State revenues in April were nearly 8% more than projected by budget officials, who are lukewarm about New Hampshire’s revenue picture in the next budget cycle.
“We’re not super excited about 2026 and 2027,” Chris Shea, deputy legislative budget assistant, told the House Ways and Committee last week. “I don’t think you’re going to see the same revenues you’ve seen in the last couple of budget cycles. There’s going to be harder decisions made, and there’s going to have to be some give and take.”
Shea, together with Lindsey Stepp, commissioner of the Department of Revenue Administration, briefed the committee on the revenue picture as of April when quarterly tax payments and prior year tax returns are due. Their presentations were complemented by an analysis prepared by Phil Sletten, research director of the New Hampshire Fiscal Policy Institute.
In April, both quarterly tax payments and prior year tax returns fall due, providing a measure of how closely revenues are matching projections while highlighting factors that may affect revenue streams in the next budget cycle, which begins in January.
April revenues of $38.2 million were 7.9% more than projected, bringing general fund and education trust fund revenues to $142.4 million, or 5.3% more than planned. However, while this surplus is not to be sneezed at, it is far short of those posted in recent years, which reached $198.5 million in April 2019, $242.9 million in 2020, $382.0 million in 2022 and $452.9 million in 2023.
Returns from several major taxes, particularly the Business Profits Tax (BPT), the single largest revenue source, and the Business Enterprise Tax (BET), were the principal drivers of past surpluses. But, with fiscal year 2024 drawing to a close, receipts from the two taxes are $3.3 million shy of plan and $38.3 million short of receipts last year.
Sletten notes that the 120 largest BPT filers, corporations operating across the country, likely pay more than half of BPT receipts, and national corporate profits are mirrored by firms paying the BPT. While profits shrank late in 2022 and rose in late 2023, Sletten suggests BPT returns in April may reflect this dip in profits. Moreover, he takes the 9% drop in estimated payments year-over year in the first quarter of 2024 from the 90% of businesses whose tax year tracks the calendar year to signal “businesses anticipated less taxable economic activity in New Hampshire this year.”
Two changes in tax policy have also contributed to flagging revenue from business taxes. Between FYs 2015 and 2022, the rates of the profits tax and the enterprise tax, which together represent nearly a third of total tax revenue, were reduced from 8.5% to 7.5% and from 0.75% to 0.55%, respectively. In 2023, the rate of the BPT was further reduced from 7.6% to 7.5%.
To reduce the liability from overpayment of taxes by businesses, the Legislature capped the amount firms can hold with the state, which accrues interest, to 500% of their tax liability and refunding the balance. So far, refunds for FY 2024 amount to $62.9 million, 70% higher than last year. Stepp said that her department calculated that 48.8% of the refunds are due to the cap.
Revenue from the both the tobacco and real estate transfer taxes has softened. The $17.9 million in returns for the tobacco tax is 10.1% below plan and $20.2 million below last year. Real estate transfer tax receipts have fallen $22.5 million short of plan and $29.4 million behind last year as straitened inventory, increasing home values and rising mortgage rates, which have both shut potential homebuyers out of the market and dissuaded homeowners from selling their property.
Several other taxes have picked up some of the slack. Boosted by rising prices for restaurant meals and room rentals, receipts from the meals and rentals tax were $5.3 million ahead of plan and 7% ahead of the prior year. Likewise, increasing property insurance rates have raised returns from the insurance premium tax, which were $22.3 million above plan and $6.1 million up year-over-year.
Likewise, lottery revenues have grown consistently, rising 113.1% between years 2015 and 2023 with the addition of Keno in 2017, sports betting in 2019 and historic horse racing in 2021. Through April, revenues were $30 million, or 24.8% above plan and $5.5 million ahead of last year to contribute to the surplus in the education trust fund.
However, one of the two sources of revenue that have sustained recent surpluses is on track to dwindle, and the other is soon to vanish. The first is the $2.13 billion in cash balances held by the state, which consists of funds accrued from past state revenue surpluses and unspent federal relief funds allocated to states in the wake of the pandemic. As interest rates rose, these cash holdings added $80.8 million to the general fund in fiscal year 2024, representing nearly 40% of the cash surplus through April. The federal funds must be spent by the end of 2026, and as they are spent down, the interest income will diminish.
The interest and dividend tax, the largest contributor to the surplus, has raised $161.3 million year-to-date, $56.7 million above plan and $34.6 million more than last year, which represent 39.8% of the general fund and education trust surplus. Increased returns were driven by the bullish stock market and rising interest rates. The tax is set to be repealed on Jan. 1, 2025.
“Long-term concerns remain due to the strengths and weaknesses among the individual state revenue sources,” Sletten 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.”
