By GARRY RAYNO, InDepthNH.org
CONCORD — Christmas came early for more than 40 property-wealthy communities when the State Supreme Court Tuesday issued a 3-1 decision that the current Statewide Education Property Tax collection scheme is constitutional, overturning a lower court decision.
Property taxpayers in property poorer communities sued the state claiming allowing property wealthy communities to retain the excess money they raise under the tax creates varying rates, a practice prohibited under the state constitution that requires proportional and reasonable taxation.
The plaintiffs in the Rand suit argued the additional revenue makes the “effective tax rates” unequal and unfair to all but the 47 communities and unincorporated places who raise more money — about $42 million — than they need to cover the cost of providing an adequate education to their students.
In the opinion written by Chief Justice Gordon MacDonald, the court rejected the plaintiff’s argument that the state’s administration of the tax creates varying effective rates, and instead declared the tax constitutional because it is assessed equally among all communities.
“There is no evidence in the record that these ‘effective rates’ are actually paid by taxpayers,” MacDonald writes. “The plaintiffs do not dispute that under the SWEPT, as administered, taxpayers are actually assessed at a uniform rate. That concludes the constitutional inquiry.”
The chief justice said the “effective rates” reflect, “at most, an indirect effect of municipalities retaining excess SWEPT revenue, as the statutory scheme permits. Theoretical indirect effects of the scheme on municipalities are not relevant to the analysis under Part II, Article 5.”
In defending the state school funding system, the attorney general’s office argued allowing the wealthier communities to retain the excess money was a “spending decision” by the legislature and therefore not subject to constitutional review due to the separation of powers provision.
The plaintiffs asked MacDonald to recuse himself from the case as he was attorney general when the ConVal suit was before the courts that claimed the state failed to meet its obligation to fully fund an adequate education, but he refused to step down.
Plaintiffs’ attorney, Andru Volinsky, who was also the lead attorney in the original challenge to the state’s education funding system in the Claremont case, said all three judges in the majority were appointed by former Gov. Chris Sununu, and MacDonald was sitting after he denied a motion to recuse himself from the case.
Volinsky said the ConVal case contained some of the same issues as Rand, and he believes they were justified in asking for his recusal. MacDonald has recused himself from the ConVal case, which the Supreme Court has heard, but has yet to release a ruling.
The Rand case also claims the state funding is inadequate to pay for an adequate education forcing cities and towns to make up the difference with widely varying property tax rates, which is unconstitutional.
Superior Court Judge David Ruoff has yet to issue an order on that section of the suit.
“Instead of stepping aside,” Volinsky said of MacDonald, “he wrote an opinion that is logically inconsistent with itself, and almost completely devoid of legal analysis.”
Volinsky said the whole system is a sham.
“A state tax is treated as a local tax except when they want to treat it as an appropriation,” he said. “It is so convoluted the legislature has now caused the judiciary to really contort itself to uphold the legislature’s action.”
“It really brings the legal integrity of the court into question,” Volinsky said.
Attorney General John M. Formella, whose office represented the state in the case, praised the court’s decision.
“Today’s decision reaffirms the Legislature’s constitutional authority to spend lawfully raised tax revenue in a manner that works best for the people of New Hampshire. We are pleased with this result.” Formella said.
Mark Decoteau, chair of the Coalition Communities 2.0, which also appealed the superior court decision, said the group is pleased the court found use of all SWEPT dollars in the town or city where they are raised does meet the requirements of Part II, Article 5 of the State Constitution.
“This decision by the court says each community and each taxpayer is being taxed through the SWEPT in the same way,” he said. “Forcing this redistribution of property taxes from one community to another would have increased tax rates for education purposes in the ‘donor’ communities without the consent or oversight of those taxpayers.”
Zack Sheehan, NH School Funding Fairness Project Executive Director, called the decision a major step backwards for the state.
“Allowing some taxpayers in this state to continue to get special treatment and avoid paying their fair share of taxes to support the education of all students in the state is beyond disappointing,” Sheehan said. “For far too long the State has allowed this two-tiered system to operate, and this order will allow it to continue at the expense of funding for schools in the districts that need it the most.”
Associate Justice James Bassett dissented with the excess revenue section of the ruling saying, “I reject the view that the SWEPT scheme is a ‘spending directive’ immune from challenge under Part II, Article 5. Simply put, the legislature cannot ‘spend’ funds that the State never collects.”
None of the SWEPT revenue goes to the state but instead remains in communities and then sent to the local school district. However, before 2011 when the legislature changed the law, the excess money had to be sent to the state which then distributed the money based on a formula to help property poor communities.
The SWEPT collects $363 million annually based on the equalized evaluations of communities. The current rate is about $1.10 per $1,000 of assessed value.
Replying to MacDonald’s decision that the current scheme has no effect on the uniform SWEPT rate assessed to each property tax payer across the state, and that the theoretical indirect effects are not relevant to the constitutional analysis, Bassett said: “The impact of the SWEPT scheme on taxpayers in excess SWEPT communities is anything but ‘theoretical’ or ‘indirect’: the effective SWEPT rate reduction those taxpayers enjoy is real and direct. The impact of the SWEPT scheme on taxpayers in other communities that do not generate excess SWEPT is also real and direct: those taxpayers enjoy no comparable reduction in their effective SWEPT rate.”
This disparity in tax rates is the kind of taxation and fiscal mischief, the supreme court warned about in its Claremont II decision in 1977, Bassett said.
In the past, he notes effective tax rates and practical effect have been critical to the court’s analysis, but in this case, “with little discussion, the majority abandons those principles and summarily declares that, because taxpayers are assessed at a uniform rate, ‘that concludes the constitutional inquiry.’”
Bassett cites three supreme court rulings on education funding with similar issues that found the schemes unconstitutional.
“It matters not whether the economic benefit for taxpayers in excess SWEPT communities is achieved through a direct rebate, a reduction in the SWEPT rate, or retention of SWEPT funds that ultimately reduces the amount to be raised through local education property taxes — these are merely different means to achieve the same ends,” Bassett writes. “The majority looks past the fundamental economic reality that money is fungible, and that when communities retain excess SWEPT revenue, the local education tax rate is reduced — and the overall property tax burden for the taxpayers in those communities is likewise reduced. The ‘effective rate’ of the SWEPT is therefore reduced. That, of course, is the purpose — and ‘practical effect’ — of the scheme.”
And he said that is why it violates the proportional and reasonable provision of the constitution.
Bassett did agree with the majority that setting negative tax rates for local education for unincorporated places with no or few children is unconstitutional, but the court left it up to the legislature or executive branch to make changes to the current system.
The negative tax rates offset what the unincorporated places would collect for the SWEPT.
The ruling also remanded the case back to the superior court now that the court overturned that court’s decision.
The Rand attorneys, Volinsky, John Tobin and Natalie Laflamme said the decision disregards the court’s prior opinions and is brief and perfunctory compared to Bassett’s dissenting opinion.
The attorneys note that Bassett points out the ruling will allow property-wealthy towns to continue to use these state education funds, which were intended to support public school students wherever they live, for local projects that are often unrelated to education, including sewer, and water system repairs and fixing local roads and bridges.
Local tax rates in these towns will continue to be reduced, because of the extra state subsidy that only these already-prosperous towns receive from state school funding taxes, the attorneys said.
While the court found with the plaintiffs that the practice of using negative tax rates in unincorporated places is unconstitutional, “the Court inexplicably refused to apply this standard to the issue of effective tax rates in wealthy communities,” they said.
Garry Rayno may be reached at garry.rayno@yahoo.com.