In 2022, the town of Newington needed to raise $309,366 in statewide property taxes in order to pay for an “adequate education” in its schools as defined by a state formula.
Instead, after applying the standard statewide property tax rate, the town raised well over that: $1.1 million.
In the past, Newington, one of the wealthiest towns in the state, would have been required to give the extra $794,000 to the state to distribute it to towns that did not raise enough money to pay the bare minimum for their schools. But since a 2011 law, it and other wealthier towns have been allowed to keep the additional property tax revenue, and the reallocation to other towns has stopped.
On Wednesday, that long-standing debate over “donor towns” – and whether the statewide education property tax should be redistributed from rich to poor – returned to the New Hampshire Supreme Court.
In oral arguments before the court Wednesday, a group of plaintiffs argued the current arrangement allowing towns to keep excess state property tax revenue, rather than pass it to less wealthy towns, is unfair to taxpayers and unconstitutional. And they said the court should force the Legislature to fix it.
“The Legislature doesn’t need any time to go back and figure it out,” said Natalie LaFlamme, an attorney for the plaintiffs. “The fix is clear. They can have the excess communities remit the excess, like they did in the past, and they can stop canceling out the SWEPT rate in unincorporated locations.”
The state and a group of property-wealthy towns known as the Coalition Communities argued the tax is fairly and evenly collected, and that the Legislature, not the court, has the full power to direct how it is distributed.
“All taxpayers pay the full, uniform SWEPT in every town, in excess towns and in non-excess towns,” said attorney John-Mark Turner, representing the Coalition.
And the three justices hearing the arguments asked sparse questions, revealing little of their thoughts and intentions.
The arguments, made in the case of Rand et al. v. State of New Hampshire, make up one half of that lawsuit. The other half, which argues the state’s school funding “adequacy formula” is unfair to taxpayers, has been sent to a superior court for a full trial, and could come to the high court later on appeal.
The Supreme Court is also taking up a separate school funding lawsuit, Contoocook Valley School District v. State of New Hampshire, in which a number of school districts are suing to argue New Hampshire’s school funding formula does not provide enough money for school districts to pay for an adequate education. The court has not set a date for oral arguments in that case.
The state appealed both cases to the Supreme Court after Rockingham Superior Court Judge David Ruoff issued two transformative orders in November 2023 siding with the plaintiffs and finding the school funding laws unconstitutional.
Wednesday’s oral arguments focused just on the constitutionality of the statewide education property tax, not the entire formula. But plaintiffs say adjusting the distribution of the tax is crucial to their overall goal of forcing lawmakers to fix funding inequities between school districts.
The state counters that the court should not intervene because doing so would intrude on the Legislature’s authority and violate the separation of powers.
SWEPT history
Created in 1999, the statewide education property tax, known as SWEPT, imposes a set percentage tax on every property owner in the state. Cities and towns must collect that statewide tax in addition to any local property tax. But the revenues are not passed on to the state; instead the town keeps the funds and must apply them to educational expenses.
The tax was created in response to a series of state Supreme Court rulings in the 1990s known as the Claremont decisions, which found that the state had an obligation to provide “adequate” education funding to all students. And as originally passed, the SWEPT had a redistribution mechanism: Towns could keep only the portion of the money they raised that was necessary to meet the state’s definition of “adequate” funding per student. The town would need to transfer any extra amount collected, or excess, to the state’s Education Trust Fund, which would allow it to be distributed to less wealthy towns in the form of adequacy aid.
That arrangement changed in 2011 when Democratic Gov. John Lynch and a Republican legislature passed a bill repealing the part of the SWEPT law requiring redistribution, and allowing wealthier towns to keep any extra they collected. Lynch and others said the previous system had made those wealthier towns into “donor towns.
Today, that 2011 change – to end donor towns – is the subject of the Rand lawsuit.
Is it even a tax?
Speaking to the court, LaFlamme said the tax is unconstitutional because wealthier towns can use the excess tax revenue they raise to offset other expenses in their town, allowing them to lower their effective tax burden. In contrast, poorer towns that don’t have high enough property values to fund their schools from the SWEPT tax alone must make up the difference with additional property taxes, raising their effective tax burden, she said.
The plaintiffs are also challenging a practice in which owners of properties in unincorporated towns – areas of land in the state that are not part of traditional towns and mostly do not have residents – are exempted from the SWEPT. That happens by the Department of Revenue Administration assigning them a negative local tax rate to balance out the SWEPT and make their property tax burden effectively zero.
In her arguments, LaFlamme noted the existence of a golf course in Hale’s Location, an unincorporated town, that is exempt from SWEPT – miles from a golf course in Conway whose owners do pay SWEPT. “There’s no reason that two very similar properties would not be subject to the state property tax,” she said.
In both arguments, the plaintiffs say the structure of the SWEPT violates the state constitutional requirement that all taxes must apply uniformly to all residents.
The state and the Coalition Communities have rejected those arguments. Attorneys for both parties told the court that the SWEPT tax is uniform and proportionate because every property owner pays the same tax rate.
What happens after the taxpayer pays, and whether the towns get to keep extra revenue, is a spending decision for the Legislature to make, the state and Coalition argued. Any unequal distribution of the tax revenue does not make the tax itself unequal, they said.
“(The state constitution) is only concerned with the amount of money leaving the taxpayer’s pocket,” said Turner. “It’s not concerned with what happens to the tax regulation once it leaves the taxpayer’s pocket.”
Turner argued the SWEPT isn’t even a state tax to begin with, because it does not bring revenue to the state. He said that meant it could not be challenged as an unconstitutional state tax.
“So the first question is are plaintiffs challenging a tax?” Turner said. “The answer is no.”
In his arguments, Anthony Galdieri, the state’s solicitor general, made clear that the Department of Justice does not agree with this argument; the state believes the SWEPT is a tax, he said, but that the distribution of its collection is up to the Legislature.
The unincorporated towns question
The attorneys spoke to a reduced panel of three of the state’s five Supreme Court justices – Justice James Bassett was unavailable to attend and Justice Anna Barbara Hantz Marconi has taken a leave of absence pending a series of criminal indictments filed against her in October.
The three justices did not ask many questions about the plaintiffs’ main argument that the SWEPT tax distribution is unconstitutional. But they expressed particular interest in the potential unconstitutionality of the negative tax rates that exempt properties in unincorporated towns from the SWEPT.
“We tax hundreds of thousands of residents who don’t have any children in the education system,” said Justice Patrick Donovan. “They still pay for education, right?”
At one point, Chief Justice Gordon MacDonald asked plaintiffs if they thought the court could separate that issue from the other arguments when making a ruling.
“Does that issue stand alone, by the way?” he asked.
“I think you can certainly separate them and reach a different conclusion,” LaFlamme said. “But overarching, they’re from the same problem of (the Legislature) not understanding that this obligation applies statewide, and that all property in the state should face the same burden.”