From ‘A Book, an Idea and a Goat,’ Andru Volinsky’s weekly newsletter on Substack that is primarily devoted to writing about the national movement for fair school funding and other means of effecting social change. Here’s the link: https://substack.com/@andruvolinsky?utm_source=profile-page
Catch up on Parts One and Two:
By ANDRU VOLINSKY
“Taxes” as a Fighting Word
In prior newsletters (see links above)we discussed two forces that make school funding unfair: the failure of economic development and privilege protecting privilege. This week, we discuss how New Hampshire does taxes in terms of politics and reality.
New Hampshire has a political slogan called, “the Pledge.” It’s not the Pledge of Allegiance or some other kind of pledge to God, country or high ideals. It’s a political pledge to William Loeb’s hatred of broad-based taxes which he defined as a state income or sales tax. Loeb’s pledge originated in the 1972 gubernatorial primary between the Republican incumbent, Walter Peterson, and a nasty, pre-Libertarian tax-hater, Meldrim Thomson. Thomson had an “0 and 2” losing record to Peterson until newspaper publisher William Loeb took up Thomson’s cause and pummeled Peterson and his teenaged daughters with front page editorials in his statewide paper, the Manchester Union Leader. Thomson won and New Hampshire politicians took notice.
Loeb was upset with Peterson because Peterson proposed a broad state income tax. Peterson’s proposal wasn’t that unusual as New Hampshire was one of only seven states without an income tax and Pennsylvania and Rhode Island had recently enacted state income taxes. 50 years later, the Pledge remains a cornerstone of New Hampshire politics and both Republican and Democratic enforcers threaten those who ignore it.
Like many states, New Hampshire in the 19th Century funded state and local government with a property tax. The property tax was a progression from the poll tax which was simply a flat amount charged to every village inhabitant. The poll tax was fair because it predated the accumulation of personal wealth. The property tax wasn’t the same as what we think of as the modern-day tax on real estate. New Hampshire’s property tax initially applied to all property: land, inventory for sale and machinery to make goods. The tax was roughly based on a taxpayer’s ability to pay. A farmer’s wealth was tied to the value of his land, a miller’s wealth was tied to the value of the mill equipment. The approach was a fair one. Perhaps the taxing philosophy was influenced by the New Testament, Matthew 25:15 (from each according to his ability and to each according to his need). Of course, this is also Marxist theory but don’t tell anyone.
Over time, as the Industrial Revolution took hold in the U.S., the property tax became less fair because people earned wages and some gained enormous intangible wealth. As well, anomalies developed in the assessment of property. A well-known N.H. auto dealer who owned car lots in towns with different property tax rates, for example, would move his cars from one town to the next on assessment day and move them back quickly thereafter.
At about this time, the 16th Amendment which allowed for a direct income tax by the federal government was ratified in 1913. After having first rejected ratification in 1911, New Hampshire ratified the 16th Amendment in 1913.
As to the beginning of New Hampshire’s income taxes, in the 1970s, the state introduced a Business Profits Tax (BPT) and the 1923 Interest and Dividends tax was set at five percent. (Yes, Virginia, New Hampshire has income taxes.) The BPT taxed the “profit” or “income” of large businesses, and the Interest and Dividends Tax taxed a narrow slice of personal income derived from stocks, bonds and other forms of distributions.
By 1990, the state’s largest employer, a tech company called Cabletron, paid ten percent of all the BPT revenues collected by the state and its founders, Robert Levine and Craig Benson, sued because the BPT failed to uniformly tax all businesses in the state. Cabletron’s lawyers used the same tax clause in the New Hampshire Constitution in their suit that we used in the Claremont school funding cases.
Governor Steve Merrill personally approached Benson to settle the suit when it became clear the state would lose. The two agreed to resolve the case with the adoption of the Business Enterprise Tax (“BET”) which taxes wages paid by small and medium sized businesses. Michael Kitch helped Bill Ardinger work out the details of the BET. Benson recalls that he and Merrill realized that taxing wages in the hands of businesses was taxing income just before it was distributed. They settled on the BET anyway.
Merrill, of course, had taken the Pledge when he ran for governor in 1992 and in 1994. Benson took the Pledge when he ran for governor in 2002.
The New Hampshire Supreme Court ruled that the way New Hampshire funds its schools was unconstitutional in 1997, just after the governorship transitioned from Merrill to Jeanne Shaheen. An enlightened, and perhaps brave, group of representatives led by Liz Hager (R-Concord) and Cliff Below (D-Lebanon) proposed an income tax to solve the school funding problem. Cliff Below, by the way, became the first Democratic senator elected from the Lebanon area since the Civil War while supporting an income tax. Mark Fernald did the same from the Peterborough area.
Shaheen, perhaps considering her political future, adamantly opposed the income tax based on the Pledge and ultimately defeated it. 26 years later New Hampshire is still in search of a fair school funding solution. Vermont and Massachusetts, who had school funding lawsuits at roughly the same time as the Claremont case, solved their problems within a couple of years relying on multiple revenue sources and, with some tweaks, those solutions have generally worked.
The Pledge also prevents discussions that would improve the revenue raising options that are permissible. Maine and Vermont, for example, have substantial state-funded circuit breakers that limit the percent of income that homeowners and renters pay in property taxes. Renters pay property taxes indirectly. Lost local revenues are replaced with state funds to even out the burden of foregone taxes. The same happens with current use taxation to preserve open lands. The state, not the local community, defrays the cost. This is not true in New Hampshire where a small community like Boscawen loses tax revenues from almost 90 percent of its land. Governor Janet Mills of Maine has also recently instituted a state-funded property tax loan deferral program that allows seniors to age in place.
Governor Chris Sununu and the legislature support phasing out the Interest and Dividends tax while also promoting further reductions in the two business taxes. The ultimate loss in revenue from repeal of the Interest and Dividends tax will be about $130 million annually, more than the state contributes to the community college system. The tax cut heavily favors the wealthiest taxpayers in New Hampshire as over half the tax is paid by just the top 1,273 taxpayers in the state, each having more than $200,000 in interest and dividend income. This income excludes earned hourly wages, salaries and profits from the sale of assets (capital gains). The tiny group of Interest and Dividends taxpayers who benefit most from the phase-out each own more than $4 million in interest bearing or dividend issuing assets to earn $200,000 in qualifying income, assuming a five percent rate of return.
In 1990, the year Claremont’s Stevens High School lost its accreditation, the state’s revenue came largely from three sources: the BPT (31%), Interest and Dividends (11%) and the Meals and Rooms Tax, a sales tax, (23%). A second sales tax, on tobacco, and the BET significantly broadened state revenue sources and by 1998 the tobacco tax and the BET each brought in 11 percent or more of state revenues.
Over time, New Hampshire has dramatically eased taxes on the largest corporations and wealthiest people and transferred the burden to smaller companies, regular wage earners and property taxpayers. In 2000, Martin Gross, the lead lawyer at the time for New Hampshire’s dominant electric utility, aptly described the basis for New Hampshire’s tax system as “injustice.” He complained that the state’s “Live Free or Die” motto is not good fiscal policy and that property taxes are regressive and inelastic. The property tax collector, like the Sheriff of Nottingham, comes calling regardless of whether taxpayers have sufficient income to pay their taxes.
New Hampshire’s reliance on property taxes to fund schools is more extreme than any other state in America. Each year, school boards who propose budgets to address rising special education and insurance costs have no choice other than to load up on property taxes and, as a resident of Hopkinton recently stated, this leaves taxpayers feeling like they’re looking down the barrel of a gun.
The way we fund schools becomes a point of resentment against public education as taxpayers with flat incomes get squeezed and see their counterparts in wealthy communities spend more money on schools while enjoying lower taxes. The resentment fuels anti-public-school efforts like vouchers and divisive concepts laws.
New Hampshire spends a lot on its public schools, on average. This sometimes confuses people. The high average hides the fact that the strong commitment comes so unevenly and is much more burdensome to those least able to pay. New Hampshire earns an F in terms of how unfairly it funds its schools. We are among the least equitable in the nation.
If we are to answer the question of how to fund our schools fairly and sustainably, we must unshackle from the ghost of William Loeb and his hypocritically enforced Pledge and, as Walter Peterson used to say, have a frank discussion based on objective facts. Perhaps start by asking your favorite candidate if she supports the Pledge and why.
Andru Volinsky is a former NH Executive Councilor who is currently flunking retirement by writing his first book, teaching a graduate course in public policy and practicing law on a limited basis. He was the lead lawyer in the Claremont School Funding case. He lives with his wife, Amy, in East Concord.
