Playing "Small Ball" to Improve Education
How NH can begin to break free from the ghost of William Loeb and his Pledge.
“Small ball” is when a speedy baseball team scores runs with singles hitters and stolen bases rather than depending on one or two powerful (and expensive) home run hitters. It’s a matter of making the most of what’s available rather than trying to fit into a strategy for which your team is not equipped. Over time, the singles add up.
Using a “small ball” strategy, NH can make its taxes more fair, improve education and prepare for the loss of COVID recovery funds without implicating the Pledge. God forbid!
On February 20, 2024, Judge David Ruoff denied requests to delay his orders during an appeal. The state property tax is thus unconstitutional as of now. There shouldn’t be negative rates to offset the state tax as of the tax year beginning on April 1, 2024, nor should wealthy towns keep “their excess” state tax revenues for state taxes collected after April 1st. The amount paid by the state for constitutional adequacy also goes up by half a billion dollars as of now. The state can ask the Supreme Court to delay one or both rulings.
The state need not automatically appeal Judge Ruoff’s orders. Last summer, the Republican-led Pennsylvania legislature decided not to appeal its multi-billion dollar school funding loss and, instead, set to work finding a fair solution.
The state has been caught flat-footed, again. The Republican leadership of NH’s House and Senate did not prepare for Ruoff’s rulings even though it was pretty obvious that the state’s system was indefensible. The Dems did a little, but only with our strenuous urging and even the most meagre responses faired poorly. One bill to respond to Ruoff’s tax ruling was just killed in the House. Another likely unconstitutional funding bill was sent for further study—as if we didn’t already know what was needed.
In contrast, when the Massachusetts Supreme Judicial Court found that state’s funding scheme unconstitutional in the McDuffy case in 1993, the legislature was ready with a remedial plan that, with some tweaks and some complaints, has held for 31 years. Vermont’s experience in the Amanda Brigham case decided in 1997 was similar. Both state’s previous funding schemes were based on failed “foundation aid,” or “targeted aid,” plans that treated towns as silos responsible for educating only their own children, much like proposed HB 1586, the bill just sent for further study.
But we have the Pledge….
Let’s put aside Loeb’s Pledge for a moment, not because I agree with it, but to eliminate it as an excuse for inaction. Here are five policy changes that don’t implicate the Pledge but which will dramatically improve the equity of New Hampshire’s school funding scheme and perhaps free up revenues to better fund education where money is lacking. They are examples of the “small ball” that can be played.
First, we can consolidate school employees’ benefit programs to make them more efficient and less costly. For example, two self-insurance risk pools now compete to provide health insurance to school employees. Increasing health insurance costs are a big driver of school budget increases. The state of New Hampshire has another, larger risk pool for its employees and the University System has yet another.
The more people insured by a plan, what actuaries call, “belly-buttons in a plan” the better the insurer can predict financial risks. It’s a math thing. The better insurance pools can predict risk, the lower the financial reserves they must maintain in case they’re wrong. Reserves are like ballast that keeps a ship from tipping over in unpredictably high winds. Reserves are funded by premiums. The higher the reserves, the higher the premiums you and I pay with our property taxes.
The National Conference of State Legislatures reported a couple years ago: “More than half of the states allow, and in a few cases require, state employee health plans to cover local or regional government employees.” The large state risk pool sets its reserves at about 3 percent of annual premiums and the smaller school and municipal pools often reserve at 15 percent. The savings are obvious. Allow school employees into the state’s plan and you can hold less money in reserves and pass the savings on to local taxpayers. You might also shave some administrative costs and stop paying for a headquarters building or two.
Second, the state can defray pension costs, as it did for 50 years for school and municipal personnel. School districts have no “local control” over the pension contributions they make, how the state’s pension invests money or what benefits are paid. These are all state decisions, yet school districts and their employees are required to participate in the state pension plan and their contributions are paid through local property taxes with widely differing rates. From its inception in 1967 through 2012, the state paid 35 percent of local pension costs for schools and municipalities. Re-starting state pension cost sharing takes the burden off of local property taxpayers and helps to lessen school funding disparities.
Third, NH can institute healthy state-funded property tax circuit breakers to ease the burden of our heavy reliance on property taxes. Both Maine and Vermont rely on local property taxes to fund their schools but to a lesser extent than NH. Unlike NH, Maine and Vermont address the difficulty of relying on property taxes that increase the cost of housing and, like the demands of the Sheriff of Nottingham, must be paid whether you are on a fixed income, lost your job, or suffered an expensive medical emergency. Economists call the property tax “inelastic” because it doesn’t adjust to the taxpayer’s ability to pay.
Circuit breakers in Maine and Vermont take over payment of the local tax once local property taxes hit a certain percentage of a taxpayer’s adjusted gross income. The burden is not placed on the municipality or local school district as is the case with NH’s tiny group of small local property tax exemptions. Generally, the circuit breaker is set at about 7 percent of income for homeowners and 40 percent of income for renters. Renters indirectly pay property taxes. The programs are designed to help low and moderate income taxpayers and there is a maximum income cap to participate in the programs.
Maine also recently started a state property tax loan program that lends money to qualified low and moderate income seniors and people with disabilities to pay their property taxes. The state recoups its money when the home is sold or the taxpayer dies. The program makes property taxes less onerous while also allowing people to age in place—a good policy outcome in its own right and a cost savings measure over nursing homes.
Based on the Maine and Vermont programs, spending about $50 million on state-funded local property tax relief programs would be about right.
Where do we get that kind of money?
The answer is context and priorities.
For context, NH is bottom five in local and state tax burden in the country. Maine and Vermont, by contrast, are commonly in the top five states. Massachusetts is near the middle. We don’t pay a lot in taxes in NH; our extreme reliance on property taxes makes it feel that way.
NH’s residents are also much wealthier and the state spends a lot less of our money on state expenses than its neighbors. NH’s median household income is $90,000, Maine’s is $75,000 and Vermont’s is $62,000. NH’s state spending is about $5,000 per capita, Maine’s is $7200 and Vermont’s is $13,000.
Here are some places to find revenue.
First, fixing the unconstitutional preferences in the state’s education property tax consistent with Judge Ruoff’s ruling saves the state about $25 million.
Second, the Interest and Dividends tax had produced about $130 million a year and the tax fell most heavily on very rich taxpayers. This tax has now been cut in half and will be phased out soon. If we just stopped the phase-out, $65 million funds circuit breakers.
Third, Maine, Vermont and NH all forgive local tax payments to help preserve land used for timber harvesting, farming and public open space. NH’s acreage threshold is ten acres. In Vermont, it’s 25 acres. The NH program is also locally funded causing this state program to likely violate the same constitutional tax clause (part 2, art. 5) that invalidated the state education tax and caused Gov. Steve Merrill to enact the Business Enterprise Tax. NH could adjust the very generous benefits of its current use program which are only enjoyed by a very few large landowners to create a state fund for circuit breakers.
Fourth, legalization of marijuana has many important criminal justice policy benefits and legalization also generates tax revenues. NH is surrounded by three states, and a province, where recreational marijuana use is legal and tax revenues are generated. Why doesn’t NH do the same?
Fifth, the state property tax produces about $250 million for every dollar of tax imposed. A 20 cent increase funds circuit breakers.
Sixth, the state lost between half and three quarters of a billion dollars in business tax revenues between 2015 and 2022 according to the NH Fiscal Policy Institute by reducing business tax rates. We could reverse some of the cuts in business taxes to address current needs and prepare for the loss of COVID-related recovery funds.
Next week: If we choose to make local taxes fairer and we want to improve education in New Hampshire where it most needs improvement, we should expand early childhood education programs and change NH’s approach to funding special education; small ball policy changes four and five. More next week.
Thanks for reading but, more importantly, I hope you’re asking candidates and elected officials about the questions raised in these posts.