Should towns be required to spend state aid directly on property tax cuts?

State legislators from both sides of the aisle seem to agree that New Hampshire property taxes are too high. Local property tax rates are a much bigger burden than the statewide property tax, however, so state lawmakers usually try to ease the property tax burden indirectly by providing towns with more state dollars.  

Towns have many other spending obligations, however, and state money does not necessarily go straight to property tax cuts.  One bill this year, SB 118, would require towns to use 60% of state aid to cut property taxes. 

Inconsistent state funding for towns and cities 

The state government kicks in money for local infrastructure, schools, and more, but that state funding has been inconsistent over the past decade. 

Notably, there is a state law that requires New Hampshire to distribute 40% of Meals and Rooms Tax revenue back to towns and cities. About ten years ago, during the Great Recession, New Hampshire stopped this sharing. 

The state government also used to pay a share of municipal retirement contributions.   

Meanwhile the state has inconsistently funded grants for local wastewater, drinking water, and other infrastructure projects. 

Lastly, the state contributes some per-pupil school funding, but towns are left to cover the bulk of school expenses with local property taxes.  There has been a string over lawsuits over how much the state sends to schools and whether it is enough to cover constitutional requirements. 

As state funding dwindles, towns and cities raise property taxes.  Of course, towns also raise property taxes for other reasons, such as a new school or a full-time fire department. 

Could state aid cut local property taxes? 

If the state increases funding for towns and cities – for example by recommitting 40% of Meals and Rooms tax revenue to municipalities – it stands to reason that towns and cities will need less property tax dollars from residents.   

Local budgets are complex, however, and rather than cut property taxes, local officials may prefer to fund other priorities with state money. Maybe the town has put off building new sports fields or upgrading information technology systems.  

Some legislators believe that towns and cities need to prioritize property tax cuts when they get state dollars. 

This year Democratic Sen. Lou D’Allesandro is the primary sponsor of SB 118, a bill that would send $40 million to municipalities over the next two years – but at least 60% of that would have to go to local property tax cuts. 

This property tax relief could be particularly helpful to residents who lost income due to the coronavirus pandemic. 

Risky interference in local budgets? 

Some opponents of SB 118 argue it is irresponsible to put one-time state funding towards property tax cuts.  If the state decides it cannot commit the same level of funding in the next budget, towns would have to slash spending or raise the taxes they just cut.  Until the state commits to permanent and predictable aid, these opponents believe towns should not rely on state aid to cut property tax rates. 

Other opponents argue towns and cities should control their budgets without state interference. After all, if residents want state aid to go to property tax cuts, they can vote to do so through the town budgeting process.  

Alternatives to lower property taxes 

There are many other proposals to ease the property tax burden this year (and every year in the state Legislature). 

For example, Rep. Sallie Fellows (D-Holderness) is sponsoring a 2021 bill to increase eligibility for the Low and Moderate Income Homeowner Property Tax Relief program, HB 486.  Rep. Jacqueline Cali-Pitts (D-Portsmouth) is sponsoring a bill to temporarily suspend property tax valuations during the pandemic, HB 552.  Rep. Terry Roy (R-Deerfield) is sponsoring a constitutional amendment that would cap local property tax increases at 2% per year, CACR 9. 

What comes next? 

Regardless of the fate of SB 118, the final amount of state aid for cities and towns will be set through the state budget process.   

Gov. Sununu delivered his budget proposal February 11, and it included restoring the 40% local share of Meals and Rooms Tax revenue. However, Democrats are concerned that other tax and spending cuts will downshift other costs to municipalities, canceling out the additional Meals and Tax revenue.   

The House is now revising Gov. Sununu’s budget proposal through a series of public hearings and committee meetings.  The full House will vote on the budget the first week of April. 

Update 2/24/21: While Gov. Sununu referenced restoring the 40% local share of Meals and Rooms Tax revenue in his budget address, his proposal only incrementally increases the local share of revenue from roughly 22% to 23%.  A separate bill, SB 99, would restore the full 40% share.  While that bill had a positive response in a public hearing, the final local share of Meals and Rooms Tax revenue will still be set through the state budget process.