Governor Shaheen and House GOP Unveil Tax Plans

February 9, 2001

By Donald J. Pfundstein, Lisa K. Shapiro, and
Heidi Kroll*

Yesterday, the House Ways and Means Chairman, David Alukonis, told us that he expects his Committee to consider 70 to 80 bills this session. Most of them will be somebody's idea on how to pay for public education in New Hampshire. Two high-profile plans were revealed this week.

Governor Shaheen's EXCEL New Hampshire Plan

Governor Shaheen released her EXCEL New Hampshire Plan which combines a new and improved statewide education property tax1 at the reduced rate of $4.90 per $1,000 of valuation, except for utility property which will continue to be taxed at the rate of $6.60 per $1,000. The EXCEL Plan also includes a 2.5% narrow based sales tax, which reportedly will exempt the necessities of life such as food, clothing, fuel, and prescription and non-prescription medications. Services are reported to be excluded from the tax base. It appears as though the proposal is a traditional retail-only sales tax.

The Governor's plan also rolls back the Business Enterprise Tax, which is a tax on the interest, dividends and compensation paid by business enterprises from a rate of .50% to the originally enacted rate of .25%. The EXCEL Plan also reduces the interest and dividends tax from 5% to 4.5% and outright repeals the inheritance tax. The plan also funds the Land and Community Heritage Investment Program with one-sixth of the existing real estate transfer tax revenue. When added to the other revenue sources which fund the Education Trust Fund (ETF), the EXCEL Plan purports to raise a total of $916,000,000 for fiscal year 2002 (July 1, 2001 through June 30, 2002).

The cost of an adequate education under the EXCEL Plan is pegged at $881.25 million for fiscal year 2002, with the significant share of the difference between the revenue raised and the cost of an adequate education going to: (1) sales tax implementation, low income, property tax "circuit-breaker" refunds, a special retail promotion expenditure in the amount of $2.5 million to help militate against the adverse perception associated with installation of a sales tax; and (2) enhanced funding for performance standards for schools, certain education accountability measures, as well as learning and literacy incentives which are designed to assure that students read at grade level by the time they complete the third grade. The EXCEL Plan also ties the annual, per-pupil education cost increase to the Northeast Consumer Price Index and requires that communities spend the adequacy grant on education or apply the funds to lower the school portion of the property tax rate. How the latter limitation would actually work is unclear.

The most important issue associated with the Governor's plan will be defining the base subject to the proposed sales tax. For instance, how will those sales consisting of a service and product be handled (i.e. the cost for ASP products and services, investment products and advice)? Will it tax the sale of equipment used to produce goods or services? What is and isn't taxed will be the critical issue to business.

House GOP Plan

Not to be outdone, the New Hampshire House GOP released its plan on the same day that EXCEL was launched by the Governor. Representative David Hess proposes to dedicate 75% of the combined proceeds raised by the Business Enterprise Tax and the Business Profits Tax to the ETF. He would return the revenue raised by certain other taxes from the ETF back to the general fund. For instance, those portions of the real estate transfer tax and rooms and meals tax currently used to fund the ETF would be returned to the general fund. His plan, as does the Governor's, relies upon a new and improved statewide property tax.

The House GOP plan is designed to fund the ETF at the proposed level of $881 million from existing revenue sources. The plan is designed primarily to shift the debate from funding education to a more general budget and revenue discussion. The plan purports to eliminate the anxiety associated with the uncertainty of continued education funding by taking the business tax revenue stream and dedicating it to solving the education problem. However, there is little guidance in the plan on how the business tax revenue (net the funds returned to the general fund) will be replaced for general budget purposes. Obviously, one unacceptable way would be to raise the rates!

As Representative Hess indicated, "If we pass a broad based sales or income tax, the people of New Hampshire deserve to know that we are doing so in order to increase the state budget or change our tax structure, not to fund education." The foregoing sentence seems to succinctly describe the "real" GOP plan.

We hope you will continue to visit us at gcglaw.com for updates as this education business tax debate unfolds.

You may contact Donald Pfundstein, Lisa Shapiro, or Heidi Kroll at 800-528-1181.

Notes

1. As outlined in our Executive Summary of January 18, 2001, a Superior Court decision has turned up the heat on the funding debate by declaring the new statewide property tax unconstitutional, due primarily to infirmities in the assessment and equalization procedures.

*Donald J. Pfundstein is admitted in New Hampshire.

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