22 October 2008
Wednesday, Oct. 22, 2008
As state government braces for a budget crisis as bad as any in recent history, we look back to the last recession and find that it proves the strength of what former Gov. Hugh Gregg called New Hampshire's "unique and admirable fiscal history." New Hampshire falls prey to the problems that other states experience, but our enviable tax structure insulates us from the worst excesses and also mitigates the calamitous declines that other states experience.
Budget problems come from a boom and bust cycle of state revenues. When times are good, revenues tend to skyrocket and politicians spend them as if the highest years of growth are average and will always exist.
As the recession approached at the beginning of this decade, Gov. Gregg warned about spending without any regard to an inevitable downturn: "when business is good and help wanted signs are posted everywhere, governments tend to be profligate and don't worry too much about tightening their budgets," he said.
Across New England, states with an income tax saw revenues skyrocket, and they ratcheted up spending as if tomorrow might never come. The Federal Reserve Bank of Boston noted in its post-mortem on the New England fiscal crisis that "on the spending side of the equation, states expanded their spending obligations significantly through the late 1990s and into 2000 and 2001."
In the other New England states, income tax revenues created the engines for government spending programs that would not be sustainable when the boom cycle turned to bust. When the recession came, it was particularly hard for five of the six New England states.
According the Federal Reserve, "rather than just slide into trouble gradually, the states fell off a fiscal precipice. With the exception of New Hampshire, New England experienced an extraordinary decline in revenues."
The recession was a calamitous event that the staid Federal Reserve bank described as falling off a precipice. But New Hampshire was singled out as being a notable exception. Why?
The single biggest reason is our lack of an income tax. During a boom economy, budget writers look enviously to our south as income tax revenues skyrocket and those states can say yes to everything. But then the inevitable bust comes, and those states "fall off a precipice." New Hampshire doesn't have the explosive boom, but neither do we experience the precipice.
In Massachusetts, legislators had a rude awakening. Income tax revenues declined by 16 percent in one year and forced sudden and drastic cuts. In that climate, New Hampshire's calmer system is the envy of our neighbors. According to the Fed, "by contrast, New Hampshire, without an income tax, was insulated from such revenue losses."
Without the roller-coaster ride of an income tax, our revenues don't rise as high or fall as low. We experience less turmoil.
We do have a milder version of the boom and bust cycle. When other states increased their spending significantly, we did too. After Gov. Steve Merrill ratcheted down spending during his last term in office, we saw a boom that would soon bust. Six years of spending growth put enough pressure on the budget that it had to be followed by four years of correction.
From fiscal years 1997 through 2003, we expanded general fund spending at about three times the rate of inflation and added about $900 million a year in education spending. We erased all the gains we had made when Steve Merrill tightened our budget belt and actually reduced spending in his second budget.
There had to be a correction. Gov. Craig Benson became the first governor in decades to actually veto a budget even with a Legislature of the same party. The final compromise budget reduced spending relative to the rate of inflation by about $90 million. The next budget, John Lynch's first, also came in below inflation by about $5 million.
Rather than find a middle ground and prepare for the next bust cycle, we decided to spend everything we had saved and then some. The current budget contained the biggest spending increase in 20 years and was the poster child for Hugh Gregg's warning about profligate spending. Now, with a recession upon us, Gov. Lynch is cutting spending he previously described as mandatory, and the state is looking at a bigger problem next year.
We're fortunate that not having an income tax is not only good for our economy but lets us avoid the worst of the roller-coaster ride. Our revenues do a good job keeping up with inflation; they just can't keep up with the appetite of spenders who forget that there's always a slowdown around the next corner.
Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.