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What is "Downshifting"

  • Writer: Daniel Veilleux
    Daniel Veilleux
  • 2 hours ago
  • 8 min read

New Hampshire’s Hidden Tax Shift: How State Budget Decisions Increase Pressure on Local Property Taxes

New Hampshire is often praised for having no broad-based income tax or sales tax. That is a significant part of the state’s identity.


Despite low-tax reputation, New Hampshire relies heavily on local property taxes to fund public services. According to Citizens Count, property taxes make up 64.7% of state and local government tax revenue in New Hampshire, the highest reliance on property taxes in the country.


Over the past two decades, the State has reduced or eliminated several forms of financial support to cities, towns, and school districts while also reducing several major state revenue sources.

As a result, many costs that were once shared at the state level have moved directly to municipalities, school districts, and ultimately local property taxpayers.


This process is commonly called downshifting: transferring responsibilities or costs from the State to local communities without providing sufficient funding to cover them.


Several of the most significant examples include the elimination of the State’s share of retirement costs for local employees, the long suspension of school building aid, education funding that has not kept pace with inflation, relatively flat road and bridge aid amid rising costs, and the end of municipal revenue sharing.


The result is more pressure on local property taxes, even when state taxes are reduced.


What Is Downshifting?

Downshifting occurs when the State reduces its financial support for programs that continue to exist at the local level.


The key point is simple: the underlying costs do not disappear.

Schools must still operate. Roads must still be maintained. Retirees must still receive benefits. Public safety services must still be provided. Towns and school districts still have responsibilities to meet.

Figure 1: Examples of state cost shifting ("downshifting") that have increased pressure on local property taxes over the past fifteen years.
Figure 1: Examples of state cost shifting ("downshifting") that have increased pressure on local property taxes over the past fifteen years.

When the State contributes less, local taxpayers often make up the difference.

That is downshifting.


Retirement Contributions: A Major Cost Shift

One of the clearest examples involves the New Hampshire Retirement System.

For decades, the State paid a portion of employer retirement contributions for teachers, police officers, and firefighters. The New Hampshire Municipal Association notes that the State had contributed to these normal retirement costs since 1940, and that the State’s share had been set at 35% since 1977.

That changed after the Great Recession. The State contribution was reduced to 30% in 2010, 25% in 2011, reduced to a one-time $3.5 million payment in 2012, and eliminated in 2013.


Today, local governments and school districts pay virtually the entire employer share.

For municipalities and school districts, this represented a major new annual cost that had to be absorbed through local budgets.


The retirement system itself did not disappear. The obligation remained. What changed was who paid the bill.


School Building Aid

For decades, New Hampshire operated a school building aid program that helped communities finance major school construction and renovation projects.


The State traditionally helped pay for eligible school construction costs. In 2011, lawmakers placed a moratorium on new school building aid projects. The program continued to pay older obligations, but communities with new facility needs were largely left without the traditional state partnership.


The moratorium was later lifted, and the State resumed a limited competitive building aid process. But the need far exceeded available funding. New Hampshire Business Review reported that after the program reopened, districts requested more than $227 million in building aid.


School buildings age regardless of the existence of state aid. Roofs still need replacement. HVAC systems still fail. Safety and accessibility requirements still apply. Communities still face changing enrollment patterns, outdated facilities, and major capital needs.


When state building aid is limited or unavailable, communities considering major school projects must often rely almost entirely on local property taxes.



Education Funding Has Not Kept Pace

The State’s adequacy aid formula is intended to provide a baseline level of funding for public education.


But the base adequacy amount has not kept pace with inflation or the full cost of providing public education.


In 2004, New Hampshire’s base adequacy grant was $3,390 per student. Today, the base adequacy amount is approximately $4,300 per student. If the 2004 amount had simply kept pace with inflation, it would be close to $6,000 today.


School districts face increasing costs for employee salaries and benefits, special education services, transportation, technology, school safety, utilities, and building maintenance. Even if state funding increases slightly in nominal terms, local taxpayers absorb a larger share when costs grow faster than aid.



Roads, Bridges, and Infrastructure

Cities and towns are responsible for maintaining local roads, bridges, sidewalks, equipment, drainage systems, and other public infrastructure.


The State provides Highway Block Grant Aid to municipalities, but local officials have repeatedly warned that aid has not kept pace with rising costs. The New Hampshire Municipal Association’s 2024 State Aid to Municipalities report notes that highway block grant distributions have remained near stagnant over the last decade while inflationary pressures and construction costs have increased.


This is especially important because infrastructure investment is critical to public safety and economic stability.


New Hampshire’s 2027–2036 Ten-Year Transportation Improvement Plan shows the same pressure at the state level. WMUR reported that the plan was about $400 million short, with officials looking to keep 39 projects on track, delay 15, and remove 34. Business NH Magazine similarly reported that roughly $300 million was cut from the draft plan, with 34 projects eliminated and 15 delayed.


Some of these projects are safety-related.


In southern New Hampshire, that includes long-awaited improvements to State Route 101 through Wilton, Milford, Amherst, and Bedford. NHDOT described the purpose of those projects as improving safety and addressing high-crash corridor segments along the 15-mile Route 101 corridor. A 2023 NHDOT presentation identified Route 101 corridor improvements as part of a data-driven safety analysis and noted that roadway departures are a major emphasis of New Hampshire’s Strategic Highway Safety Plan. WMUR also reported that the Milford Bypass section of Route 101 has a history of serious and deadly crashes, with NHDOT identifying head-on collisions and run-off-road crashes among the most severe crash types.


A road that is not maintained becomes more expensive to rebuild. A bridge that is not repaired can become a safety risk. Equipment delayed today often costs more tomorrow. Safety projects delayed today can mean risks remain on the road longer than they should.


When state aid and transportation revenue do not keep pace with costs, local governments and state planners face difficult choices:

  • Defer maintenance;

  • Delay safety improvements;

  • Reduce other services; or

  • Raise more money locally.



Revenue Sharing

One of the least understood examples of downshifting is New Hampshire’s former revenue sharing program.


Revenue sharing was created after New Hampshire changed the way it taxed businesses in the late 1960s and early 1970s. Those changes removed certain property-taxable business assets from the local tax base. Because cities and towns lost part of what they had previously been able to tax locally, the State created a mechanism to return a portion of state revenue to municipalities for unrestricted local use.


In other words, revenue sharing was meant to help replace local revenue that had been taken out of the property tax base by state law.


For many years, this program provided meaningful support to local governments. The New Hampshire Municipal Association reports that total revenue sharing was approximately $47 million in 1999. In 2000, part of the program was redirected into the State’s education funding system, leaving roughly $25 million per year in general revenue sharing for municipalities and counties.

That $25 million annual amount continued through fiscal year 2009.


Beginning in 2010, however, revenue sharing was suspended in every state budget. Local governments did not receive those payments, even though the underlying municipal costs remained.

In 2025, the State repealed the revenue sharing statute entirely. RSA 31-A, “Return of Revenue to Cities and Towns,” ceased to exist on July 1, 2025.


Revenue sharing helped cities and towns support local services, reduce pressure on property taxes, maintain infrastructure, or meet other local needs.


When that aid disappeared, municipalities had fewer options. They could cut services, defer maintenance, or raise more revenue locally.


For property taxpayers, the practical effect was simple: one more source of state support disappeared while local responsibilities remained.



State Revenue Reductions and Property Tax Pressure

At the same time local governments and school districts have faced rising costs, New Hampshire has reduced several major state revenue sources.

The Business Profits Tax was reduced from 8.5% in 2015 to 7.5% today. The Business Enterprise Tax was reduced from 0.75% in 2015 to 0.55% today. The Meals & Rooms Tax was reduced from 9% to 8.5% effective October 1, 2021. The Interest and Dividends Tax was phased out and repealed for tax periods beginning on or after January 1, 2025.


IIn 2026, the Legislature passed HB 155, which would raise the Business Enterprise Tax filing threshold to $400,000 and create future BET rate-cut triggers if certain revenue conditions are met.


Supporters argue that these policies improve competitiveness and encourage economic growth.

Others note that reduced state revenue can make it harder to sustain investments in education, infrastructure, and local aid programs.


Regardless of one’s position on the tax cuts themselves, the broader point is straightforward: less state revenue means less capacity to relieve pressure on local property taxpayers.

Meanwhile, local costs continue to rise.



Why This Matters for Affordability

The debate is not simply about whether taxes are high or low.


The more important question is who pays, how they pay, and whether the system is honest about where the bill goes.


New Hampshire’s tax structure puts enormous weight on the local property tax. That affects homeowners trying to stay in their homes. It affects renters whose housing costs reflect rising property taxes. It affects small businesses trying to grow, hire, and invest. It affects seniors on fixed incomes. It affects communities trying to maintain schools, roads, public safety, and infrastructure.

Property taxes are also disconnected from ability to pay. A homeowner’s tax bill can rise even if their income does not. A renter can feel the effect through higher rent. A small business can face higher fixed costs before it hires one new worker or serves one new customer.

That is why downshifting matters.


When state support declines, local costs remain. They are frequently transferred to cities, towns, and school districts that rely heavily on the property tax.


Reasonable people can disagree about the proper balance between state and local funding. But meaningful discussions about affordability should acknowledge the role that state policy decisions play in shaping local property tax burdens.


We should be honest about who’s paying the bill.

Sources and Further Reading

 
 
 

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