The New Hampshire Supreme Court decided wealthier towns can retain all their statewide education property tax payments instead of redistributing a portion to poorer towns, reversing a lower court’s decision that keeping the unused funds was unconstitutional.

The highly anticipated decision in the case, Rand v. The State of New Hampshire, is a victory for towns with high property values and few students, like Waterville Valley and Moultonborough, and a defeat for middle- and lower-income towns.

The 3-1 decision, written by Chief Justice Gordon J. MacDonald, found that the practice did not effectively establish different tax rates for different towns, contrary to claims from a group of property owners in towns with lower property values. Rather, the justices in the majority concluded the state is allowed to let municipalities keep tax revenue when it exceeds what is required to cover the cost of an adequate education for their own students.

The ruling issued Tuesday hinged on the Supreme Court's finding that the tax system amounted to a spending decision by the legislature rather than the implementation of a nonuniform tax.

“This scheme is materially different from other education property tax schemes that we have found to violate” the state constitution, MacDonald wrote in his opinion. He characterized the “effective” tax rates that the plaintiffs pointed to as an “indirect effect” that didn’t run afoul of the state constitution.

The ruling overturns a 2023 decision by Rockingham Superior Court Judge David Ruoff that the tax ran afoul of state law.

Long history

The statewide education property tax, known as SWEPT, was established in 1999 in the wake of a series of Supreme Court decisions that found the state had an obligation to more adequately fund education. The law initially required the state to redistribute the tax revenue among towns.

That changed in 2011, when the state legislature passed a bill allowing towns to keep any money raised that exceeded the amount required to fund the cost of adequacy for their own students, which is calculated based on a formula that the state legislature sets.

The effect of that change, according to the plaintiffs in the case, was to establish different tax rates for different communities. Accounting for the excess that they retained, residents in Moultonborough paid $0.44 per thousand dollars of property value, while residents in nearby Plymouth paid $1.56 per thousand, an expert for the plaintiffs found.

In a dissent, Justice James B. Bassett agreed with the lower court judge, David Ruoff, finding that the “inescapable conclusion is that retention of the excess SWEPT funds has the practical effect of reducing the local property tax rate — and the tax burden as a whole — for taxpayers in excess SWEPT communities.”

Three decades of debate

The court’s ruling is the latest in a three-decade history of jurisprudence shaping the state’s role in funding public education. In a series of cases in the 1990s, the court ordered the legislature to adequately fund education and ruled that an education property tax that involved different tax rates between towns violated the constitution.

The issue of school funding has long been fraught in New Hampshire, which relies on state funding to pay for public schools at among the lowest rates in the country. The effect is that local property taxpayers bear the brunt of the burden and local property tax rates vary widely.

While the Supreme Court ruled Tuesday that the SWEPT tax system was by and large constitutional, they did take issue with one more minor aspect of it, unanimously affirming the lower court’s decision that the state cannot set negative tax rates for a small number of unincorporated communities, as it currently does.

The SWEPT issue is one of several related aspects of the school funding system currently working their way through the state court system. The Supreme Court is set to rule in the coming months on another challenge to a lower court decision, which ordered the state must raise the per-pupil base adequacy allocation from roughly $4,266 to $7,356.

The SWEPT issue involved just one component of the Rand case. Separately, the plaintiffs in the case have also challenged the state adequacy formula, with a particular focus on “differentiated aid,” which is additional state funding school districts receive for students who have special education needs, qualify for free or reduced lunch, or are English language learners. A court decision in that case has yet to be released.

Education spending

Though the money raised through SWEPT reflects a relatively small portion of the roughly $3.5 billion spent on public education statewide, school funding reform advocates characterized it as a decision that flew in the face of previous Supreme Court precedent.

Zack Sheehan, the executive director of the school funding advocacy organization NH School Funding Fairness Project, described the ruling as 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,” he wrote in a statement. “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.”

John Tobin, one of the lawyers representing the plaintiff taxpayers, said in an interview that his legal team was “very surprised and dismayed that [the court] disregarded their prior rulings.”

Attorney General John Formella, however, wrote in a statement that he was “pleased with this result.”

“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,” he said in a statement.

Jeremy Margolis can be contacted at jmargolis@cmonitor.com.