Event highlights fiscal challenges facing the next administration
The nation’s current fiscal policy threatens “a less prosperous future,” says the Concord Coalition’s executive director.
Last week, Robert Bixby, who also is member of the Debt Reduction Task Force of the Bipartisan Policy Center (BPC), together with Rachel Snyderman, a veteran of the Office of Management and Budget and director of Economic Policy at the BPC, spoke to an online forum hosted by the Warren B. Rudman Center by the UNH Franklin Pierce School of law.
“This is a very risky path we are on,” Bixby said.
The Concord Coalition was formed in 1992 on the initiative of Sens. Warren Rudman, a New Hampshire Republican, and Paul Tsongas, a Massachusetts Democrat, in response to the rising budget deficits and growing national debt following the round of tax cuts and the increase in defense spending of the Reagan administration.
Bixby distinguished between annual budget deficits, when spending outruns revenue, and the national debt, the cumulation of those deficits. Deficits and debt are best measured as a share of the economy, measured by gross domestic product.
In 1946, after running continuous deficits to finance World War II, the debt reached $242 billion, or 106% of GDP. By 1974 sustained economic growth pared the debt to 24% of GDP despite wars in Korea and Vietnam and the introduction of major entitlement programs, particularly Medicare and Medicaid.
According to the U.S. Treasury data, since 1981 the amount of debt and ratio of debt to GDP have grown steadily, falling only President Clinton’s second term between 1996 and 2000. Since then the debt has grown from $3.28 trillion, or 32% of GDP, to $33.17 trillion, or 123% of GDP in 2023 and recently topped $34 trillion.
Rachel Snyderman, director of economic policy, Bipartisan Policy Center
Both Republican and Democratic administrations have driven the increase, beginning with the deficits of the Reagan administration. President George W. Bush undertook a round of tax cuts, expanded entitlement programs and pursued two wars in the Middle East. To overcome the Great Recession, former President Obama bailed out the stricken financial sector and introduced an $831 billion economic stimulus package.
Following President Trump’s round of tax cuts, President Biden has thrown billions at COVID relief, infrastructure investment and support for Ukraine.
Asked what is a reasonable ratio of debt to GDP, Bixby replied “there is not a good answer to that,” then added “but the ratio is projected to rise to 200% of GDP in 30 years. That is the path we are on.”
Bixby said that, as the debt has grown interest on the debt has “metastasized.” Snyderman remarked that while “borrowing is easier than raising taxes,” interest payments, increased by high interest rates, are adding to it. Net interest costs in fiscal year 2023 were $659 billion, 39% more than the prior year and ranked as the fourth largest expenditure behind Social Security, Medicare and defense spending.
Bixby said the challenge is compounded by an aging demographic, which drives the rising costs of Social Security, Medicare and Medicaid while at the same time slowing the pace of economic growth.
He stressed there is no one simple, painless solution. “The problem is so big, no one thing would be enough,” Bixby said. “One thing didn’t cause it and one thing won’t solve it.” Eliminating waste, fraud and abuse, he said, is “not enough to make a dent.” Cutting taxes to stimulate the economy, he said, would forego revenue while expecting “an implausible rate of economic growth.”
Robert L. Bixby, executive director of The Concord Coalition
Net interest costs in FY 2023 were $659 billion, 39% more than the prior year and the fourth largest expenditure behind Social Security, Medicare and defense spending.
Instead, Bixby stressed “all sides of the budget must be in play. Revenues need to be on the table.” He noted that “you can raise revenues without raising rates by eliminating exemptions and deductions in the tax code and widening the tax base.”
Both Bixby and Snyderman were encouraged by the prospect of Congress conveying a bipartisan fiscal commission to address the worsening fiscal situation. Last week, the House Budget Committee voted 22 to 12 to form a panel of 16 members, with six voting members from each party and four outside experts. Senators Mitt Romney (R-Utah) and Joe Manchin (D-W.Va.) have introduced a companion measure in the Senate.
“It’s a great idea, and the only game in town,” said Bixby, while Snyderman called it “a tremendous opportunity.”
Upcoming tax legislation
Following annual reductions in both the Business Profits Tax (BPT) and Business Enterprise Tax (BET) between FY 2015 and FY 2022, Republican lawmakers have proposed a second, more expansive round of tax reductions between FY 2025 and FY 2030.
HB 1422, sponsored by Rep. Joe Sweeney (R-Salem) and co-sponsored by House Majority Leader Rep. Jason Osborne, called the Consumer Tax Relief Act, would reduce the rates of the two business taxes as well as the Meals and Rooms Tax, while trimming then repealing the Communications Services Tax in 2027.
The BPT, currently levied at a rate of 7.5%, would be reduced by 0.1% each year beginning in tax year 2025 until reaching 7% in tax year 2030. The BET, currently levied at a rate of 0.55%, would be reduced by 0.1% each year over the same period before returning to its original rate of 0.25% when it was introduced in 1993.
The Meals and Rooms Tax, which includes vehicle rentals, would be reduced from 8.5% to 6.0% between FY 2025 and FY 2027. Currently, 30% of the revenue from the tax is allocated to the Meals and Rooms Municipal Revenue Fund, which is distributed to cities and towns based on their population. The bill would increase the distribution to 42.5% beginning in 2025. However, the Department Revenue Administration projects that the reduction in the tax rate will shrink the amount deposited in the fund.
The Communications Services Tax would be halved from 7% to 3.5% for each month from July 2024 to June 2025 and halved again to 1.75% before being repealed on January 1, 2027.
The DRA provided a static analysis, which does not take into account the effect of the rate reductions on economic activity in the long term to estimate the fiscal impact of the bill. The department estimated that revenues from the four taxes would shrink by increasing amounts each year between FY 2025 and FY2031, and the cumulative fiscal impact would amount to $2.2 billion in foregone revenue.
Proponents of reducing taxes contend that lower taxes stimulate economic activity and growth, which in turn generates increased tax revenues. Last year Phil Sletten, research director of the NH Fiscal Policy Institute, undertook an extensive analysis of the fiscal and economic effects of reducing business taxes from FY 2015 to FY 2022. He reported he “found no evidence that concurrent business tax rate reductions led to increased revenue by spurring more economic activity in the state.”
Instead, he concluded that, by reducing business tax rates, the state failed to capture the revenue generated by the growth driven by other factors, forgoing between $496 million and $729 million in revenue between 2016 and 2022. Sletten’s report can be found at nhfpi.org.
Osborne, along with other sponsors of HB 1422, has also sponsored CACR 15, proposing to amend the Constitution to require a two-thirds majority to increase any tax or license fee, or to introduce a new tax or issue state bonds. A two-thirds majority of the Legislature is required to place the amendment on the ballot and a two-thirds majority of the electorate would be required to adopt it. Similar measures have failed in the past.
