It's back to the drawing board for New Hampshire legislators now that the state Supreme Court has declared unconstitutional another hard-won financing plan designed to provide more equal funding of public schools.

The court recently struck down a statewide property tax enacted in April because it was phased in over five years for some towns but not for others. With only a week to go before tax bills are supposed to be mailed out, the nation's largest state legislature must find a solution that will satisfy the court and fill a $440 million gap in the state budget.

"The timing couldn't be worse," said state Revenue Department Commissioner Stanley R. Arnold. "I try to look at it from the standpoint of local communities, many of which are small and operate using part-time personnel. They have a hard enough time trying to keep the day-to-day operations going. They don't need the uncertainty of where their funds are coming from."

States in New England, like those in other regions of the country, have been waging a difficult battle over how to achieve equal funding for public schools in high- and low-income communities. The Vermont Supreme Court this month reenergized opposition to that state's controversial school funding law by sending cities and towns seeking to overturn the law back to a lower court to make their arguments at trial. Most recently, suburban communities in Rhode Island sued the state last week over alleged inequities in public school financing.

But Granite Staters, with their strong anti-tax sentiment and affinity for local control, have faced a lengthier debate than most. The high court has scrutinized education financing alternatives after demanding in 1997 that the state fund public education primarily with a uniform tax rather than widely varying property taxes.

The New Hampshire legislature, split between a Democratic-controlled Senate and Republican-controlled House, considered everything from a personal income tax and sales tax to legalized video gambling. They finally broke the political stalemate earlier this year with a plan that called for supporting annual public school budgets with $825 million in state funds, using a statewide property tax as the chief funding source.

Some legislators and residents considered the arrangement a temporary measure--and, with the latest court ruling, they have been proven correct.

"It's time to come up with a permanent solution," said state Sen. Clifton Below (D-Lebanon), chairman of the Senate Ways and Means Committee, who favors an income tax in a state that has never had one. "It's a case where the emperor has no clothes, and people are realizing it."

Facing a renewed fiscal crisis, Gov. Jeanne Shaheen (D) last Tuesday proposed a slightly lower statewide property tax coupled with a new 4.5 percent capital gains tax. The new property tax rate of $6 per $1,000 assessed value would spread the burden of paying for public education more evenly across the state, she said, and the capital gains tax would produce an estimated $164 million during the next two years.

"If we do not act quickly, both the state and local communities will face severe fiscal problems," the governor said in a statement. "Indeed, many communities will run out of money in December if we do not act within the next few weeks. School children, the elderly and disabled, and others who rely on state services should not be held hostage to our debate over school funding."

At least on this point, her critics agree.

"Our Supreme Court exercised its constitutional authority to proclaim the rights of children and taxpayers. The two other branches of government have dropped the ball," said attorney Thomas Connair, chairman of the Claremont Coalition, a group of towns suing the state for funding equity in public education.

Last Friday, the Senate approved a 4 percent income tax. House leaders remain firmly opposed to income or capital gains taxes in any form and plan to discuss the income tax proposal and possibly a revised version of the statewide property tax today, said House Speaker Donna Sytek.

In yet another move, the House Finance Committee voted 13 to 7 recently in favor of a constitutional amendment to shift control of education from the courts to the legislature.

Exactly where this leaves New Hampshire's 240 cities and towns and 200,000 public school students is unclear. The cities and towns have been advised that they may issue tax bills before a new property tax rate is set or, depending on their cash flow, wait until the legislature comes up with an alternative.

If a new system is not in place, school bills due in January will have to be covered by other state funds, and state officials said some communities will need to learn how to borrow money. Said Charles Connell, one town administrator: "We've been put on hold."

CAPTION: Gov. Jeanne Shaheen proposed a lower statewide property tax and a capital gains tax to fund schools.