Editorial: Wrongheaded tax leaves state in a bind
The suspense continues.
Once again, a court ruling has tied the state budget and New Hampshire’s regressive tax system to the railroad tracks of reform. Last week, Hillsborough County Superior Court Judge Philip Mangones ruled that the Medicaid Enhancement Tax, which the state levies on hospitals, is unconstitutional. His ruling echoed a similar one made earlier by another superior court judge. If the rulings stand, as they should, they will blow a $200 million annual hole in the state budget and challenge New Hampshire’s ability to do business without crippling budget cuts or a major tax increase.
Can New Hampshire escape again and remain one of just two states without either a general sales or income tax? Will fortune intervene as it did in the 1990s, with billions in federal “Mediscam” money that balanced the budget or federal stimulus funds that saw the state through the recession? Will the state Supreme Court uphold the lower court rulings or reverse them on appeal? The answer won’t be known until after the next election, but a successful appeal seems unlikely.
New Hampshire’s Constitution requires that taxes be “proportionate and reasonable, equal in valuation and uniform in rate, and just.” The tax on hospital revenue isn’t, but the question was irrelevant as long as it didn’t cost the hospitals anything. For nearly two decades, the state used the tax to pull hundreds of millions of federal Medicaid dollars through a loophole in federal law. It taxed the hospitals, received equal matching money from the federal government, kicked the tax money back to the hospitals and used the federal match to balance the state budget.
The scheme changed in 2011. Lawmakers began keeping some, or in some cases nearly all, of the money that would have been kicked back to the hospitals. The sham tax became a real tax that led to the loss of hundreds of hospital jobs.
“This legislative history indicates that the primary, if not the sole, purpose of the MET had been to bring federal funds to the state treasury, with the hospitals acting as pass-through intermediaries,” Mangones noted in his ruling.
For the state to argue otherwise, as we presume it intends to do before the state Supreme Court, will require rewriting history.
The tax is unconstitutional, both judges said, because hospitals are taxed on services that are not taxed if they are provided by, say, an urgent care clinic or another non-hospital provider. That is neither reasonable nor just taxation. Instead, it’s akin to taxing an auto dealer on the money earned from an oil change but not a local garage that performs the same service.
What the rulings do not consider is the madness inherent in taxing health services when lowering health care costs is a national goal.
In 1991, then-state senator Jeanne Shaheen called the Medicaid Enhancement Tax “more of a shell game that we are playing because we aren’t yet willing to face up to the fact that we have got a tax structure that doesn’t work anymore.” That structure, with its regressive reliance on high property taxes, hasn’t worked in decades. It taxes most those who can least afford to pay.
If the rulings stand, the governor and Legislature will have few choices: further reduce government services or downshift their cost to local taxpayers; increase taxes; or succumb to the lure of casino revenue.
Casino proponents leapt at the chance to use Mangones’s ruling to renew their push, but it will take revenue from more than one or two casinos to replace the lost hospital tax money. Filling that budget hole by expanding gambling would require that New Hampshire become a very different, and less livable, place.