ECONOMIC ANALYSIS

The Economic and Fiscal Impacts of a Uniform Statewide Property Tax

January 1999

Authors:

• Dr. Lisa Shapiro, chief economist and project coordinator, Gallagher, Callahan & Gartrell.
• Dr. Richard England, professor, economics department, Whittemore School's Center for Business and Economic Research, University of New Hampshire.
• Dr. Daphne Kenyon, professor and chair, economics department, Simmons College.
• Charles Connor, retired state budget expert.

Executive Summary
(without attachments)

I. Background
II. Summary of Findings
III. Table of Contents (of full study)
IV. List of Tables and Figures

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I. BACKGROUND

New Hampshire is at a fork in its fiscal policy. Its unique tax structure — no broad-based income or sales tax and a near-total reliance on local property taxes to fund education — must now change in order to comply with the New Hampshire Supreme Court's December 1997 Claremont decision. Claremont School District v. Governor, 142 N.H. 462 (1997). (New Hampshire currently has a limited income tax on dividends and interest and a sales tax on meals and rooms.)

"To the extent that the property tax is used in the future to fund the provision of an adequate education, the tax must be administered in a manner that is equal in valuation and uniform in rate throughout the state." Ibid., at p. 471.

The local portion of education funding in New Hampshire is 90 percent, 25 percentage points greater than any other state in the country and about twice the U.S. average. (See Appendix A in the report.) There are many ways to adjust New Hampshire's tax system to comply with Claremont. All would lessen the local burden and move some of it to the State.

New Hampshire's near-total reliance on local property taxes has created hardship for many, as towns across the state have struggled to raise enough money to pay for an adequate education. Property taxes are consistently ranked the most unpopular of any tax. The property tax burden in New Hampshire is one of the highest in the country. But the system has also done well for the state. Coming out of the last recession at the beginning of this decade, New Hampshire was consistently a top performer in New England and nationally, with strong job growth, low unemployment, impressive income growth, attraction of technology workers, and development of new growth industries.

As New Hampshire crafts a solution to the Claremont funding challenge, the State must ensure that its overall economic well-being is not harmed. Also at issue is the quality of our education system. Average spending on K-12 education is higher in New Hampshire than other states, and scores on outcome measures are relatively high. There is little defection to private schools, despite relatively high family income. (Brian Gottlob, On the Side of the Road to Reform. New Hampshire Business and Industry Association Newsletter, 1998.)

More than any other state, New Hampshire controls education locally. While many people literally cannot exercise a choice of where to live, New Hampshire's overall system provides many options. Parents have taken advantage of them, sorting their families (where possible) into communities that offer varying mixes of public services.

New Hampshire must now choose how to re-organize its fiscal structure. Several types of new taxes have been proposed — taxes on income, sales, consumption, and on certain activities such as gaming and production of electric power.

Even states with a large perceived State presence in education, such as New Jersey, still require localities to come up with about half the money necessary to support their schools. A uniform property tax in New Hampshire, for instance, would change the historical balance between State and local funding by about 15 percentage points, reducing the local share from around 90 to 75 percentage points. The 75 percent is calculated by treating the amount of money donor towns pay into the State under a uniform property tax as part of the "State" share and the amount raised but kept locally as "local" share.

This study looks at one type of reform of the fiscal system: a uniform statewide property tax to pay for 100% of the cost of an adequate education. The impacts of other types of tax reform are not analyzed in detail. (See Table 7, Appendix B, and Appendix D in the report for some analysis of different uniform property tax rates. For appendices, contact the authors.)

For the purposes of this study, it is assumed that the cost of an adequate education is $5,000 per student. (This study takes no position on what is the appropriate cost of an adequate education. The economic and fiscal impacts are based on this assumption as a starting point. Some initial analyses of the economic and fiscal impacts of using different assumptions of the costs of adequacy are discussed in the report. Further analysis of the economic and fiscal impacts of a uniform property tax using different assumptions for adequacy and the combination of tax instruments could be provided using the models developed in this study.)

There are several reasons a uniform property tax was studied in this form. First, during the 1998 legislative session, a uniform statewide property tax was proposed to fund 100 percent of adequacy costs. (Beyond what the State is currently contributing toward education.)

Second, 1998's House-passed Advancing Better Classrooms (ABC) plan was based on a cost of adequacy of $5,000 per student and this level is roughly the average that is currently being spent by localities. Third, the ABC Plan (without its unconstitutional abatements) was largely a statewide property tax. Fourth, there is a feeling among some that the statewide property tax is the devil we know, and that it would be the least disruptive change to the current system. Fifth, many of the proposals to solve the Claremont funding challenge include a statewide property tax at some level.

The purpose of this study is to provide an in-depth analysis of the economic and fiscal impacts of a uniform property tax to fund 100 percent of adequacy costs where adequacy costs are pegged to roughly the statewide average costs of an education. An alternative approach would be to use an econometric model of the New Hampshire economy to forecast changes in the economy from changing taxes. Such a methodology was beyond the scope of this study, but would be a good check on this approach. Of course, any methodology and model has its strengths and weaknesses as all try to forecast the future. The strength of the model used in this study is that it uses town-by-town changes in taxes to forecast changes in the economic output for the state economy as a whole.

If New Hampshire were to move in this direction, the types of impacts discussed in this study are forecast. This analysis is intended to provide lawmakers and the public with an understanding of the kinds of impacts one could expect if New Hampshire were to adopt a uniform property tax. The economic and fiscal impacts of a much lower statewide property tax than modeled in this report, and of such a tax in combination with other taxes, needs further study. The models used in this study could be run for differing assumptions of the uniform property tax rate, adequacy costs, etc.

These results should be balanced with careful consideration of the alternatives in order to find a constitutional way to fund education in New Hampshire.

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II. SUMMARY OF FINDINGS

+ With a statewide property tax, there are donor towns and receiver towns. Donor towns are those which pay a portion of their property taxes to the State. Receiver towns are those which receive the donors' money, filtered through the State.

+ A uniform property tax used alone to fund an adequate education at $5,000 per student ($14.79 /$1,000) increases taxes in half of New Hampshire towns, and decreases them in the other half. The uniform statewide property tax rate per $1,000 of equalized assessed value to raise $5,000 per student (students counted as ADM, average daily membership) is $14.79. See Appendix B in the report for a more detailed discussion of assumptions used in the model, and the impact of using alternative assumptions.

+ The total tax increase in donor towns is $187 million. Tax decreases in receiver towns are somewhat less because some of the revenue is used to bring local education spending up to the adequacy level, and is therefore not available for property tax relief. If receiving towns increase spending on education, property taxes will be reduced by even less. Conversely, if donor towns cut back on local education and/or municipal spending, tax increases will be mitigated. The basic assumption used in this study is that education and municipal spending will stay constant, unless noted otherwise. (See Attachment 1 and Attachment 6.)

+ In percentage terms, taxes go up by about twice as much as they go down. Rates in donor towns will increase by 30 percent, whereas rates in receiver towns will decrease by 15 percent.

+ Rates in donor towns will go up by about $4.03/$1,000, and in receiver towns will go down by about $5.31/$1,000, on average.

+ The poorest New Hampshire towns in resident household income level, covering 20 percent of the population, face the highest tax increases - 18 percent or $62 million, assuming spending levels on education remain constant. Overall however, the towns where taxes increase (donor towns) have higher income levels, a lower percent of people living in poverty, and fewer renters Although Portsmouth, with 57 percent of its housing stock in multifamily units, compared with 30 percent for Rockingham County and 35 percent for Strafford County, faces significant tax increases under a statewide uniform property tax. than towns where taxes decrease (receiver towns).

+ A uniform property tax to fund education at about $2,700 per student ($8.00/$1,000) increases taxes in donor towns and decreases taxes in receiving towns by about $101 million. While receiving towns are forecast to experience a boost in economic output, and donor towns a decline, the net effect on the economy is forecast to be negative. Taking into account the distribution of other State revenue sources that would be used to bring per-pupil spending to $5,000, donor towns' net increase in taxes will be $45 million. The number of donor towns is reduced. See Appendix D in the report. The economic impact of such a mixed proposal would need to take into account the source of the revenue.

+ A uniform property tax to fund education at about $1,184 per student ($3.50/$1,000) increases taxes in donor towns and decreases taxes in receiving towns by about $44 million. Taking into account the distribution of other State revenue sources which will be used to bring per pupil spending to $5,000, donor towns' net increase in taxes will be $6 million.

+ Other states which have adopted a uniform statewide property tax use significantly lower rates than what is being considered in this study, and what is proposed in some of the bills introduced in the 1999 session. States outside of New England all have effective rates lower than $4.00 per thousand for residential property. All data except for Maine and New Hampshire is provided in Scott Makey, National Conference of State Legislatures, response to a data request by New Hampshire's Office of Legislative Services, December 1998. Maine data was gathered from newspaper articles covering Maine's repeal of the uniform statewide property tax to fund education. See the Reference section of this report. The New Hampshire figure is the base assumption used in this report. Although Vermont's rate is $11.00, it does not include the effect of a rebate for people earning less than $75,000 per year. Moreover, within those states, taxes on business and utilities tend to be somewhat higher than residential property. (See Attachment 2.)

+ Thirty-nine percent of the jobs, and 42 percent of business property are in donor towns. Taxes go up on businesses in donor towns by 28 percent on average and down on businesses in receiver towns by 13 percent on average.

+ In towns where taxes go down, economic activity will probably go up. Assuming these towns relieve property taxes rather than spend more on schools. And where taxes increase, economic growth will slow. While overall taxes go down on businesses by about 2 percent, because of the much higher increase in taxes than decreases and the higher concentration of business property and jobs in donor towns in the aggregate, a uniform property tax will reduce job growth by at least 3,395 jobs over the next decade, and perhaps by as many as 6,000 to 20,000 jobs.

+ A uniform property tax reduces incentives for economic development by as much as two-thirds in some instances. Towns, which under a statewide property tax outperform the economy, ultimately could switch from being receiver to donor.

+ Most utility property is in donor towns as taxes go up on utility property by 41 percent. But the dramatic increase in tax rates in those towns may significantly impact the competitiveness of New Hampshire's power production industry. The increase in Seabrook's rate, for instance, significantly increases the nuclear power plant's operating costs. This will potentially make the plant more difficult to sell and less likely to stay in operation. Some hydroelectric power producers may also be affected. New Hampshire may be less likely to get its share of new gas-fired power plants if a uniform property tax of this magnitude is adopted. The indirect and spin-off development from these plants would also be lost.

+ New Hampshire's tourism industry is especially hard hit. Many of the towns which will see their taxes increase are in and around the lakes, mountains, and seacoast tourism regions. This could affect the real estate, skiing, restaurant and lodging industries; lead to a reduction in rooms and meals tax revenues; and reduce investment in ski resorts. (See Attachment 4.)

+ Tax increases and decreases are likely, at least in part, to be capitalized into property values so that towns with decreasing taxes will see boosts in property values, and vice versa. (See Attachment 5.) Capitalization could change property values, up or down, in a number of communities by as much as 20 percent, leading to potential disruptions in real estate and credit markets. This could make it difficult, for example, for owners to refinance mortgages or obtain home equity loans. It could also affect businesses who need to use their property as collateral for business expansion and improvement. There could be a slump in the real estate market in towns heavily dependent on second homes.

+ Because of the capitalization effect, as property values go up in receiver towns and down in donor towns, the amount of property tax revenues redistributed through the uniform property tax will diminish by 19 percent.

+ Because of the capitalization effect, the greatly increased importance of town assessments on local budgets, and the widely varying local assessment practices, there is likely to be an increased need for a uniform, possibly State-controlled assessment.

+ The overall effects of capitalization, reduced growth in economic output, and redistribution of tax revenues on a geographical basis, coupled with demographic trends, could reduce growth in the property tax base. (See Attachment 7.)

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III. TABLE OF CONTENTS

List of Tables and Figures

Executive Summary (without attachments)

• Background
• Summary of Findings

Basic Model of Uniform Property Taxes

• Impacts by Income Level
• Forested Lands
• Spending on Education
• Variations in Uniform Property Taxes

Business Impacts

• Tax Incidence
• Literature Review of Business Responses to Tax Changes
• Projected Employment Impacts
• Economic Development
• Utility Property
• Tourism

Capitalization Model

• Relevance of Capitalization
• The Algebra of Capitalization
• The Degree of Capitalization
• Choice of Discount Rate
• Town by Town Model
• Time Pattern of Capitalization
• Analysis of Distribution of Predicted Changes
• The Case of Second Homes
• The Case of Rental Property
• The Case of Commercial Property
• Feedback Effect of Capitalization
• Summary

Some Implementation Issues

• Assessment Battles
• Local Control

References

Appendices

• Appendix A: Local Share Local/State School Revenue
• Appendix B: Model Assumptions and Methodology
• Appendix C: Impact of a Statewide Property Tax Community Listing
• Appendix D: Comparison of Tax Changes under Different Uniform Property Tax Rates
• Appendix E: List of Cities and Towns By Metropolitan Statistical And Labor Market Areas
• Appendix F: Forecasted Effects of a Statewide Property Tax on Median House Values
• Appendix G: Sample Feedback Effects from Capitalization on a Statewide Property Tax

About the Authors

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IV. LIST OF TABLES AND FIGURES

• Table 1. Impact of a Statewide Property Tax - Summary
• Table 2. Impact of a Statewide Property Tax by Percentage Change in Taxes
• Table 3. Change in Taxes Under a Statewide Property Tax - by County
• Table 4. Impact of Statewide Property Tax by Income Level (Quintiles) of Communities
• Table 5. Tax Increases In Communities with Per Capita Income Less Than 80% of the Statewide Average
• Table 6. Tax Decrease In Communities with Per Capita Income Greater Than 120% of the Statewide Average
• Table 7. Variations in Uniform Property Tax Rates
• Table 8. Total Tax Change by Type of Property
• Table 9. Effects of Taxes on Economic Activity - Summary of Interstate and Inter-regional Studies
• Table 10. Effects of Taxes on Economic Activity - Summary of Intraregional and Intrametropolitan Studies
• Table 11. Employment Impacts of a Uniform Statewide Property Tax
• Table 12. Employment Impacts by Labor Market Area
• Table 13. Comparative Property Tax Burdens of nuclear Power Plants
• Table 14. New Gas-Fired Power Plants in New England
• Table 15. Towns with Taxable Ski Resorts
• Table 16. Taxation of Ski Resorts
• Table 17. Alpine Resorts and Winter Tourism
• Table 18. Ski Tourism and State Tax Revenue
• Table 19. Summary of Property Tax Capitalization Studies
• Table 20. Statewide Property Taxes and Capitalization - The Effects on State Aid
• Figure 1. Change in Taxes Under a Statewide Property Tax by Community
• Figure 2. Comparison of Statewide Education Property Taxes
• Figure 3. Impacts of a Statewide Property Tax by Type of Property
• Figure 4. Impact of a Uniform Property Tax by Tourism Region
• Figure 5. Distribution of Changes in Property Values For Median Home Values
• Figure 6. Distribution of Percentage Change in Property Values For Median Home Values
• Figure 7. Annual Growth Rates - Property Values vs. Private Sector Wages

For more information or a copy of the entire study, contact Dr. Lisa Shapiro at (800) 528-1181.

 

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