GRANITE STATE TAXPAYERS

www.granitestatetaxpayers.org

TESTIMONY OF GRANITE STATE TAXPAYERS ON HB100

February 22, 2005

Executive Summary

            The Granite State Taxpayers (GST) opposes the passage of HB 100 for two independently sufficient reasons. 

            The first is that HB 100 is a Trojan horse for an income tax and other broad-based taxes and gambling.  It implicitly increases the statutorily defined cost of an adequate education to approximately $8,291.00 per pupil, which is a total cost of approximately $1.65 billion.  But it uses the local property tax to pay for all but approximately $450 million of this cost, which the Supreme Court has repeatedly and unequivocally declared unconstitutional.  Thus, the presumptive outcome if HB 100 is passed is that the Court will strike down the approximately $1.2 billion in local property taxes funding HB 100 and rule that this cost must be paid for with state taxes.

            Even if the claim that HB 100 is not based on a per pupil cost of $8,291.00 is accepted as true, HB 100 still fails to comply with the Claremont decisions because, over time, it will provide no state aid to so-called rich communities.  Consequently, in these communities the local property tax will pay for the entire cost of an adequate education, which the Supreme Court has repeatedly and unequivocally declared unconstitutional.

            While GST supports targeted aid, passing any targeted aid plan before passing a constitutional amendment that reestablishes that the municipality, not the state as a whole, is the taxing district for determining whether an education tax is reasonable and proportional, at best, is putting the cart before the horse.  Worse, it may force the passage of an income tax and other broad-based taxes and gambling.

            The second reason that GST opposes HB 100 is that it is bad policy.   It penalizes school districts that improve student performance.  It penalizes municipalities that have engaged in sensible land-use planning.  And it is based on an inaccurate measure of need.  In short, it does exactly the opposite of what a targeted aid plan should do.

Legal Analysis

            The key points of our analysis are:

1.          As long as the Claremont decisions remain the law, the State must fund all of the cost of an adequate education and to the extent that a property tax is used to fund an adequate education, it must be a state property tax. 

2.          Education funding proposals, such as HB 100, that repeal the state property tax, but do not use state taxes to replace the funding generated by the state property tax, necessarily involve using local property taxes to fund the cost of adequacy.

3.          When these funding proposals are challenged, a court applying the Claremont decisions will have to strike down the funding portions of these plans to the extent that they use local property taxes to fund adequacy.

4.          Once the cost of an adequate education is defined as $1.65 billion, as HB 100 does, it is likely that a court would reject any attempt to reduce the cost of adequacy to its current $805 million, and it is unlikely that such legislation could be passed.

A.         How HB 100 Works

            Essentially, HB 100 divides a pool of $450 million in state education aid between the cities and towns with public school students.  HB 100 will provide some cities and towns with more state aid on a per pupil basis than other cities and towns.  In fact, when it is fully phased in, some cities and towns, the so-called rich ones, will receive no state aid at all.  Thus, HB 100 is quite a change from the current funding formula, which distributes per pupil funding of approximately $3,500 to all cities and towns.

            While HB 100 doesn’t distribute the same amount of per pupil aid to all cities and towns, it is based on target spending of roughly $8,291 per pupil.   The way that the $450 million in funding is distributed is that each town is assigned a “measure of risk” by the plan, which is simply the percentage of the $8,291 per pupil cost that is to be funded by the state.   For example, Allenstown’s measure of risk is .5733, and the state pays 57.33%, or about $4,753 per pupil in that town.  The remainder is paid by the local property tax. 

            To determine what dollar amount of the $8,291.00 per pupil cost is paid for by the state in your city or town, simply get a copy of the Governor’s “EEI Grants by Town” spreadsheet, take your city’s or town’s “Education Equity Grant” and divide it by the “ADM-R,” which is the number of students.  Dividing that result by the city’s or town’s “measure of risk” produces, in every case, $8,291.00.

            Because the “measure of risk” differs between cities and towns, the local property tax pays for part of the $8,291.00 per pupil cost to differing degrees in different cities and towns.

B.         Why HB 100 Doesn’t Comply With Claremont

            In relevant part, the Claremont decisions say that no part of the cost of an “adequate education” can be funded with local property taxes.  In order to avoid any ambiguity or confusion, let’s start by defining the terms “adequate education” and “local property taxes.”

            Local property taxes are property taxes set by the school district and collected within the school district. 

            Adequate education is a legal term of art that appeared for the first time in a 1993 Supreme Court decision that we will refer to as Claremont I.  In Claremont I, the Supreme Court said that all “educable students” in New Hampshire have a constitutional right to an adequate education.  The court also said that the legislature and governor have a constitutional duty to define an adequate education.

            In 1997, in a decision we will call Claremont II, the Supreme Court rejected the definition of an adequate definition that had been developed by the State Board of Education, not because it was substantively inadequate but on the procedural ground that the legislature could not delegate this duty.  The court then went on to say that the legislature’s and governor’s duty to define an adequate education required the definition to be based upon a definition of educational adequacy developed by the Supreme Court of Kentucky in 1989.  In 1998, the legislature and governor enacted RSA 198-E:2, which essentially defined an adequate education based on the Kentucky definition, with the addition of math and science, which apparently are instinctive or unimportant knowledge in Kentucky.

            The part of the Claremont II decision that most concerns us here, however, is what the Supreme Court had to say about funding an adequate education.  The court said that local property taxes could not be used to fund an adequate education. 

            The court’s rationale was that any tax used to fund an “adequate education” was subject to a requirement that the tax be “proportional and reasonable” on a statewide basis.  In plain English, “proportional and reasonable” means that the subject of the tax, for example real estate, must be valued the same way throughout the State and that the tax rate must be uniform throughout the State. 

            When Claremont II was decided, the principal way that education was funded was through local property taxes, which as we noted above are property taxes set by the school district and collected within the school district.  The rates of local property taxes varied widely among school districts, which the Supreme Court said rendered them unconstitutional.

            It is important to understand why local property tax rates varied.  One reason was local control; different school districts chose to spend different amounts on education.  Another reason was differing amounts of State funding among school districts.  Another reason, and what concerns us, is demographic differences between school districts; the number of students and the size of the tax base differed from district to district. 

            The demographic differences between school districts mean that uniform per student spending among districts will not result in uniform tax rates among districts.  For example, whether the cost of an adequate education is set at $1 per student or $8,291 per student, funding that cost through local property taxes, that is setting a tax rate within the school district that generates taxes equal to the per student cost of adequacy multiplied by the number of students in the district, would not produce a uniform tax rate among school districts.  Districts with smaller numbers of students and/or larger tax bases would have lower tax rates than districts with larger numbers of students and/or smaller tax bases.  This means that, under Claremont II, adequacy cannot be funded to any extent with local property taxes.  Rather, to the extent that a property tax is used to fund an adequate education, it must be a state property tax.  

            After Claremont II, some maintained that the Claremont decisions did not require the State to fund the entire cost of an adequate education.  They did so based on language in the Claremont decisions describing the State’s “duty” as “to guarantee adequate funding,” and argued that the State’s duty could be met by “targeting” funding to school districts that had the highest local property tax rates.  However, in Claremont IX, which was issued in 2000, the Supreme Court made it crystal clear that what it meant by “duty” was that the State must fund all of the cost of an adequate education.

            Claremont IX arose out of a bill, SB 462, that the Senate sent to the Supreme Court for an advisory opinion that used the local property tax to fund part of the cost of adequacy. The total cost of adequacy was projected at approximately $910,000.   Of that amount, about $750,000 was to be raised though state taxes, while only about $160,000 was to be funded through local property taxes.  Nevertheless, the court said the bill was unconstitutional.

            Under SB 462, some municipalities would not have needed to raise any money through local property taxes because a state property tax of $6.10 per $1,000 would have covered their entire cost of an adequate education.  In other municipalities, however, state funding would not have been enough and local property taxes would have been needed to make up the difference.  These communities would, to differing degrees, pay higher tax rates to fund the cost of adequacy.  Thus, because of the use of local property taxes to fund a portion of the cost of adequacy, the tax rate on property being taxed to fund adequacy would not be equal across the State, as required by Claremont II.  For this reason, the Supreme Court ruled that SB 462 was unconstitutional.

            In order to clear up what the Supreme Court described as “lingering confusion” about its prior decisions on education funding, the court in Claremont IX added that “the New Hampshire Constitution imposes solely upon the State the obligation to provide sufficient funds for each school district to furnish a constitutionally adequate education to every educable child.”  The court also stated that “[i]f the legislature chooses to use a property tax [to fund adequacy], the tax must be equal and proportional across the State.”   As we discussed above, in plain English this means that local property taxes cannot be used to pay for any portion of the cost of an adequate education.

            No subsequent Supreme Court decision has revisited the issue.  So, while there is room to debate whether the Supreme Court got it right in the Claremont decisions, there is no room to debate what the court has said about how the cost of an adequate education must be funded.  The State must fund all of the cost of an adequate education and to the extent that a property tax is used to fund an adequate education, it must be a state property tax. 

            The current funding system does that.  It distributes approximately $3,500 per pupil, which makes the total cost of an adequate education for the 2004-2005 school year is approximately $805 million.   About $371 million is to be raised through the state property tax.  The remainder, $434 million, will come from other state sources –  Sweepstakes profits, business taxes, the real estate transfer tax and other state revenues.

            Before turning to HB 100, it is worth digressing for a couple of paragraphs to touch upon the issue of “donor” and “receiver” municipalities.   For the 2004-2005 school year, in 202 municipalities, the state property tax will generate less than the cost of an adequate education.   These municipalities, the receiver towns, will retain all of the state property tax they collect, and will receive from the State the difference between the state property tax and the cost of adequacy.  In 52 municipalities, the state property tax will generate more than the cost of adequacy.  These are the donor towns. 

            Donor towns will send the difference between the state property tax and their cost of adequacy to the State, which will distribute this money along with the $434 million derived from sources other than the state property tax to the receiver towns.   The amount passed on to the State by the donor towns is less than $21 million, which means that less than 5 percent of the money actually distributed by the State to fund adequacy comes from donor towns.

            In contrast to the approximate $3,500 per pupil that the cost of an adequate education is currently defined as, HB 100 implicitly defines the cost of an adequate education as $8,291 per pupil.  Why else base every municipality’s funding on that figure?

            As we discussed above, the funding formula of HB 100 is complicated, but it would result in some portion of the $8,291 per pupil cost of adequacy being funded by local property taxes.  To recapitulate, the amount of state aid a town receives is determined by multiplying its “measure of risk” times the $8,291 per pupil cost of an adequate education times the number of pupils attending public school.  Because the “measure of risk” differs between cities and towns, the local property tax pays for part of the $8,291.00 per pupil cost of an adequate education to differing degrees in different cities and towns.  Which means that HB 100 obviously fails to comply with the Claremont decisions. 

            Even if the claim that HB 100 is not based on a per pupil cost of $8,291 is accepted as true, HB 100 still fails to comply with the Claremont decisions because, over time, it will provide no state aid to so-called rich communities.  Consequently, in these communities the local property tax will pay for the entire cost of an adequate education, which the Supreme Court has repeatedly and unequivocally declared unconstitutional.

            In sum, if, or more accurately when, HB 100 is challenged in court, a court will rule that the plan’s funding mechanism violates the Claremont decisions, because local property taxes are being used to fund adequacy.

C.         Why HB 100 Is a Trojan Horse For an Income Tax

            For the obvious reason that HB 100 is based on target spending of $8,291 per pupil, the Supreme Court may decide to infer that the cost of an adequate education is the plan’s target spending of $8,291 per pupil.  The Court might then rule that it is unconstitutional to use the local property tax to pay for public education unless the state imposes sufficient state taxes to pay for the entire cost of adequacy, which would be approximately $1.7 billion.  And that would require an income tax and/or other broad-based taxes and/or gambling.  Indeed, even accepting the highly dubious claim that HB 100 is not based on per pupil spending of $8,291 per pupil, passing HB 100 still would require an income tax and/or other broad-based taxes and/or gambling.

            In the absence of a statutorily defined cost of an adequate education, it is likely that the Court would use the total cost of an adequate education for the 2004-2005 school year, which is approximately $805 million.  As discussed below, this cost, which is less than half of the cost of an adequate education that appears to be set by HB 100, requires funding to some extent by either an income tax, a sales tax, or a state property tax, because of its size.   Let’s begin by looking again at how this $805 million is funded.

             As we discussed above, about $371 million is raised through the state property tax.  The remainder, $434 million, will come from Sweepstakes profits, business taxes, the real estate transfer tax and other revenues.  We’ll call these ancillary taxes.

            To the extent that the cost of adequacy remains at the $805 million set for the 2004-2005 school year, it is not possible to fund adequacy without an income tax, a sales tax or a state property tax.  The reason is that raising nearly another $400 million from the ancillary taxes is not feasible.  

            A study done by the New Hampshire Center for Public Policy Studies in 2000 shows that, for example, increasing the tobacco tax by ten cents would only generate an additional $18 million of taxes.  Increasing the Business Enterprise Tax by 150 percent would generate less than $50 million of additional taxes.  Other examples can be found on the Center’s website.  And it is worth underscoring that, as the Center concedes, its study assumes that taxpayer behavior is static, which is an incorrect assumption.  For example, increasing tobacco taxes has led to less smoking.  Similarly, increasing business taxes would likely lead to less business activity as businesses can relocate to more hospitable environments.

            Thus, to the extent that the cost of adequacy remains at or above the $805 million set for the 2004-2005 school year, we are left with the choice of funding adequacy with a sales tax, an income tax or a state property tax, or passing an amendment that modifies Claremont II.      

            Because the state property tax has been so politically unpopular, it is perhaps worth taking a few sentences to remind ourselves of the comparative merits of property taxes to income and sales taxes.  Unlike sales and income taxes, a property tax does not automatically increase every time our incomes and expenditures increase.  And, unlike sales and income taxes, which are hidden taxes, a property tax is painful because we write relatively large checks twice a year to pay it, which reminds us to be vigilant about government spending.  Thus, government is smaller and more accountable when it is funded by a property tax. 

            With the exception of a constitutional amendment that would allow the local property tax to be used to fund part of the cost of an adequate education, a state property tax is the most fiscally responsible response to the Claremont decisions.   Additionally, the current state property tax is capped at $371 million, which will attenuate the “donor town” effect of adequacy funding.

            Now let’s take a look at what HB 100 would cost if the Court imputes the $8,291 per pupil target spending as the cost of an adequate education. Multiplying the per pupil cost by the average number of students that actually attended school in the 2001-2002 school year (the most recent year we could find), 199,347.4, produces a cost of an adequate education of $1.65 billion.

            Because HB 100 repeals the state property tax, approximately $1.2 billion would have to be raised from a sales tax or an income tax or some combination of these taxes.  Relying on the study by the New Hampshire Center of Public Policy Studies, a 13.6 percent sales tax or a 4.8 percent income tax would be required.

            Finally, let’s examine the proposition that, if the Supreme Court were to deem the cost of adequacy of HB 100 as $1.65 billion, we could simply redefine the cost of adequacy back to $805 million, which would allow us to reinstate the state property tax and thereby avoid an income tax and other broad-based taxes and gambling.

            The problem with such an approach is that the Supreme Court likely would hold that such legislation does not represent the true cost of adequacy, but is simply an attempt by the State to avoid its funding obligations.  The court would deem the $1.65 billion the true cost of adequacy, which would lead it to rule that the new replacement funding system used the local property tax to fund one-half of the cost of adequacy in violation of Claremont II.  That would put us in the position of having to raise an additional $800 million of taxes, which as we hope is clear by now can only come from an income tax or a sales tax or a state property tax or some combination of these taxes and gambling.

            Even if the Supreme Court didn’t strike down legislation reducing the cost of adequacy back to $805 million, it is unlikely that such legislation would pass the current House.  The number of “Main Street Republicans” and Democrats are sufficient to block any such legislation, and it is reasonable to assume that they would oppose any attempt to reduce the cost of adequacy.

* * *

            In sum, while GST supports targeted aid, passing any targeted aid plan before passing a constitutional amendment that reestablishes that the municipality, not the state as a whole, is the taxing district for determining whether an education tax is reasonable and proportional, at best, is putting the cart before the horse.  Worse, it may force the passage of an income tax and other broad-based taxes and gambling.

Policy Analysis

            The second reason that GST opposes HB 100 is that it is bad policy.   It penalizes school districts that improve student performance.  It penalizes municipalities that have engaged in sensible land-use planning.  And it is based on an inaccurate measure of need.  In short, it does exactly the opposite of what a targeted aid plan should do, which is to give schools an incentive to reward performance and to measure “need” on factors that do not encourage bad policy choices by municipalities or threaten the New Hampshire advantage.

A.         How HB 100 Works

            As discussed above, HB 100 divides a pool of approximately $450 million in state education aid between the cities and towns with public school students.  The way that this state aid is distributed is that each town is assigned a “measure of risk” by the plan, which is simply the percentage of the $8,291 per pupil cost that is to be funded by the state.

            The “measure of risk” is composed of four factors.  A town’s property tax base  constitutes 40 percent.  The lower the town’s property valuation on a per pupil basis compared to the state average, the higher the amount of state aid. 

            A town’s taxable income constitutes 20 percent.  The lower the town’s taxable income, on a per household basis, compared to the state average, the higher the amount of state aid.

            The number of poor students and students who don’t speak English constitute 10 percent.  Here, however, the higher the town scores relative to the state average, the higher the amount of state aid.

            Finally, student performance constitutes 30 percent.  The worse the town’s students perform relative to state averages, the higher the amount of state aid.

B.         HB 100 penalizes municipalities that have engaged in sensible land-use planning.

            HB 100 simply compares a municipality’s property valuation on a per pupil basis to the state average in order to determine its need for state aid.   An obvious problem with this approach is that a municipality that has engaged in sensible land-use planning gets penalized.  

            Let’s assume that there are two towns, identical in all respects, except one town has passed zoning laws that encourage business to locate there, while the other town has chosen to be unfriendly to business.  As a result, the first town has a per pupil property tax base that is 30 percent higher than the state average, while the second town is 30 percent below the state average.

            Under HB 100, however, the first town’s reward for its sensible land-use planning would be no state aid on that account, while the second town would receive state aid for being business unfriendly.  This is especially unfair because HB 100 uses, in part, the business taxes from the first town to subsidize the lower local property taxes in the second town.

            A better measure of need would be median home price, as that would take into account variables affecting property tax base over which a municipality has less or no control, such as location.

C.         HB 100 is based on an inaccurate measure of need.

            HB 100 uses data from the United States Decennial Census to determine income.   This information is already inaccurate because Census data is only collected once every ten years.

            More importantly income does not accurately reflect need.  Rich people do not pay income taxes.  Instead they manage their financial affairs in ways that allow them to report little or no taxable income.  The self-employed can exercise far greater control over the income they report than wage-earners, which allows them to maintain a better a standard of living than wage-earners who report the same amount or more income. 

            Finally, income should not be part of the distribution formula because that would be a significant step down the slippery slope toward an income tax.  If people living in towns with a higher than median household income should have to pay higher local property taxes so that other towns pay less local property tax, which is how HB 100 works, then why shouldn’t income be taxed directly?  After all, some of those living in towns with higher than median household income undoubtedly earn a lower median household income than some residents in towns with lower than median household incomes.  This is a road that leads to the end of the New Hampshire advantage.

D.         HB 100 penalizes school districts that improve student performance.

            Finally, there is a misconception that HB 100 “provides for accountability” by making  student performance part of the distribution formula.  Actually, it does just the opposite. 

            The better a school district’s performance compared to state averages, the less state aid it receives.  In other words, there is a disincentive for schools to improve their results or to continue getting good results.  On the other hand, schools are rewarded for getting bad results or worse results.  This is just the opposite of how an accountability-based system should work.