The information contained in this article is not intended as legal advice and may no longer be accurate due to changes in the law. Consult NHMA's legal services or your municipal attorney.
Recently, it seems that the topic of tax and budget caps has been talked about more and more among municipalities. Even though there are currently only a few municipalities which have actually adopted a tax or budget cap, the New Hampshire legislature has also shown a renewed interest in making some changes and alterations to that way that tax and budget caps are implemented, calculated, and removed. This guidance will seek to provide a quick reference for municipalities on the most important aspects of tax and budget caps and provide an explanation of how a tax or budget cap may affect a municipality after implementation.
Q. What is the difference between a tax cap and a budget cap?
A. A tax cap limits the amount of funds that can be raised by taxation each year, based on a specific formula, thus keeping the yearly tax impact on residents lower than it may have been without the cap. The estimated amount to be raised by local taxes as shown on the proposed budget certified by the select board or official budget committee (as the case may be) and posted with the warrant may not exceed the amount of taxes actually raised for the prior fiscal year by more than the amount calculated by the cap. This includes the operating budget and all other warrant articles with a tax impact. RSA 32:5-b, I.
In 2025, the Legislature also added an option for towns to implement a budget cap rather than a tax cap. RSA 32:5-g and RSA 32:5-h. A budget cap limits the budget that can be proposed to an amount not to exceed the dollars spent by the town per resident in the prior fiscal year times the current population, plus either a fixed percentage or a percentage annual increase for inflation as reported by the Bureau of Labor Statistics or American City or County. This cap would be adopted in the same manner as a tax cap except that, unlike any other budgetary or tax question under any statute, voters at the deliberative session or traditional business session are not permitted to amend the variable portions of it (the percentage or other portions of the question that are not prescribed by the statute). They can only vote for or against it when it is time to vote on the article. RSA 32:5-h, V.
Q. How are tax caps adopted?
A. The answer depends on whether or not your municipality operates via a charter. Cities and towns with a charter can adopt a tax cap through an amendment to their charter. This process follows the usual charter amendment process under RSA chapter 49-B. If there is a tax cap in the charter, there must also be a provision allowing the legislative body to override the cap but requiring a supermajority vote to do that RSA 49-C:12, III; RSA 49-C:33, I(d); RSA 49-D:3, I(e). A charter without an override provision or which says that a cap can be overridden by a simple majority vote will not be valid.
In other towns which do not have a charter and which operate with either a traditional town meeting or official ballot referendum (SB2) town meeting, the voters may adopt a limit on annual increases in the estimated amount of local taxes in the proposed annual budget. RSA 32:5-b; RSA 32:5-c. The question of adopting a cap may be placed on the warrant either by the governing body or by citizen petition under RSA 39:3. The governing body must hold a public hearing on the question 15-30 days before it is to be voted upon. In a town with a traditional town meeting, voting on the question is by ballot conducted at the business session of the meeting; it does not get placed on the official ballot used for the election of officers. In an SB 2 town, the question is voted upon on the official ballot with all other questions. In either case, adoption of the cap requires a three-fifths majority of votes cast. If a cap is adopted, it takes effect beginning with the subsequent fiscal year. A cap can be repealed in the same manner in which it is adopted. RSA 32:5-c.
Q. How are tax caps calculated?
A. Again, it can be somewhat different depending on whether or not your municipality operates under a charter. In charter municipalities, the charter amendment will need to outline how the cap is calculated. Amendments to the tax cap statutes effective in 2021 limit the ability of a city or charter town to exclude things from the cap or avoid its application through accounting practices. The charter can provide that the calculation of the cap will not include certain dedicated, enterprise, or self-supporting funds or accounts, capital reserve funds, grants, or revenue from sources other than local taxes, or interest and principal payments on municipal bonded debt, or capital expenditures, but doing so requires a supermajority vote of the legislative body. The same is true for any ordinances or accounting practices that have the effect of redistributing excludable budget items from within the limits of the capped budget to outside the limits of the capped budget. This means that a town or city cannot exclude particular items from their cap or use clever accounting to do anything that would have the effect of avoiding the cap on appropriations funded through property tax unless the legislative body of the town or city approves it by a supermajority vote.
The law provides a variety of different methods among which non-charter towns can choose to determine a cap. The original options were a fixed dollar amount or fixed percentage maximum increase over the amount actually raised by taxes in the prior year. Towns now also have the option to set the cap based on a multiplication factor used to adjust the amount actually raised by taxes in the prior year; this multiplication factor is based on inflation (the Consumer Price Index) and the town’s population. RSA 32:5-b, I-b and II. When calculating the cap using any of these methods, if the taxes for the prior year were reduced by the use of fund balance, that amount is added back in and included in the amount to which the tax cap is applied. RSA 32:5-b, I-a.
Q. Can the legislative body override the tax cap?
A. As mentioned above, charter municipalities must include an override provision to the cap. For non-charter towns, under the law as amended in 2025, the business session of a traditional town meeting must now vote on every appropriation that would override a tax cap or budget cap by secret ballot vote and each such vote requires a 3/5 majority to pass. RSA 32:5-b, III; RSA 32:5-g, III. The same 3/5 vote is required to override a tax or budget cap in a town using the SB 2 form of government (where all votes are taken by official ballot on election day). However, the law is not entirely clear on how this will work. The statute does not explain whether votes at the deliberative session to amend the amount of an appropriation which would have the effect of exceeding the cap would require a secret ballot vote or a 3/5 majority, although presumably they would. In addition, the statutes provide that if the warrant article for the operating budget results in appropriations exceeding the tax or budget cap but has received less than a 3/5 majority in favor on the final vote, “the adopted operating budget shall be reduced by appropriations already raised to remain compliant with the cap.” RSA 32:5-b, III(a); RSA 32:5-g, IV.
Q. What are some things that municipalities should consider when presented with the possibility of adopting a tax cap?
A. While tax caps can be an effective tool to help municipalities keep tax impacts low for residents, municipalities will need to plan carefully for when the need to spend arises. Not all spending follows a predictable yearly pattern. Sometimes, municipalities may find themselves in need of raising funds for a one-time, large expense, project. This could involve a large tax impact that may be limited due to an existing tax cap. In a situation such as this, the municipality would need to seek a supermajority to override the cap, or would need to find the funds elsewhere to make up the difference.
Another practical consideration for municipalities when entertaining the possibility of implementing a tax cap is the effect it can have on debt and borrowing. For larger expenditures, municipalities with tax caps can look to lease or bond agreements to keep yearly tax impacts lower. This is usually done at the expense of funding something like a capital reserve fund, which may entail a larger, one-time, payment and can sometimes have a more immediate impact on the tax rate. However, entering into debt can result in a continued shifting of taxpayer dollars away from current services and towards paying down debt and interest. It is also a more involved process to seek approval to enter into debt than it would be to expend funds previously deposited into a capital reserve fund.