Last week the New Hampshire Supreme Court heard the appeal mounted by the state and some two dozen municipalities seeking to reverse the order by Judge David Ruoff of Rockingham County Superior Court that the administration of the Statewide Education Property Tax (SWEPT) is unconstitutional.
Chief Justice Gordon MacDonald was flanked on the bench by Associate Justices Patrick Donovan and Melissa Countway. Senior Associate Justice James Bassett followed the hearing remotely and Associate Justice Anna Barbara Hantz Marconi is on administrative leave from the court.
In 2022, Steven Rand of Plymouth and other property owners brought suit charging the state is failing to fulfill its duty to fund an adequate education with constitutional taxes as ordered by the Supreme Court in the Claremont rulings of 1993 and 1997. The plaintiffs are represented by attorneys Andru Volinsky and John Tobin, both veterans of the Claremont litigation, and Natalie Laflamme, who was then an elementary school pupil in Berlin.
Soon after filing suit, the plaintiffs asked the court to enjoin the SWEPT, which they argued failed to comply with Part II, Article 5 of the Constitution requiring that state taxes be “equal in valuation and uniform in rate” throughout the state.
The SWEPT was enacted in 1999 as one element of a package of taxes and fees to address the rulings of the Supreme Court in the Claremont litigation requiring the state to fund an adequate education with taxes “equal in valuation and uniform in rate” throughout the state. The SWEPT is levied on taxable property throughout the state at a uniform rate set to raise $363 million a year. The tax is collected by municipalities and the proceeds are appropriated to school districts to defray the cost of an adequate education.
The state calculates each district’s cost by multiplying its enrollment by the base cost per pupil, which in FY 2025 was $4,182, plus additional dollars for each pupil living in poverty, learning English as a second language and receiving special education services.
In some two dozen cities and towns with abundant property wealth, the SWEPT raises more than required to meet their cost of an adequate education. When the SWEPT was introduced in 1999, this excess was remitted to the state and distributed among municipalities where receipts from the tax fell short of the cost of an adequate education. A number of affluent municipalities banded together as the Coalition Communities 2.0 in opposition to what they called the “donor-receiver model” of school funding.
In 2011 the Legislature, with support from Democratic Governor John Lynch, repealed the requirement to remit excess SWEPT and entitled municipalities to retain any excess. In FY 2024, more than two dozen cities and towns retained $26.3 million.
Meanwhile, the NH Department of Revenue Administration (DRA) has set negative local school tax rates in 21 incorporated places — most without schoolchildren and many without inhabitants — offsetting the SWEPT altogether. In FY 2024, taxable property valued at $171.3 million was spared from taxation.
The plaintiffs, represented in the appeal by Laflamme and Tobin, argue that retaining excess SWEPT revenue and setting negative tax rates reduces the effective rate of the tax, rendering it in violation of Part II, Article 5 of the Constitution, which requires all state taxes be uniform in rate across the state.
The Coalition Communities and the state counter that the Legislature’s decision to allow municipalities to retain excess SWEPT revenue does not bear on the tax itself and disputes the claim that it lowers the effective SWEPT rate. John-MarkTurner of Sheehan, Phinney, Bass and Green, representing the 26 cities and municipalities told the court, “No taxpayer pays the effective rate. All taxpayers pay the full uniform SWEPT rate in every town in excess towns and non-excess towns.”
Instead, Turner said repealing the requirement to remit excess SWEPT to the state represents a spending decision or appropriation by the Legislature, which falls squarely within its discretionary authority so long as the funds serve a legitimate public purpose. The municipalities, he said, “are spending money on their local schools at the direction of the Legislature.”
“So the districts are spending money at the state’s acquiescence,” said Justice Donovan. “So how do we know they’re spending it on the school as opposed to a fire truck?” Turner insisted the funds are spent on the schools and there is no evidence to the contrary. “It is not a financial windfall,” he said.
Speaking for the state, Solicitor General Anthony Galdieri also characterized the retention of excess SWEPT as a “spending decision.” Furthermore, he noted that no court has ever held that “an effective tax rate can be identified based on how money goes back to an entity or municipality and is used there and may affect other tax rates in that community,” as the plaintiffs argue.
Galdieri described Judge Ruoff’s order enjoining the state from permitting municipalities to retain excess SWEPT and the DRA from setting negative tax rates as “far too over broad and violates the separation of powers and is problematic.”
Galdieri acknowledged that the treatment of unincorporated places is inappropriate and suggested the court enjoin the practice and give the Legislature time to correct it. “How can we be confident that the Legislature is going to fix it,” asked Justice Donovan, “it’s been thirty plus years now and they haven’t fixed it.”
Chief Justice MacDonald asked Galdieri to explain a suggestion in the state’s brief that certain precedents bearing on school funding should be overruled as inconsistent with settled tax policy.
Galdieri replied that Judge Ruoff and the Rand plaintiffs have taken the Claremont decisions to mean that the revenues raised can only be spent to meet the state’s obligation to fund an adequate education and consequently must be raised by taxes equal in valuation and uniform in rate across the state. The state, he said, disagrees and in particular rejects the notion that the structure of Part II, Article 5 can be “umbrellaed” to apply to spending decisions.
Laflamme flatly rejected the argument that the retention of excess SWEPT amounted to a spending decision, calling it “a litigation tactic with no basis.” She recalled that, in the past, the court considered several measures to spare affluent municipalities the full burden of the SWEPT and rejected them, never treating them as spending decisions and always finding them contrary to Part II, Article 5.
MacDonald noted that the statute repealing the requirement to remit excess SWEPT to the state stipulates the funds must be used by the school district, which suggests a spending decision. Laflamme insisted it was not a spending decision and even if it were, “it wouldn’t make any sense for the Legislature to do that.”
She remarked that “the state is not particularly generous with its school funding” and confines its contribution to the cost of an adequate education as defined by the Legislature, which represents a fraction of the cost of operating public schools. “To say that the state made an affirmative decision to appropriate more money to certain communities for the general use of their schools beyond adequacy simply doesn’t make sense,” Laflamme said.
Justice Donovan asked whether the plaintiffs believed excess funds were being applied to “anything other than educational purposes.” Laflamme referred to affidavits submitted by three town managers in which they explained, without the excess SWEPT funds, they would be hard pressed to fund public works projects and emergency vehicle purchases. The affidavits, she said, implied that excess SWEPT was being treated as “general town funds,” moving MacDonald to interject “fungible.”
Justice Countway asked if the plaintiffs would raise the same objection if excess SWEPT was used only to fund schools. “Yes,” Laflamme replied, explaining that state funds can only be used to defray the cost of an adequate education, as defined and costed by the Legislature, and nothing more. By using SWEPT funds to defray expenses beyond the cost of adequacy, she said, ”they would be using state funds for something the state says is not a state cost,” Laflamme said.
Laflamme also stressed that the court has consistently held that the effective rate, rather than the nominal rate, is the yardstick for measuring the uniformity of a tax. Responding to a question from Justice Countway, she explained that in the plaintiff municipalities all the receipts from the SWEPT pay the cost of an adequate education. In the Coalition Communities only a part of the proceeds from the SWEPT is required to defray the cost of adequacy, leaving an excess.
An analysis submitted to the trial court found that, in FY 2022, the effective SWEPT rate to fund an adequate education was 44 cents in Moultonborough, 59 cents in Center Harbor and 63 cents in Waterville Valley. On the other hand, the effective SWEPT rate in three of the five plaintiffs’ towns matched the equalized rate — $1.56 in Plymouth, $1.48 in Hopkinton and $1.35 in Newport. Galdieri questioned the analysis as “not a legal theory recognized in this court’s Part II, Article 5 jurisprudence.”
Furthermore, Laflamme argued there is no just reason to exempt property in unincorporated places from the SWEPT, which is the effect of setting negative tax rates in them. The SWEPT, she said, applies to all property to fulfill a statewide obligation. She pointed to a golf course in Hales Location, an unincorporated place, that sold for $1 million yet is not taxed, while another golf course in nearby Conway is taxed.
“What’s the remedy you’re asking for?” Justice Donovan asked. “You want us to deem the whole statutory scheme unconstitutional wholesale and start over?” In reply, Laflamme recommended the court uphold Ruoff’s order requiring excess SWEPT be remitted to the state and directing DRA to stop setting negative tax rates in unincorporated places. “So we go back to donor towns, winners and losers?” Donovan mused.
Justice Countway asked how this remedy would impact towns expecting to incorporate excess SWEPT revenues in their budgets. Laflamme said that the litigation has been underway for more than two years, ample time for these municipalities to prepare for an adverse outcome. She added that, given the nature of the municipal budget cycle, “there is never going to be perfect time for a change, but there is no reason to wait.”
Justice Donovan wondered whether the court should defer its decision until it rules in the ConVal case, where the Superior Court has ruled that the state must increase its share of school funding. He said if the court upholds that decision, “the excess might not be excess.”
“No, we disagree,” Laflamme replied. She explained, “If the state chooses to use a statewide property tax, we’re going to have the same issue. The same rate is going to raise an excess amount in some communities and not as much in others.” She said the issue should be resolved now rather than be left to persist.
