June 29, 1998 The 'Live Free or Die' State in a Tough Spot on Taxes By CAREY GOLDBERG CONCORD, N.H. -- If a callous carnival barker were to stand outside the noble old New Hampshire State House these days, he could legitimately cry: Come see an entire political establishment squirm! Come see the Granite State caught between a court-decreed rock and a political hard place! Come see the most tax-hating, local-controlling, Living-Free-or-Dying state in the nation face the heaviest pressure anyone can remember to change its tax system! New Hampshire is in a fix. Last December, its Supreme Court ruled that it could no longer fund its schools almost entirely through local property taxes. Suddenly the likelihood loomed that the state so long irreconcilably opposed to income and sales taxes might have to change its off-my-back ways. The mood here has been one of an intensifying and agonizing search for a solution, and these days, the sweat blotching shirts seems to come not just from the lack of air conditioning in parts of the 182-year old State House. More than those in any other state, New Hampshire's schools have been financed by local government -- about 90 percent of the $1-billion-plus education budget, compared with about 50 percent nationwide. And that local control is deeply ingrained in political tradition here. So is the hostility to "broad-based" taxes like income and sales taxes -- to the point that politicians routinely take the pledge not to introduce any. The state's independent-mindedness could be said to go back at least to 1774, when New Hampshire -- even then a tax haven for smugglers and poachers seeking to avoid paying the crown -- was the first state to declare itself independent from England. And local control is up there with liberty as a political ideal, from the still-thriving town meetings to the 400-member House of Representatives, the third-largest legislative body in the English-speaking world. Against that background, the court ruling, said Donna Sytek, the Republican speaker of the House, "is so violative of New Hampshire traditions." And its implications "are, I believe, unprecedented, certainly in this century," said Mrs. Sytek, whose $100-a-year citizen-representatives would normally be done for the session by now. "We're looking at a billion-dollar problem, and only two ways to solve it -- an income tax or a statewide property tax," she said. "It's a choice of Brussels sprouts or lima beans. Well, frankly, I don't like either." Neither, it seems, does the New Hampshire populace, who already complain that their property taxes are among the highest in the country, and who continue to oppose passage of an income or sales tax. And neither does Democratic Gov. Jeanne Shaheen, who took the no-new-taxes pledge when she was running two years ago, and who would like to be re-elected this fall when her two-year term is up. After the court ruling, her administration devised a plan that would have increased education spending and set a statewide property tax rate while keeping school funding locally administered and avoiding redistributing from richer to poorer towns. The plan seemed, as the Russians say, to satisfy the wolves while keeping the sheep uneaten; polls showed broad support for it, and the House of Representatives passed it along with the tens of millions of dollars it would have required the state to raise from unspecified other tax sources. But last week the state Supreme Court issued an advisory opinion that the governor's plan, known as ABC for Advancing Better Classrooms, was not constitutional. It hinged on giving money back to those towns that would have ended up paying more in property taxes, and the court ruled that such abatements are as unequal as the current widely divergent local property tax rates. So lawmakers are now going back to the drawing board, with attention focused this week on the state Senate and what plan it will come up with from among nearly two dozen floating around the State House in the form of bills and proposals. As they ponder, New Hampshire lawmakers cast a frequent fearful eye to Vermont, which has been in the throes of heated discord over Act 60, its own scheme for responding to a court ruling about school funding. In fact, more than 30 states have faced such challenges of their local school-financing systems since 1971. The challenges argued that education is such a fundamental right, access to it and the bills for it should be essentially equal for all rather than locally set. The trend lately, experts say, has been for courts to agree with that argument, and for states to try painfully to comply. But New Hampshire seems to stand out as more defiant and more intent on defending its local tradition than any other state. One way to maintain local independence, one camp here proposes, is to pass a constitutional amendment that would trump the court ruling and keep power over school funding in local hands. "We jealously guard local autonomy," said state Sen. Jim Rubens, a Republican candidate for governor who is proposing an amendment to retain the current system of funding while increasing guaranteed state aid to education. "We resist intrusion of the central planners who think they can solve our education problems," Rubens said. "And the issue is bigger than money; money is second in line, the big issue is control." In fact, there is a school of thought even more defiant. Paul Mirski, a Republican lawmaker, argues in his proposed bill that the Legislature should consider the court's decision unconstitutional, and therefore void, because it effectively creates a new tax. And according to New Hampshire's "fabulous Constitution," with its roots in anti-British rebellion, he said, only the Legislature or the people, not the court, can create a tax. "I think the court made a mistake," he said, adding that the Legislature should say, "We can't comply with this." At the other end of the political spectrum are the courageous -- some would say quixotic -- "broad-basers," who see the court decision as a great opportunity to finally introduce the income tax that they think New Hampshire has long needed. (Virtually no one is talking about a sales tax, for fear out-of-staters would stop coming in droves to shop here.) "I think ultimately people will see that we need to mitigate the high property taxes with some other more fair tax," said Clifton Below, a lawmaker proposing an income tax. Because of the ruling, he said, "a lot more people are asking the questions and having that debate." It is not uncommon in New Hampshire, Below noted, for poor people to spend 10 percent or 20 percent of their income on property taxes while rich people spend perhaps 1 percent. The state has the highest property tax burden as a percentage of personal income in the country, he said -- 6.6 percent -- and the court's push toward a broad-based tax should be seen as a step forward, not back. "But we have to get over that conceptual hump," he said. There are also those proposing a uniform statewide property tax, like freshman Rep. Frank Sapareto, a professional tax and financial planner from the high-property-tax town of Derry. "It takes someone seriously suicidal like me" to make such a proposal, he said, but it is simply financially sensible and just. "What's going to happen?" he asked. "I'll get fired and go back to making money?" Gov. Shaheen allowed that the school ruling, known in verbal shorthand as "Claremont" for the town that brought suit, is perhaps the greatest challenge of her governorship. Lawmakers say that they cannot remember such knotty work since trying to balance the budget during the recession. "The court has put us in a box," said Republican legislator Doug Teschner. Added his colleague, Jeb Bradley: "It's the devil and the deep blue sea is what it is." Copyright 1998 The New York Times Company -----------------------------------------------------------------