12 March 2009
Ending Revenue Sharing for New Hampshire Towns
Property Tax Impacts of HB 2
By Grant D. Bosse By Grant D. Bosse
Voters have approved town budgets across New Hampshire, but they won’t know how changes to the state budget will affect their local tax rates. A proposal to suspend $160 million in local revenue sharing could increase municipal tax rates by a few cents in some towns, or more than three dollars in others. Berlin taxpayers would be hit hardest, facing an increase of $3.16 to their property tax rate. Comparing the amount of revenue towns received in 2008 to the total taxable property value of a town, average tax rates would increase by 48 cents per thousand, but taxpayers would have markedly different outcomes depending on which town they lived in. Berlin’s tax rate would jump $3.16 unless replaced by other state revenue. Over a dozen cities and towns would see tax increases of over $1.00 per thousand. Voters have approved town budgets across New Hampshire, but they won’t know how changes to the state budget will affect their local tax rates. A proposal to suspend $160 million in local revenue sharing could increase municipal tax rates by a few cents in some towns, or more than three dollars in others. Berlin taxpayers would be hit hardest, facing an increase of $3.16 to their property tax rate. Comparing the amount of revenue towns received in 2008 to the total taxable property value of a town, average tax rates would increase by 48 cents per thousand, but taxpayers would have markedly different outcomes depending on which town they lived in. Berlin’s tax rate would jump $3.16 unless replaced by other state revenue. Over a dozen cities and towns would see tax increases of over $1.00 per thousand.
Under House Bill 211, the state would suspend its two large revenue sharing programs for the next two years, which would help the state fill its looming budget deficit. Since proposing the shift in his February Budget Address, Governor John Lynch has backed away from ending one of the two largest revenue sharing programs, but continues to support suspending the other. Gov. Lynch believes that money from the federal stimulus package will more than make up the difference. Under House Bill 2, the state would suspend its two large revenue sharing programs for the next two years, which would help the state fill its looming budget deficit. Since proposing the shift in his February Budget Address, Governor John Lynch has backed away from ending one of the two largest revenue sharing programs, but continues to support suspending the other. Gov. Lynch believes that money from the federal stimulus package will more than make up the difference.
Suspending the Revenue Sharing Deal
In 1970, the New Hampshire Legislature rescinded a dozen local taxes including the tax on machinery and the stock-in-trade tax, and replaced them with a state-level Business Profits Tax. In exchange for taking away these local revenue streams, state law required that Business Profits Tax revenues be shared according to a formula4 under Chapter 31-A of state statutes. For the past 40 years, these revenues have bolstered local property taxes in paying for local government. According to the New Hampshire Municipal Association5, the state distributed over $25 million to cities and towns under 31-A in 2008, ranging from $171 to tiny Hart’s Location to almost $4 million to Manchester and $2.4 million to Nashua. While Gov. Lynch proposes suspending this formula for two years, local officials worry that a temporary suspension could evolve into a permanent loss of local revenue.6
Rooms and Meals
The local share of the Rooms and Meals Tax is an even larger piece of town budgets, accounting for $55.5 million in local revenue in 20087. Since 1995, state statutes have reserved most of the Rooms and Meals Tax receipts for the state. The remaining funds, gradually growing to 40%, are sent back to municipalities on a per capita basis8. Nashua received nearly $3.7 million last year, while Manchester got back $4.6 million, most of which is dedicated to financing city payments on the Verizon Wireless Arena. Losing this dedicated funding source would have endangered Manchester’s ownership of the arena and the city’s bond rating.9 This reliance on Rooms and Meals revenues shows how towns have treated the program as a dedicated funding stream, rather than an aid program subject to the decisions of state budget writers.
Because this formula is based solely on population, and not local property values, property-rich towns receive a higher proportion of state revenues from the Rooms and Meals Tax, while property-poor towns receive a relatively higher share from 31-A. Because both sources would be suspended for two years under HB 2, the total amount of lost state revenue must be calculated against each town’s property tax base to determine the full potential impact on local budgets.
In order to replace more than $1.4 million received from the two revenue sharing programs in 2008, Berlin would have to raise its municipal property tax rate by $3.16 per thousand. Claremont taxpayers would need to increase their rate by $1.40 per thousand to make up the more than $1 million lost, and Keene would need an additional $1.05 on its local tax rate to replace the nearly $2 million it wouldn’t receive from the state.
Gov. Lynch first announced his proposal to suspend revenue sharing on February 12th, long after town budget committees had crafted their local spending plans. Thus, town budget writers didn’t plan on losing two major revenue streams when crafting their budgets or the warrant articles sent to voters. New Hampshire towns don’t actually set their own tax rates. The budgets approved at Town Meeting - or through a city’s budget process - are sent to the state, where the Department of Revenue Administration calculates how high the tax rate must be to raise the revenue approved under the budget. If local budget committees relied on traditional state revenues, and those funds are suspended by the Legislature later this year, the DRA will be forced to increase local tax rates to make up the difference.
Offsetting the Impact on Local Taxpayers
Though voters across the state have approved their local budgets at Town Meeting, suspending revenue sharing in the state budget would impose additional property tax increases that weren’t on the ballot. While Gov. Lynch proposes using federal stimulus money to make up for the loss of revenue sharing from the state, there is little assurance that each town will get back the same amount of money it would lose, and even less that the proceeds would make their way back to local taxpayers. The Legislature won’t approve the state budget until June, leaving substantial uncertainty about where local budget writers will get the money to fund local services.