictions, and that most states do not permit deduction for gambling losses. House Ways & Means abandoned the tax, but if it is to be used, I would recommend using federal exemptions and taxing only in-state winnings – fixing the language so multi-state games we are a party to count – unless the DRA finds it can get the out-of-state venues to report/collect.

From IRS Form W-2G instructions: Reportable Gambling Winnings

Report gambling winnings on Form W-2G if:

1. The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot machine

2. The winnings (reduced by the wager) are $1,500 or more from a keno game,

3. The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker tournament,

4. The winnings (except winnings from bingo, slot machines, keno, and poker tournaments) reduced, at the option of the payer, by the wager are:

a. $600 or more,

b. At least 300 times the amount of the wager, or

5. The winnings are subject to federal income tax withholding (either regular gambling withholding or backup withholding).

Road Toll

Sections 139-149 Raises the gasoline road toll by 5¢ per year from the current 18¢ to 33¢ a gallon in July 2011; raises the diesel road toll to 20¢ in '10, 22¢ in '12, 25¢ in '14, 29¢ in '16, and 33¢ in '18; puts the entire increase into a sub-dedicated account in the Highway Fund that is used only for maintenance and construction of roads and bridges; and provides increased highway money to municipalities through two forms, a percentage of the whole and increased betterment funding.

There is good evidence, both anecdotal and from Dr. Lisa Shapiro’s recent study, that the pricing policies of the oil companies that supply our gas stations wipe out any tax difference between states in our region.

H W&M negotiated the delay in the diesel increase with the Public Works & Highways committee and the truckers, for two reasons: their industry is extremely impacted by the current recession and is critical to large parts of our economy; and unlike cars, who pay the price at the pump and are done with it, the interstate taxing structure means that they will see the tax increases directly in most cases, regardless of oil company pricing policies.

The road toll increase stabilizes the Highway Fund for many decades and wipes out the need for overweight/oversize fee increases, driveway permit fee increases, car registration fee increases, loss of the resident EZ Pass discount, and major toll increases both in and outside of the budget – which off-budget toll increases would be used partly to pay for the interstates of those of us that live far from tolled roads.

The increased road toll also flows via the unrefunded road toll law to the Fish & Game Fund and to the snowmobile and OHRV trail funds of DRED. Both have been experiencing deficits.

All these items are critical to the budget, and HB644 was retained and sent to HB2.

Various Dedicated Fund Fees

Motor Vehicle Record Fees Supporting Fire Standards & Training & Emergency Medical Services

Sections 11-12 Increases the fees charged to insurance companies and their agents seeking MV records from $8 to $10.50, or $15 if not in pre-set accounts, to close a deficit in the FST/EMT fund. The DOS proposal was for $12 and House W&M cut it at the request of the insurance companies, believing the increase was too high too fast. The nexus is that the FST/EMT fund prevents considerable expense to the insurance companies by its training activities.

Fire-Safe Cigarette Certification Fee Supporting Fire Standards & Training

Section 175 Creates a fee of $250 per type of cigarette (brand, flavor, pack size, etc) for certification as fire-safe, and applies it in 2010 to those cigarettes already certified, and in 2011 to the recertification process. Most of the fee will not be used for the certification process, but for the Fire Marshall’s fire safety activities, the nexus being the propensity of cigarettes to start fires. H W&M only passed this after the cut to the above fee increase passed, leaving the FST/EMT fund considerably underfunded. After the FY10-11 biennium it will only contribute to the fund every three years, at half the amount garnered in this next biennium.

Administrative Fee Change for Federally Funded Water-based Revolving Funds

Section 39 Allows DES to allocate 2% of outstanding loan balances to administration rather than only 1%. The federal government has required more administrative work and reduced funding over the years, and DES needs the higher percentage to cope. There is no short-to-medium-term risk of having to turn away municipalities that wish to borrow money because of this; there may be one decades hence.

Subsurface Program Funding

Sections 40-42 Doubles the fee for subdivisions requiring septic systems from $150 to $300 per lot, and dedicates the money to a new fund to pay for septic regulation, in order to guarantee adequate oversight. HW&M felt this was reasonable given the enormous cost of restoring failed systems. It requires a regular report on use.

Motor Vehicle Air Pollution Abatement Fund

Sections 43-45 Increases the fee for annual motor vehicle inspection stickers from $2.50 to $2.90, 15¢ for the increased cost of sticker purchase (cut by HW&M from 25¢ after checking costs) and 25¢ for a new MVAPAF for a program to help meet federal Clean Air law targets by reducing motor vehicle pollution, mostly through education.

Judicial Branch Information Technology Fund

Sections 102-111 Increases the criminal penalty assessment from 20% to 24% of each fine, adjusting the percentages going to the Police Standards & Training and Victims’ Assistance funds so as to maintain their shares, and reserves this increase and 14% of civil court entry fees (with the understanding that the Court will raise those fees by that amount) for a new JBITF, to allow an adequate replacement cycle for the existing computer system in the courts. It requires a regular report on use. HB609 was critical to the Judicial budget and was retained and put in HB2.

Saltwater Fishing License

Sections 120-131 Creates the saltwater fishing license for individuals and boats that the federal government has mandated that either the state or the feds will provide by 2011. The federal government is pushing the states to do this themselves; if the former had to set up a program and levy a fee just for NH it would probably be higher than ours due to the difficulties of scale. By the time it left House Fish, Game & Marine Resources, there was only one person in opposition, who believes that because the feds will not set their fees until they have to (in 2011) they may be lower. The fees will add $720K to the F&G Fund annually, a major repair to its chronic revenue problem, which is why HB481 was retained and put in the budget.

Boating Registration and License Fees

Sections 132-138 Increases boat registration fees by about 50% (depending on size), to update funding of the Navigation Safety Fund, increases the license fee for boat officers from $4 to $15, and increases the boat exotic weed control and prevention programs fee from $5 to $7.50 to provide more money for milfoil and other aquatic weed control. The boat registration fee increase sunsets in 6 years unless renewed. DOS asked for the fee to be doubled, but only provided documentation to justify a 50% increase; their justification for the rest, involving capital equipment, came too late for H W&M to consider. Since the boat registration fee strongly impacts the DOS water safety program, it went in the budget, and we retained HB 205 to take a further look at the capital equipment side in the event that the Senate acts on it.

A Note on Process

Unlike the Senate, there is no overlap between House Finance and House Ways & Means. In order to bring all deliberations on revenue for the budget out into the open, and provide information to the Finance committee in time to allow it to do its work, H W&M has for two terms now adopted the following procedure. All revenue items placed in HB2 by the Governor’s Office are identified and copied into non-germane amendments on selected bills in our possession: this term, these were a tobacco tax bill HB638 and the road toll bill HB644. Public hearings are held normally on the non-germane amendments, after notice in the House Calendar. At the same time, or earlier if we can get fiscal notes in time, other bills sent to the committee are heard. Work sessions are held on all of these items. A final work session is held on all potential budget revenue items at which straw votes are taken to decide whether to recommend them to the Finance committee for inclusion in HB2 and in HB1’s revenue estimates. Then in the formal executive session the bills that had been moved to the budget are retained, principally to avoid the confusion of having the same fight twice on the same day on the floor. This is not perfect, but it is the best solution we can find to provide open government with two committees. Re-merging the committees has been considered but each has an enormous and distinct workload.