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The New Hampshire Supreme Court has ruled that
under our constitution the state has an obligation to provide
an adequate education for all children. The court left it to
the legislature to define adequacy, determine its cost, and choose
the methods for raising the revenue needed to meet the state's
obligation. An education income tax is based on this simple idea:
if we are all obligated as citizens of this state to support
public education, we should all contribute in the same way, through
an equal percentage of our income, after standard exemptions
for the most basic necessities (about minimum wage for an individual).
A property tax on homeowners is regressive. Many residents,
especially retired citizens on limited income, are paying property
taxes in excess of 10% of their income, while our wealthiest
citizens, who have benefited the most from the prosperity that
is founded on universal public education, pay property taxes
on average equal to only about 2% of their incomes. However,
a state-wide property tax with a homestead exemption means that
second home owners and business property would continue to contribute
to the state's obligation to public education, albeit, on average,
at a slightly lower rate than they currently pay.
The legislature has set the state's education obligation
at $825 million for this year and next. That will increase to
over $900 million in 2001 when the figure is adjusted for two
year's growth in the student population (about 4%) and inflation
(nearly 6% over a two year budgeting
cycle). The current funding for education will also be an additional
$100 million or so short in 2001 because some of the revenue
currently being used (diversion of funds from the rainy day fund,
and one-time revenue sources) will not be available in 2001.
As a result, absent another major new revenue source or cut
in the state's share of school funding (below about 55% of the
total), the state-wide property tax rate will have to increase
to $9.50 or more to meet the state's obligations. The Hager-Below-Fernald
Plan will avoid state-wide property tax increases, resulting
in average property tax savings for homeowners of over 40% (about
$10 to $12/$1,000 of market value).
In recent years NH has had the highest property tax rates
in the nation as a percent of personal income. Over the past
decade growth in the property tax base has not kept up with school
spending, resulting in increased rates year after year in most
communities. For example, in the last 5 years for which we have
comparable data, from 1992-1997, total equalized property value
in the state grew by a mere 4%, while total K-12 current spending
grew by 21%, five times the rate of the growth in the property
tax base. In contrast, total NH Adjusted Gross Income grew by
43% over the same period, at twice the rate of school spending!
That kind of growth in personal income has allowed most states
to build up strong reserves or rainy day funds for the next downturn
(NH has practically nothing saved), while nearly 2/3 of the states
have also been cutting tax rates, by over $8 billion in the last
fiscal year, over half of which have been cuts in state personal
income tax revenues (where most of the growth is coming from).
Total current public school spending in NH in recent years
has been growing only about 5% to 6% per year. This rate of growth
is only slightly faster than pupil growth (2% to 2.5% per year)
plus inflation (about 2% to 3% per year). About 2/3 of most
public school budgets consist of wages and salaries. In the
private sector, wages and salaries per employee have been increasing
by about 1% to 2% per year faster than inflation, due to increases
in productivity. If we are going to maintain a high quality public
education system then we need to pay competitive wages and salaries
in order to retain and recruit good teachers and staff, especially
when unemployment is so low. If we are to avoid ever rising tax
rates or new narrow based taxes, then we need a tax base that
grows with population and average income growth, which is precisely
and ideally the personal income tax base. Note that New Hampshire's
public education expense as a percent of income has been, on
average, constant or down slightly over the past 30 years. For
example, NH public school spending was 5.6% of NH AGI in 1967,
while in 1997 it was 5.3%. Local control and accountability
for the overall school budget is maintained in this plan, as
local school districts decide how much to spend beyond the state
adequacy grant (which is less than what any school spends now)
and they raise that amount with a local school property tax.
Some have suggested a sales or consumption tax instead of
an income tax. There are several problems with this. The lack
of a general sales tax is a true NH advantage. Our retail sales
per capita are extremely high compared with other states in region,
because many shoppers come to our border communities due to the
lack of a sales tax. States with a sales tax are experiencing
significant loss of revenue from mail order and the explosive
growth in internet sales. A general sales tax in NH would create
a significant disadvantage for main street retailers, who already
pay higher property taxes than web and mail order based retailers
with whom they must increasing compete. Finally, unlike state
property and income taxes, sales taxes are not deductible from
federal taxable income for people who can itemize deductions,
resulting in an increased federal tax burden for many NH residents.
In contrast a personal income tax would capture many tens of
millions of dollars in taxes now being paid to other states and
the federal treasury. The biggest "donors" to NH would
be our neighboring states who now get to double dip, taxing the
income of both their residents who work in our state and our
residents who work in their state. NH would capture the income
tax on all earnings in NH; no one would pay twice. It is time
for NH to move to a more adequate, efficient, stable and equitable
tax system for funding public education in the 21st century.
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