Taxing capital gains can provide sorely needed school aid
The urgency of the need for property tax relief was expressed just about every day to those of us on the campaign trail in 2018
State aid for our public schools averages about $3,500 per pupil. But the average statewide cost per student net of federal funding is about $16,500 per pupil. Almost the entire difference, about $13,000 per pupil, is paid by the local property taxpayer.
The resulting burden on property taxpayers is too high, even in many relatively affluent communities. Educational and tax burden disparities between communities, reflecting wide swings by ZIP code in income and wealth, dramatically worsen the picture. The system as a whole is unfair and damaging to children’s education and to the economic and social wellbeing of communities.
Our dependence on the property tax is extreme compared with other states. Locally collected property tax revenues currently pay about 70 percent of all public school costs, a higher percentage than any other state. The resulting tax rates, tax bills and school spending levels are overtly unfair, irrational and disproportionate.
In spite of these inequities, New Hampshire has been steadily cutting its state school aid. Some of the severest cuts have been to our neediest communities — for example, Berlin, Claremont and Winchester, all with extremely low median household incomes and property values per pupil, are each losing $219,824, $251,312 and $74,193, respectively, in state stabilization grant aid. The problem is compounded by the several other ways in which the state has been downshifting costs to local property taxpayers — pension and revenue sharing cuts are leading examples of this.
Can we in the Legislature find the will to respond to these inequities?
We can certainly stop the bleeding of state school aid. Ending the stabilization grant cuts will cost only $6.4 million per year, a sum that can be managed without a new revenue source. Beyond that, however, existing revenue sources, including potential increments from economic upturns or incremental rate adjustments, are fully committed to pay for the needs of existing state programs — for lifesaving mental health services, for competitive caregiver salaries, for case workers to attend to the needs of elders and children of families in trouble, and for so much more.
The truth is that new revenues, equitably raised, will be required for a meaningful response.
It is in this context that I have filed a bill to raise new revenues and provide significant education funding and property taxpayer relief. The new revenues, enabling a $160 million per year increase in state school aid, will come from a simple extension to capital gains of our existing tax on interest and dividends.
The school aid provided by the bill is explicitly designed as an interim measure, using the existing formula but with higher per-pupil monetary factors. It is the minimum necessary to respond to the current crisis. The complexities of recommending formulas and funding for a permanent constitutionally compliant legislative solution are referred within the text of my bill to the school finance commission that is being separately proposed in a bill filed by Rep. Mel Myler, D-Contoocook.
When fully implemented in FY 2021, my bill will bring, for example, about $1.5 million to Berlin, $2.1 million to Claremont and $600,000 to Winchester annually above current state school aid levels. (I have a spreadsheet showing results for all localities; write me at email@example.com to get a copy.)
Decisions on whether the increased state school aid will be used to enable more local spending on education or to provide direct property tax relief will occur school district by school district and town by town.
Capital gains income, which is investment income just as is interest and dividend income, is received mostly by people with high incomes. Taxpayers with adjusted gross incomes above $200,000 received 89.3 percent of the taxable capital gains reported by New Hampshire taxpayers to the IRS for 2016.
This proposal will close a loophole that has until now allowed high-income taxpayers to avoid the 5 percent investment income tax. Closing that loophole will also enable a substantial increase in personal exemptions from the 5 percent tax. My bill raises the exemption for a married couple under age 65 to $10,000 and for a senior couple to $25,000. Available estimates indicate that about 8 percent, or about 4,600 of the payers of the current 5 percent tax on interest and dividends, will receive a tax cut due to these personal exemption increases.
We can do this. We should do it. I look forward to constructive and productive deliberations.
Dick Ames is a democratic state representative from Jaffrey.