Coronavirus set to slam New Hampshire’s fiscal picture

‘Sudden and steep drops’ expected in major revenue sources
New Hampshire Revenue Commissioner Lindsey Stepp.

“A crystal ball would be great,” said Lindsey Stepp, Commissioner of the New Hampshire Department of Revenue Administration, who has been wrestling with the impact of the Covid-19 crisis on state tax revenues.

“We know the direction, but not the magnitude or duration,” she said.

During the last four months of the fiscal year — March, April, May and June — the state had expected to collect $795.6 million in general fund tax revenue from its three largest taxes — business profits tax, business enterprise tax and rooms and meals tax, or about 30% of the $2.6 billion collected by the state in annual general taxes.

The two business taxes were projected to return $427.1 million — $115.5 million in March, $147.7 million in April, $22.3 million in May and $141.6 million, or 54% of their planned annual receipts. The rooms and meals tax was projected to return $111.1 million — $25.8 million in March, $28.3 million in April, $26.4 million in May and $30.6 million in June, or 30% of planned annual receipts.

But, Stepp said, the impact of slowing and stalled business activity cannot be measured and the gap between projections and collections will increase with the passage of time.

National and multinational firms, headquartered outside the state, pay as much as 70% of receipts from the BPT and 40% percent of receipts from the BET. Stepp said that circumstances in other states could affect the tax liabilities of these firms in New Hampshire as well.

“It is very difficult to assess the situation,” she said.

With the closure of restaurants and bars, receipts from the rooms and meals tax will begin falling in April, when taxes levied in March are collected. Moreover, profits from the sale of liquor and wine, projected to total $40.3 million between March and June, will also decline while restaurants and bars are shuttered.

‘Rapidly changing situation’

Apart from the immediate impact of the Covid-19 crisis on commerce, particularly the hospitality sector, the pall may cast a long shadow as some businesses – especially those with significant debt burdens – fail to reopen once the crisis has passed.

Stepp said that a DRA team has been convened to constantly monitor and assess the effects of what she described as “a rapidly changing situation.”

She explained that, unlike states whose tax statutes and regulations mirror those of the Internal Revenue Service, New Hampshire possesses some discretionary authority. In particular, she explained, although the tax rates and filing dates are set by statute, the state can abate penalty and interest payments. She said the department is “evaluating its filing and payment deadlines while trying to digest the IRS guidelines, which are changing by the minute.”

Stepp said that, amid the changing circumstances, the department is seeking to provide timely and accurate guidance to taxpayers.

Phil Sletten, policy analyst at the New Hampshire Fiscal Policy Institute, described the state’s FY 2020-21 budget as “tight,” with a small surplus recorded at the end of February.

He noted that the state’s rainy day fund has a balance of $115.3 million, compared to $89 million at the onset of the Great Recession. At the end of the biennium the Rainy Day Fund would balance a budget deficit accompanied by a shortfall in projected general fund revenues. And the fund may be used to offset the lesser of either the budget deficit or the revenue shortfall. Any other uses of the rainy day fund require a two-thirds vote of the House and Senate and approval of the governor.

Moreover, Sletten said the federal government will likely distribute funds to the states as well as to businesses and individuals to ease the fiscal and economic pressures stemming from the crisis. In particular, Sletten pointed to an increase in the federal share of Medicaid funding, offsetting some of cost of the program, which is likely to rise as both enrollment and costs per person increase.

He added that “the state is partway through its biennial budget, leaving policymakers limited time to make adjustments. The state has expectations based on anticipated revenues that may not be realized. Unlike other economic downturns. We can expect sudden and steep drops in receipts from key sources of revenue.”

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