In 2022, the town of Newington was required to collect $309,366 in statewide property taxes to provide “adequate education” in its schools, as defined by the state formula.

Instead, after applying the standard statewide property tax rate, the town collected far more than that: $1.1 million.

Newington, historically one of the wealthiest towns in the state, was required to give the state an extra $794,000 to distribute to towns that didn’t raise enough money to meet the minimum required for their schools. But since the 2011 law, Newington and other wealthy towns have been allowed to keep additional property tax revenues, halting reallocation to other towns.

On Wednesday, the long-running debate over “donor towns” and whether the statewide education property tax (or SWEPT) should be redistributed from the rich to the poor returned to the New Hampshire Supreme Court.

In oral arguments before the court Wednesday, a group of plaintiffs argued that the current regulation that allows towns to keep excess state property tax revenue instead of transferring 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 does not need time to go back and fix the problem,” said plaintiffs’ attorney Natalie LaFlamme. “The solution is clear. They can have surplus communities repatriate surpluses as they have in the past, and stop canceling the SWEPT rate in unincorporated areas.”

The State and a group of property-rich towns known as the Coalition Communities argued that the tax was collected fairly and equitably and that the Legislature, not the court, had full authority to determine how the tax was distributed.

“All taxpayers pay full and uniform SWEPT in every town, towns with a surplus and towns without a surplus,” said John-Mark Turner, an attorney representing the coalition.

And the three judges who heard the arguments asked sparse questions that revealed little of their thoughts and intentions.

Arguments put forward in the case Rand et al. / State of New Hampshiremake up half of this case. The other half, who argued the state’s school funding “adequacy formula” was unfair to taxpayers, was sent to a higher court for a full hearing and could then go to the high court on appeal.

The state Supreme Court is also hearing a separate school funding lawsuit. Contoocook Valley School District – State of New HampshireA number of school districts are suing, claiming New Hampshire’s school funding formula does not provide school districts with enough money for an adequate education. The court did not set a date for oral arguments in this 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 school finance laws unconstitutional.

Wednesday’s oral arguments focused only on the constitutionality of the statewide education property tax, not the entire formula. But the plaintiffs say adjusting the tax distribution is crucial to their overall goal of forcing lawmakers to fix funding inequities among school districts.

The state says the court should not intervene because it would interfere with the Legislature’s authority and violate the separation of powers.

SWEEPED history

The statewide education property tax, known as SWEPT and created in 1999, imposes a percentage tax on every property owner in the state. Cities and towns must collect this statewide tax in addition to the local property tax. However, the revenues are not transferred to the state; instead the town retains the funds and must apply them to education expenses.

The tax was created in response to a series of state Supreme Court decisions in the 1990s, known as the Claremont decisions, that found that the state had an obligation to provide “adequate” educational funding to all students. And as originally agreed, SWEPT had a redistribution mechanism: Towns could keep only the portion of the money they collected that was necessary to meet the state’s definition of “adequate” funding per student. The town would be required to transfer the extra amount or surplus collected to the state’s Education Trust Fund, which would allow that money to be distributed in the form of proficiency aid to less wealthy towns.

That arrangement changed in 2011, when Democratic Gov. John Lynch and a Republican legislature passed a bill that would repeal the portion of the SWEPT law requiring redistribution and allow wealthier towns to keep the surpluses they collect. The previous system turned these wealthy towns into “donor towns,” Lynch and others said.

Today, the 2011 amendment to end donor towns, rand case.

Is this even a tax?

Speaking to the justices on Wednesday, LaFlamme told the justices that the tax is unconstitutional because wealthier towns can use the excess tax revenue they receive to offset other expenses in their towns, thus reducing their effective tax burden. By contrast, poor towns that don’t have property values ​​high enough to fund their schools from the SWEPT tax alone should make up the difference with additional property taxes, thus increasing their actual tax burden, he said.

Plaintiffs also challenge the practice of exempting property owners in unincorporated towns (areas of land that are not part of traditional towns in the state and are mostly devoid of residents) from SWEPT. This happens when the Internal Revenue Service assigns them a negative local tax rate to offset the SWEPT and make the property tax burden effectively zero.

In his claims, LaFlamme noted the existence of a SWEPT-exempt golf course in the unincorporated town of Hale’s Location, miles away from a golf course in Conway whose owners pay SWEPT. “There is no reason why two very similar properties should not be subject to state property tax,” he said.

In both claims, plaintiffs say SWEPT’s structure violates the state constitutional requirement that all taxes apply uniformly to all residents.

The State and Coalition Communities denied these allegations. Lawyers for both sides told the court that the SWEPT tax is uniform and proportionate because every property owner pays the same tax rate.

The state and the Coalition argued that what happens after the taxpayer pays and whether towns get extra revenue is a spending decision for the Legislature to make. They said that unequal distribution of tax revenue does not make the tax itself unequal.

“(The state constitution) is only about the amount of money that comes out of the taxpayer’s pocket,” Turner said. “It doesn’t concern itself with what happens to the tax arrangement after it leaves the taxpayer’s pocket.”

Turner argued that SWEPT wasn’t even a state tax to begin with because it didn’t generate revenue for the state. That means it can’t be challenged as an unconstitutional state tax, he said.

“So the first question is: Do the plaintiffs challenge the tax?” said Turner. “The answer is no.”

The state’s attorney general, Anthony Galdieri, made clear in his arguments that the Justice Department disagreed with this argument; He said the state believes SWEPT is a tax, but distribution of collections is up to the Legislature.

Question about unincorporated towns

The attorneys spoke to a reduced panel that included three of the state’s five Supreme Court justices; Judge James Bassett was unable to attend, and Judge Anna Barbara Hantz Marconi took leave due to a series of criminal complaints filed against him in October.

The three justices didn’t ask many questions about the plaintiffs’ main argument that the SWEPT tax distribution is unconstitutional. But they expressed particular concern about the potential unconstitutionality of negative tax rates that exempt properties in unincorporated towns from SWEPT.

“We are taxing hundreds of thousands of residents who do not have children in the education system,” Judge Patrick Donovan said. “They still pay for education, right?”

At one point, Chief Justice Gordon MacDonald asked the plaintiffs if they thought the court could separate this issue from other arguments in making its decision.

“By the way, does this issue stand alone?” he asked.

“I think you can definitely separate them and come to a different conclusion,” LaFlamme said. “But overall, they (the Legislature) also face the problem of not understanding that this obligation applies statewide and that all properties in the state should be subject to the same burden.”

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