2010 middle-class property tax hike

Despite professions of heart-felt concern for Vermont property taxpayers, the Legislature raised property taxes this year on a lot of middle-income Vermonters—resident homeowners with incomes less than $90,000. Lawmakers had solid information from the Tax Department showing that Vermonters with incomes over $1 million pay about 0.5 percent of their income to support public schools, while those with incomes of $60,000 pay almost 3 percent. Nevertheless, the Legislature chose to hike school taxes for many people in the lower bracket and rolled back a proposed increase that would have affected those with the highest incomes.

That’s the bad news. The good news is it could have been worse.

One of the biggest criticisms of the property tax is that it’s not based on ability to pay. This problem becomes painfully evident in a recession, when people lose their jobs or have their hours reduced, but still have to come up the money for the property tax bill.

Vermont’s school finance system dealt with this problem for a majority of Vermont homeowners. Families with household income of less than $90,000 can qualify for “income sensitivity,” which allows them to pay school taxes based on their income, rather than the value of their property. In the current recession, if their income has dropped, so have their school taxes.

Although he frequently complains that Vermont’s property taxes are too high and local schools districts spend too much, Governor Douglas has pushed to increase school taxes on households with incomes of $60,0000-$90,000 who qualify to pay based on income. Even though they spend a greater share of their income to support education than the richest Vermonters, the governor proposed a plan in January that would have nearly doubled school taxes for a family making $80,000 a year and cut school taxes for those with seven-figure incomes.

The Legislature resisted some, but not all, of the pressure from the governor. Lawmakers agreed that someone with a moderate income and an expensive house—say a single mother making $50,000 who got a $600,000 house in the divorce settlement—ought to pay property taxes in addition to her taxes based on income. Meanwhile, someone with a modest income, living in a modest house, but who has lots of expensive toys like boats and planes and fancy cars, will continue to pay school taxes based on income alone.

Vermont’s school finance system is one of the fairest in the county, but it still could be improved. Unfortunately, lawmakers bowed to the governor and moved in the wrong direction.

First, they made the law more complicated. Families and individuals who qualify for income sensitivity and live in a house worth more than $500,000 will pay the income-based school tax and property taxes on the value greater than $500,000.

Second, they made it less fair. They decided that someone with moderate income and an expensive house—that is, one worth more than $500,000—doesn’t deserve to pay taxes just based on income. However, someone with a modest house and another valuable asset—like a stock portfolio or even a second home in the Bahamas—isn’t viewed as too rich to pay just an income-based school tax. Also, for the purposes of calculating school taxes, families with at least $10,000 in unearned income will pay more than a similar family with earnings from only salaries or wages. In certain circumstances, $10,000 of unearned income will disqualify some families from paying the income-based school taxes.

Meanwhile, the Legislature has ignored the disparity that now exists across income brackets. The wealthiest Vermonters, on average, pay a smaller share of their income to support Vermont’s schools than people in any of the brackets below them.

As a matter of fiscal policy, the question of whether and how Vermont should tax assets is a worthwhile debate. But there needs to be a thorough, methodical review all assets that might be taxed, and then the Legislature has to develop a defensible rationale for whatever it chooses to tax. What the Legislature did this year looks arbitrary and even punitive.

If the Legislature does conclude that it makes sense for Vermont to tax certain assets, whatever new revenue is generated should go into the General Fund. Many people—including legislators—already complain that the school finance system is too complicated. Why add another layer of complexity?

As a matter of fairness, the Legislature should look for ways to expand income sensitivity, not curtail it. Having everyone pay school taxes based on their income would at least have the richest 1 percent of Vermonters pay the same rate as a middle class family.