Our study of the effects of New Hampshire’s current education funding system suggests the system is an abject failure that has not improved the relative situation of poorer towns and may be making things worse. Poorer towns have not made progress relative to wealthier towns on education spending and are losing significant ground on tax rates.
As the New Hampshire Legislature continues its struggle with the school funding issue, the debate still seems to shed more heat than light. Some of the apparent confusion derives from faulty logic, some from loose terminology used for key concepts.
Discretionary Aid vs. Obligatory Payment
For example, there has been a lot of talk about misused “school aid” and about “targeted school aid” as the means to satisfy the State’s constitutional obligation to fund an adequate education. In the post-Claremont context, however, the subject is not really discretionary “aid” but rather obligatory payment due from the State. We don’t normally use the term “aid” or “grant” to refer to obligatory payment of bills to people who do work for us, for example, payments to the carpenter we contract to work on our house.
The Supreme Court held that the Constitution required the State to provide an “adequate education.” The State may delegate the administration of that education to the local school districts, but the obligation to fund adequate education remains the State’s, and any tax to fund performance of that obligation is therefore a State tax subject to the constitutional requirement that a State tax be “proportional and reasonable.”
The State’s portion of the school district’s funding is for the core elements essential to “adequacy,” with the discretion left to each local school district as to how much its taxpayers want to tax themselves beyond “adequacy” to fund more languages, interscholastic athletic teams, and the like. This is conceptually the reverse of the pre-Claremont situation in which it was the school districts who were obliged to bear the bulk of the cost of education and the State had the discretion to decide how much it would grant to the school districts as supplementary “school aid.”
Alleged Misuse of State Aid
Another fallacious notion deriving from the “state aid” terminology is that towns have misused their “aid” or “grants” for non-school purposes, particularly for reduction of taxes. In no case has a school district spent less for education than it received as the State’s payment for the State’s obligation.
Property poor towns which had already collected on high tax rates set before they could count on the State’s “adequacy” share quite properly considered the misnomered state “grants” as reimbursement of funds the districts had already advanced to cover the State’s share of the total school budget. Further, the Claremont case was as much about “proportional and reasonable” taxation as adequate education. Those low property-value-per-student communities that had previously suffered disproportionately high taxes to support adequate education were hardly expected to continue taxation at those high levels.
Is There a Real New Hampshire Advantage?
Another frequently used term which covers some faulty logic is the so-called “New Hampshire advantage,” said to be enjoyed by our state because of the lack of sales or income taxes and relatively low per capita tax burden. Undoubtedly businesses and certain wealthier and more sophisticated individuals will be influenced in their location choices by the amount of con-sequent tax liability. But they will be concerned for the total tax burden rather than the types of taxes.
Prior to the recent addition of the state property tax, New Hampshire’s exceptionally heavy reliance on local property taxes to cover cost of public education, combined with variance among communities of over 400 percent in property value per pupil, had meant that the tax burden in New Hampshire varied widely from one community to another depending on such fortuitous factors as abundance of lake shore and location of power plants. So there had been no real “New Hampshire advantage,” but rather a Portsmouth or Wolfeboro advantage matched by a Pittsfield or Claremont disadvantage. Indeed our pre-Claremont tax system had pushed these latter communities into a vicious downward spiral whereby loss of one major business and its tax base would substantially increase the tax burden on remaining businesses, tending to drive them away and to discourage other businesses from coming in to take their place.
Donor Towns are Unnecessary
A particularly pernicious notion propagated by politicians and the media who should know better is that of “donor towns.” Gubernatorial candidate Gordon Humphrey even included in his platform a constitutional amendment plank to “disestablish the concept of donor towns.” So-called “donor towns” were not created by the Constitution or by the Supreme Court, but rather by the Legislature which chose to have the state real estate tax collected by the towns, some of whom collect more for the State than they are entitled to receive from the State for the State’s “adequate education” obligation, and therefore must pass on the excess to the State.
The State could just as well bill the state real estate tax directly to each taxpayer, as it does for the interest and dividends tax. With that change in tax administration, there would be no “donor towns” under the statewide property tax, just as there are no “donor towns” under the interest and dividends tax. All property owners in the state would continue to pay the statewide property tax at the same rate, $6.60 per $1,000 of equalized valuation. Variations in payments by town, which are irrelevant from a tax equity standpoint, would not be highlighted under such system of tax administration.
A Direct Funding Obligation Cannot be Met by Targeted Aid
Many who are fearful of substantially increased taxation at the State level would prefer that the State role in public education be limited to aid to “poor towns.” At first they hoped to achieve this result through interpretation of the Claremont decision as requiring only that the State “guarantee” adequate funding for an education. But in Opinion of the Justices on SB462, December 7, 2000, the Supreme Court made doubly clear that the State’s constitutional obligation Such degree of local taxation, combined with continued administration of education by the local school districts, will help promote quality of education by empowering our citizens to take local initiatives to improve their schools, and encouraging local taxpayers to continue their involvement with their schools to see that their tax dollars are well spent.