By Rosemary Ford and Caitlin Agnew

This article has been edited for length and clarity.

The rise of inflation has had a major effect on people especially those whose salary hasn’t caught up. On this episode of The State We’re In, Melanie Plenda talks with Phil Sletten, Research Director for New Hampshire Fiscal Policy Institute to discuss the economy, inflation, and what relief the average person might find to pay their bills.

Melanie Plenda:

So can you give us a brief overview of what's going on with the economy right now? Are we in a recession? Are we headed into one? Or is the economy good? I read headlines every day with contradictory information. So what's going on?

Phil Sletten:

Yeah, and it's understandable, because there's a lot going on. And sometimes there are trends that have counter trends from other sets of data. Fundamentally, the national economy is in quite good shape. The economy was running relatively hot, as in, the economic growth was quite fast, particularly coming out of the COVID 19 pandemic. And that economic growth has slowed some in 2022, on average, and has not leapt back up to high levels that we saw, for example, in 2021. And that's true in New Hampshire as well speaking generally, the economic growth that we've seen has been actually relatively robust. The job growth nationwide has been strong. And inflation, which was quite high in 2022, has been coming down and has come down for 12 of the last 13 months. Only in the last month did we see year over year inflation be a little bit higher than the year before. So the national economy is not in a recession. 

Indeed, the forecasts that we saw even as early as, as recently as January of this year, that suggested there would be a recession at some point this year appear to have generally changed to show that there's less likely to be a recession, the Congressional Budget Office doesn't have one in their two year forecast, for example, although they do have the economy slowing. In New Hampshire, we haven't seen a strong job growth year over year. And part of that is because of our labor force constraint. It's not because there's a lack of demand in the economy for goods and services. It's because there are not as many people in the labor force. So the labor force is only slightly grown relative to last year thus far in 2023. And it's difficult for employers to find employees to fill positions.

Melanie Plenda:

And just to follow up on that real quick, do we know why that is?

Phil Sletten:

That's a great question. So, I do want to be clear that the number of jobs that employers say they have filled is actually higher than it was in 2022. But the number of people in New Hampshire who say they're employed, is actually a little bit lower than it was or about the same as it was this far and average this year.So that suggests that maybe more people are staying in the state to work as opposed to commuting out of state, more people may be taking part time jobs. So to for example, in response to rising costs, and the major constraints that we see on the growth and labor force, are really rooted in housing and childcare constraints, the lack of accessible and affordable housing, and the lack of accessible and affordable childcare means that there are people who otherwise would have moved into the state who haven't been able to find a place to live in the state or who would have moved around the state for work who haven't been able to find an affordable place to live. And for people who are already in the state, but need to have some access to childcare and need to care for a child or children. They have not been able to find childcare that's affordable in a way that makes sense for them to engage in the labor force as fully whether that means they're working part time instead of full time, or because they are not working at all to care for a child at home. That is something that there are some numbers that suggest that's a pretty significant labor force constraint in the state as well.

Melanie Plenda:

And so let's get back to inflation for a bit. So what is inflation and where does it come into play? Why has inflation risen so sharply in the last year? What's causing it?

Phil Sletten:

Yeah, that's a great question. So inflation, when economists are talking about inflation, generally it's referring to an overall increase in prices. So the price of a particular item or a particular service might go up or down but be independent of how other prices move. Inflation is referring to all prices, or at least the price overall of the collection of things that most of us purchase. When we are behaving in the economy, when we're buying goods and services, the prices overall have gone up. And that is reflecting the erosion of the value of the currency, meaning the dollars that you have buy fewer things, right, and the dollars that you have buy fewer services. So when we're talking about inflation, we're talking about that general increase. And why has it gone up is a complex question, because there are lots of different factors that have been at play. 

Initially following the COVID-19 recession, the price increases were isolated to a few areas, used cars and airline tickets. But especially over the course of the second half of 2021, we saw increased demand for goods and services more generally, particularly on the good side, because a lot of people shifted their spending from services to goods as the COVID 19 pandemic started to affect how we all behaved. And that meant that supply chains had to respond and supply chains had trouble responding. And there were a lot of goods that were suddenly more people were buying things for their households, as opposed to going out and getting haircuts and going to the movies. So there was the response, that was something that a lot of supply chains had difficulty doing getting goods to people who were looking to purchase them, and that led to some price increases as well. Households had savings, that coming out of the pandemic, they spent a significant amount of that savings because of both changes in habits, not going on vacations in the same way that you might have, for example. But also in changing your spending patterns because of federal fiscal stimulus that put more money in people's pockets. Some of that money was used right away in the economy, some of it allowed people to build up savings. And those savings were pretty significant, especially for upper middle and upper income households in 2022, a lot of those have actually been spent now that in aggregate, those additional savings from the pandemic have appeared to have eroded away. So but that contributed to inflation as well, because people were able to spend more and spend more in different ways in the economy. 

Also energy prices, particularly because of Russia's invasion of Ukraine, energy and food prices both increased substantially. And those two are interrelated because the food has to move around. And that's usually powered by energy. And, of course, the unique nature of Russia and Ukraine, and both the energy and food markets respectively, led to a substantial increase in inflation in 2022, is some research from the Economic Policy Institute suggests that the increased corporate profits that we've seen, may be part of it as well, people expecting inflation leading to higher prices, and those prices may have outpaced the costs in some cases. But, inflation expectations lead people to make different decisions to try and forecast what inflation would be. And if everyone's expecting inflation, they're more likely going to plan for it. And that can help cause it actually, as well. So there are a lot of different factors, some of the choices that the Federal Reserve made between 2020 and now, a lot of different factors have contributed to inflation. There's no one single reason that we've been seeing it, but we have seen quite a bit of it relative to the last, 30 years or so of history. There's been quite a bit particularly in 2022, but it has eased substantially in 2023.

Melanie Plenda:

Recently, you did a study about the state business tax rate reductions leading to hundreds of millions less for public services. So can you unpack that for us? What did that study entail?

Phil Sletten:

Sure, and the reason that we embarked on this study is to really understand or do our best to understand why business tax revenues have gone up over the last, roughly half decade. So between state fiscal year 2015 and state fiscal year 2022. The combined revenues from the business profits tax and the business enterprise tax, which are the state's two primary business tax revenue sources, the combined revenues went up 118%. That's substantial, especially in the context of New Hampshire's fiscal situation and the New Hampshire state budget. The business profits tax is the single largest tax revenue source the state has now by a factor of two. So a lot of the surpluses, the dollars that are generated over budget plan. Over the plan that the state budget made in terms of how much revenue was going to come in, those surpluses have been largely generated, not entirely, but largely generated by additional business tax revenues. So why have they come in so strong? And was it because of a policy change that was happening at the same time, which were rate reductions, the both the business profits and the business enterprise tax rates were reduced incrementally over time between 2015 and 2023? If that is the cause, then that would be a valuable fiscal policy to know about because then we could. That's something state policymakers have control over as opposed to other factors they wouldn't they don't have control over. 

We didn't find evidence that the tax rate reductions led to increased revenue or offset the revenue losses associated with the tax rate reductions. There was not a correlation between the business profits tax rate and job growth over time, and there was not a correlation between the business profits tax rate and economic growth in New Hampshire relative to the rest of New England over time, and the business enterprise tax revenues went down when the numbers are parsed out, Business Enterprise tax revenues went down business profits, tax revenue still went up. National corporate profits appear to be a primary driver behind that, as well as federal tax policy changes associated with the tax cuts and Jobs Act which was passed back in December 2017. And provided incentive for multinational companies which comprise more than half of the revenue that's collected by the business profits tax come from filers of business filers that indicate that they have a significant international component. 

Those revenues, they're one time revenues associated with the tax cuts and jobs act as well as permanent changes to the tax base, that have likely boosted revenue as well. So we didn't we didn't find an economic relationship, certainly one on one that was sufficient or significant enough to identify that there was an increase in our corporate tax revenues, that was caused by our tax rate reductions. And also other states saw their corporate tax revenues increase as well, during this time period, nationally, the increase was about the same as New Hampshire, between state fiscal years 2015 and 2021. And in the rest of New England combined, it was actually higher. It varies by state. But that depends on particular state policies and economic conditions and how businesses are behaving in each of those states. But we saw an increase elsewhere, that's what strongly indicated, New Hampshire was not unique in seeing this rise in corporate tax revenue. And finally, there was not there was no other research, there was no academic research, peer reviewed research that indicated that a corporate tax rate reduction here would lead to increased revenue. So those other causes are likely what's contributing to it. And as a result, we were able to then calculate based on available research and economic modeling, what the tax rate reductions would have been, what the tax revenues would have been, how much higher they would have been if the rate reductions hadn't taken place between 2015. And now or and 2022, I should say. And that's based on some of the economic modeling that indicates there was some economic feedback from tax rate reductions, but again, not enough to offset the tax revenue losses.

Melanie Plenda:

For viewers who don't pay business taxes, why should they be interested in the business tax rate? How does it affect them? And how would you explain that to them simply?

Phil Sletten:

Sure, well, New Hampshire relies on our business tax revenues more for state budget expenditures than any other state does. In New Hampshire in 2021, roughly 31% of state tax revenue came from corporate taxes, where the next closest state was New Jersey with 14%. So it is very important for our state budget and for funding state services, and for supporting the state budget in a way that permits the state to send more money to local governments, whether that's for education, or, in many cases, supporting highway route and bridge construction as well, or for general economic aid or fiscal aid to local governments. So it does impact, for example, local property taxes in that way indirectly. There's also if we learn more about corporate tax rate changes, business tax rate changes, and who's paying business taxes and what those impacts are in the economy. And that helps us understand what are the impacts that we as people in New Hampshire are buying things and looking for work? Could feel when it comes to a state level tax rate change. If there were a strong effect on employment, for example, or if a lot of the costs associated with the tax rate changes were passed on directly to consumers in New Hampshire, that would be important to know and valuable to know, and those corporate tax rates and understanding the impact of these business tax rates on the economy. Having that understanding allows us to under a hat allows us to better know how our state is raising money and spending money and what the trade offs, the economic trade offs and the trade offs and services are associated with that. So business tax rates are not something that most of us see every day, but they can affect our county compensation and they can affect the services that we see.

Melanie Plenda:

Well, there's a lot to think about there. New Hampshire Fiscal Policy Institute Research Director Phil Sletten, thank you so much for joining us today.

The State We’re in a weekly digital public affairs show is produced by NH PBS and The Marlin Fitzwater Center for Communications. It is shared with partners in the Granite State News Collaborative, of which both organizations are members.