Low inflation weighs on Laconia’s effort to keep taxes down
By MICHAEL KITCH, LACONIA DAILY SUN
LACONIA — During the past 12 years, the city has worn the property tax cap as if a school boy wore the same suit from the day he entered first grade until he received his diploma at graduation, as city managers and city councilors have tailored successive budgets to the fit the limits of the cap amid changing circumstances just as a seamstress alters a suit to fit a growing boy.
Since the tax cap was introduced with the 2007 budget, changes in both economic conditions and public policy have have added to the pressures and volatility of its application. The advent of the recession and waning of inflation reduced the value of the two multipliers for calculating the annual increase in the tax commitment. At the same time, the state has reduced or withheld aid to municipalities and school districts while transferring costs to them. Together, these factors have weighed heavily on budgeting within the limits of the tax cap.
Voters adopted the tax cap by referendum in 2005 and it has applied to the municipal budgets since fiscal year 2007. The tax cap limits the annual increase in total expenditures funded by property taxes to the rate of inflation, measured by the Consumer Price Index — Urban (CPI-U), for the prior calendar year, plus an additional amount representing the value of new construction, which is calculated by multiplying the value of building permits less the value of demolition permits issued between April 1 and March 31 by the prior year's property tax rate. The total incremental increase permitted by the cap is divided between the budgets of the city and school district.
In other words, the cap applies two factors, both beyond the control of the city, to limit the increase in the amount raised by property taxes from one year to the next. The amount raised by property taxes, or tax commitment, includes the dollars raised by the local city and school tax rates as well as those raised by the state education property tax and the county property tax. Property taxes represent approximately 73 percent of all the revenue that funds the municipal budget.
The balance consists of revenues accruing to both the city and the school district. Licenses and permits, along with other charges and fees, account for most city revenues, with motor vehicle registration fees representing the lion's share. Both the city and particularly the school district receive aid from the state.
Apart from 2009, when the CPI-U fell to zero, both the rate of inflation and value of construction were relatively strong in the first four years of budgeting to the tax cap. The CPI-U ranged between 2.8 percent and 3.8 percent and the value of construction topped $25 million. The tax commitment rose $1.8 million in 2007, $1.5 in 2008, $1.5 million in 2009 and $1,6 million in 2010, which reprint increases of 5.6 percent, 4.5 percent, 4.2 percent and 4.5 percent.
But, in 2011, following another year without inflation and construction values tumbling to $15 million, the cap allowed the tax commitment to increase by a mere $270,000 and the tax commitment shrunk by $121,267. Since the onset of the deflationary economic environment, marked by low inflation and interest rates, the CPI-U has topped three percent just once and has been less than two percent for five of the past seven years. At the same time, only twice in this period has the value of construction exceeded $20 million, reaching $29 million and $32 in 2016 and 2017.
With the reduction in the multipliers, the incremental increase in the amount raised by taxes permitted by the cap shrank to $429,926 in 2012, $571,638 in 2013, $800,634 in $827,048 in 2014, $1,157,846 in in 2016 and $751,572 in 2017.
The recession also affected revenues from sources other than property taxes. Fees from motor vehicle registrations, which typically returned $2.2 million or more a year began falling in 2009, dipped to $1.9 million in 2010 and 2011 before returning to prior levels in 2015. Low interest rates shrank returns on municipal investments from around $300,000 a year to less than $100,000.
Meanwhile, in 2009 the state eliminated revenue sharing with cities and towns, which the years before amounted to the more than $600,000 in annual revenue to the city. The same year also adjusted the formula for distributing a share of annual increase in the Rooms and Meals Tax to municipalities, freezing the total funds disbursed by population. As a result although the city has continued to receive between $700,000 and $800,000 a year, since returns from the tax have risen, it has foregone revenue it would have received had the formula not been changed.
Apart from reducing payments to municipalities, the state has also transferred costs to them, which can only be defrayed by property taxes. In particular, after contributing 35 percent of the employer contribution to the New Hampshire Retirement System for the pensions of school teachers, firefighters and police officers since 1977, the state trimmed its share to 30 percent in 2010, 25 percent in 2011, 3.5 million in 2012 and the next year eliminated it altogether. In the 2018 city budget, the increased contribution to the retirement system represented more than half the incremental increase in the tax commitment allowed by the tax cap.
The impact of deflationary economic conditions and austere fiscal policy on the mechanics of the tax cap is reflected in the slowing rates of increase in the tax commitment. In the first four years after the cap was introduced, from 2007 to 2010, the amount to be raised by property taxes increased by between $1.4 million and $1.8 million or by between 5.6 and 4.5 percent a year. Since then annual increases have not exceeded $827,000 and percentage increases have not exceed 2.8 percent and in 2011 decreased by 0.3 percent.
If rising costs, especially health insurance and retirement contributions, cannot be met within the limits of the cap, priorities must be reshuffled or expenses cut.
Despite these fiscal challenges, the city has made significant investments, including construction of a new middle school, major improvements at the high school, improvement and expansion of the central fire station, reconstruction of the main street bridge, increased spending on street repairs, extension of the downtown river walk and a number of the projects.
Nevertheless, critics of the tax cap contend that it subjects the city's fiscal fortunes to forces beyond its control and in the changed economic and fiscal climate, binds the municipal budget process to satisfying a mathematical formula rather than addressing the needs of the community. Although the tax cap can be overridden by a two-thirds majority of the City Council, for the moment it appears to be a political imperative to uphold it. And continue wielding needle and thread to make the suit fit the school boy.