Three-decade fight over public education funding shows no signs of abating

As expected, the state and 26 municipalities filed briefs last week with the New Hampshire Supreme Court appealing the order issued by Justice David Ruoff of Rockingham County Superior Court holding that the administration of the statewide education property tax is unconstitutional.

In challenging the reasoning behind Ruoff’s opinion, Solicitor General Anthony J. Galdiieri suggested in his brief that the Supreme Court revisit — even reverse — its opinions in the three Claremont cases of the 1990s, which together have controlled the litigation over the funding of public education for the past three decades.

In 2022, attorneys representing Steven Rand, a business owner from Plymouth, and five other property owners, filed suit charging the school funding system, which relies overwhelmingly on local property taxes, runs afoul of Part II, Article 5 of the state constitution, which requires that state taxes be “equal in valuation and uniform in rate” across the state.

That suit, which will be tried in Superior Court next month, asks the court to enforce the order of the Supreme Court in the Claremont litigation of the 1990s. Then, the court held that the constitution places a duty on the state to provide every child an adequate education funded by constitutional taxes levied at a uniform rate across the state, which the plaintiffs claim the state has yet to fulfill.

As part of the case the plaintiffs claimed that the tax, which the Legislature adopted to address the state’s responsibility, is also levied at disparate rates. In November, Ruoff ruled for the plaintiffs, prompting the appeal lodged by the state and Coalition Communities to appeal.

Although the tax is collected by municipalities and appropriated to school districts, it is a state tax. The tax rate is set annually by the New Hampshire commissioner of revenue administration to raise $363 million, which in 2022-2023 represented 9.5% of the $3.8 billion in revenue raised to support public schools.

In 1999 when the tax was introduced, municipalities with sufficient property wealth to generate revenue from the tax exceeding the amount needed to fund an adequate education remitted the excess to the state.

These funds were then distributed by the state among the overwhelming majority municipalities where, for want of sufficient assessed property wealth, the returns from the tax failed to meet the cost of an adequate education.

‘Donor towns’ balk

The small number of municipalities where receipts from the tax exceeded the cost of an adequate education, calling themselves “donor towns,” balked. Shortly after the tax was adopted, 22 municipalities came together as the Coalition Communities to press lawmakers to spare their taxpayers from paying the full rate of the tax.

Lawmakers offered measures to abate the tax altogether, or stagger its introduction in these municipalities. But these ploys were summarily rejected by the Supreme Court, which ruled they lowered the effective rate of the tax in these municipalities in violation of the constitutional requirement that all state taxes be imposed at uniform rates across the state.

Despite these legal precedents, in 2011 the Legislature repealed the statute requiring municipalities to remit excess tax to the state, entitling them to retain any funds exceeding their cost of an adequate education “for the use of the school district.”

In 2021, 34 municipalities retained $24.4 million in excess funds from the tax while in 21 other communities, mostly incorporated places with few if any pupils, the NH Department of Revenue Administration set negative local school tax rates to offset the tax.

Although the statewide education property tax — referred to the court as SWEPT — is a small part of property tax bills, the impact of allowing property-rich municipalities to retain the excess is significant. In 2022, a median-priced home in Newington worth $450,000 was taxed at 40 cents per $1,000, or $180, while its counterpart in Hopkinton was taxed at $1.48 per $1,000, or $666 — more than three times more.

“In short,” Ruoff held, “communities that do not generate excess SWEPT funds use all their funds generated under the facial SWEPT rate for adequacy aid purposes and excess SWEPT communities do not. There can be no meaningful dispute that allowing communities to retain excess SWEPT funds lowers the effective SWEPT rate paid by those communities.”

Likewise, Ruoff ruled that all communities, including unincorporated places with little or no educational expenses as well as municipalities, must levy the tax at its full rate, doing away with negative tax rates. Public education benefits the entire state, he wrote, not only those communities where public school students reside. Setting negative local school tax rates that offset the statewide tax “to any degree,” Ruoff held, runs afoul of the constitution.

The briefs filed by the state and Coalition Communities mimic one another and repeat the arguments both presented at trial. Since the statewide tax is equal in valuation and uniform in rate, the state contends it does not provide either an abatement or a rebate to individual taxpayers in any municipality.

This, they claim, distinguishes the current administration of the tax from the earlier schemes to abate or phase-in the tax struck by the courts. The state argues that the tax complies with Part II, Article 5 of the constitution, which requires taxes be “proportional and reasonable.”

‘Excess’ or ‘appropration’?

What the plaintiffs describe as excess tax, the state describes as an appropriation, funded by “nothing more than lawfully raised tax revenue.” The state insists the revenue is used solely to fund a public purpose, namely the public schools, and not to abate, rebate or reduce the rate of tax of any individual property taxpayer.

However, in its brief the Coalition Communities, calling themselves “donor towns,” acknowledges that the organization “originally joined together prior to 2006 to oppose the donor-receiver educational funding model.” Ever since the member municipalities have resisted remitting the excess tax receipts they collect to the state for redistribution to so-called “receiver towns.” Meanwhile, the self-described “donor towns” invest the state funds in educational programming beyond the parameters of adequacy, thereby lowering their local school property taxes.

Nonetheless, the state argues the trial court “erroneously expanded Part II, Article 5’s restrictions on how the Legislature may impose taxes to include restrictions on how the Legislature may spend tax revenue.”

The state also dismissed Ruoff’s finding that, because the public school system benefits the entire state and its property owners, including those with property in unincorporated places, there is no just reason to exempt property in unincorporated places from the statewide tax by setting negative tax rates.

The state claims “there are many just reasons” for the exemption arising from the differences between municipalities and unincorporated places. Property in unincorporated places, the state argues, is “subject to different benefits and burdens than property in municipalities.”

In particular, property owners may need to spend their own money to build, maintain and repair roads as well as provide for law enforcement and other services. Lacking the population and institutions to fund and share these costs the exemption from taxation enables these property owners to afford costs that otherwise would be provided by municipal government.

Galdieri closes by reminding the court that the judiciary “does not make or set education policy,” and concludes “the Superior Court has done just that.” In doing so, he continues, “it violates the separation of powers by usurping the lawmaking and appropriation authority of the Legislature as well as the execution and spending authority of the executive.”

Then, Galdieri takes this argument a step further by urging the Supreme Court to correct the error by making it clear that “its education funding precedents do not subject education funding taxes to different constitutional requirements than other state taxes.”

If the Supreme Court’s prior precedents — that is, the Claremont opinions — render the statewide tax unconstitutional,” the state’s brief continues, “then those precedents should be overruled to the extent necessary to permit state education taxes to be subject to the same constitutional standards as other state taxes.”

Attorneys representing the plaintiff property owners have until Sept. 30 to file their briefs, after which the Supreme Court will schedule an oral argument in the case.