Helping Granite Staters Get to the Bottom of Downshifting

D.J. Bettencourt
D.J. Bettencourt

By: DJ Bettencourt – January, 2015

As Governor Maggie Hassan and the Republican-controlled legislature begins crafting the 2015-2016 state budgets, Granite Staters can be certain that both sides will allege that the other is “downshifting.”

While campaigning for office last fall, Republicans promised no new taxes or fees and no borrowing gimmicks. They also campaigned on no additional downshifting of costs to local communities. But what is downshifting?

If you serve on a town council or board of selectmen, you know exactly what it means. Generally downshifting occurs when, through a legislative action and not through some outside circumstance, a municipality gets fewer funds than it did in the previous budget.

Downshifting has historically occurred in several different ways, and it is important to understand these differences so the public does not fall victim to propaganda intended to use the term as a political weapon.

First an example of actual downshifting from the 2010-2011 budgets that was entirely crafted by Democrats: In 1970, New Hampshire had a tax on inventory known as the “stock and trade” tax. On April 1 of each year the state would assess the value of all merchandise that any business had in stock. However, on March 31, if a business had moved its inventory over the state line, a practice of many automobile dealers, it was not subject to the tax because, technically, on April 1 the inventory was not located in New Hampshire. In an effort to close this loophole, the “stock and trade” tax was repealed and replaced with the Business Profits Tax (BPT), which was collected and administered by the state.

Since the “stock and trade” tax was collected by local municipalities and benefited local taxpayers, the state was, in essence, taking money away from municipalities and putting it into the state treasury. To compensate for this, the state agreed to hold the cities and towns harmless and avoid downshifting by relocating the money lost with what came to be called “revenue sharing.” Under a formula used by the state, revenue sharing has for many years been set at $25 million a year. Unfortunately, under the 2010-2011 budgets, passed by Democrats and then-Governor John Lynch, payments to the cities and towns were suspended. That allowed the Democrats to increase state spending by $50 million, and saddled towns and cities with the bill.

Another example of actual downshifting under the previous budget can be found in local retirement costs. Initially, as an enticement to get municipalities to join their retirement system, the state offered municipalities an incentive. The state picked up a percentage of school and town employee costs. For a number of years, the state paid 35% of the retirement system costs for local employees’ pensions. After the Democrats spending spree they were desperate to balance their 2010-11 budgets so they told municipalities that they’d only give them 30% in 2010 and 25% in 2011.
This resulted in a downshift of $30 million for the biennium.

So what is not an example of downshifting? In the 2010-2011 budget, legislative Democrats raised the rooms and meals tax from 8% to 9%. Under a formula in place since the 1990s, some of the increase in rooms and meals revenue was supposed to go to municipalities. Their share would continue to grow until the split between the municipalities reached 60% state and 40% to municipalities. When the Democrats increased the tax from 8% to 9%, the municipalities should have received additional funds. But the Democrats needed the full 1% to sustain their spending, so they “froze” revenue sharing. In other words, municipalities got identical funds they received in the prior year, but they did not share in the increased revenue resulting from the tax increase.

While Republicans at the time felt this was wrong, this practice was not downshifting because municipalities continued to receive the same amount as in the previous year. While the expectation of additional funds was not met, a failed expectation doesn’t amount to downshifting.

Regardless of what is contained in the final budget, shouts of “downshifting” will be made by both parties. Hopefully, by better understanding what downshifting is Granite Staters will be able to distinguish fact from partisan political rhetoric.

NOTE: Parts of this editorial were co-authored with Representative Gene Chandler, of Bartlett, who is the current Deputy Speaker of the NH House.

D.J. Bettencourt served as a State Representative in the New Hampshire House of Representatives from 2005 to 2012 and was the House Majority Leader for the 2011-2012 legislative term. He currently works as the Director of Development and Community Relations at the Salem Animal Rescue League and serves on the Economic Development Action Committee in Salem, NH.