Public Assets Institute > Policy Areas > Education > House committee wants to scrap income sensitivity

House committee wants to scrap income sensitivity

A new education funding plan taking shape in the House Ways and Means Committee is being billed as a move toward simplicity and greater reliance on the income tax to support education. In fact, the plan appears to make the connection between school spending and taxes less transparent, and it will take Vermont back to the days when only wealthy communities could afford to pay the property taxes necessary to support a good education.

Currently, about two-thirds of Vermont resident homeowners pay income-based school taxes. Tax rates vary from town to town, depending on the education spending per pupil. But there is a direct relationship between the income-based tax rates and local spending.

The new plan would do away with the current income-based school tax, commonly known as “income sensitivity.” Instead, there would be a general education income tax, in addition to the state’s personal income tax. The education income tax rates would be fixed statewide, and tiered—higher income taxpayers would pay higher rates. There would be no relationship between the education income tax and education spending. It just would be a chunk of money put into the Education Fund each year. There are no firm figures yet, but it’s not clear that the new income tax would generate more money than Vermont currently collects in income-based school taxes. If it generates less, the new plan actually would move us away from school taxes based on ability to pay.

Under the new plan, the education income tax, sales taxes, and other revenues would provide a base of education funding that is below what most districts currently spend. The balance of the money that communities need for the education of their children would come from property taxes. These property taxes would operate like the current homestead taxes: each town’s rate would be determined by the town’s per-pupil spending, and rates would rise as spending increased.

But to raise an extra dollar per pupil would be much harder under the new plan. This year, if a community wants to spend another $1,000 per pupil, it means another 10 cents on the tax rate. According to the available information about the Ways and Means plan, it would require a 22-cent increase to generate an extra $1,000 per pupil.

Initially, it appears the new plan would reduce the average property tax rate (although we don’t know yet how individual taxpayers would be affected). But over time, spending growth would fall primarily on the property tax. When the economy slows, history has shown the Legislature is unlikely to raise income or sales tax rates to pick up the slack. It will be the property tax that has to make up the difference, but increasing property taxes will be more painful than it is now. And when it becomes too painful, especially in less wealthy communities, Vermonters will stop spending what they need to support their schools and educate their children.

If the Legislature really wants to shift reliance from the property tax onto income-based school taxes, there is a much simpler and fairer solution. In fact, they could eliminate the property tax on all primary residences plus two acres of land in Vermont. All they have to do is require all Vermont residents to pay the income-based school tax that about two-thirds of resident homeowners currently pay.

Having all residents pay the locally determined income rate would simplify the funding system and make it much easier for voters to understand. It also would insure that all Vermonters contribute to educating our children on the basis of their ability to pay.

 

Posted by Jack Hoffman on January 30, 2018 at 4:41 pm

3 Responses to “House committee wants to scrap income sensitivity”

  1. Jay Nichols says:

    Hi Paul,

    I’d love to discuss this at some point. My first reaction was concern on how the proposal would work during any type of economic downturn.

  2. Gene Bergman says:

    Jack,

    Call me a dummy but I’m not getting the alternative you mention at the end of the post. Can you do a follow up post on the mechanics of that locally determined income-based school tax and how that also provides equity for individuals and equity between towns, as Brigham requires?

    Gene

  3. Sarah Lyons says:

    Gene,

    Thanks for your comment. There are no dumb questions.

    Vermont’s current funding system allows low- and moderate-income resident homeowners to pay school taxes based on property value or household income. About two-thirds of resident homeowners opt for the income-based tax. The income-based tax rate—like the homestead property tax rate—varies from town and town and is determined by education spending per pupil. I won’t go too deep in the weeds, but there is a base tax rate, which is associated with a base amount of spending per pupil. If a town spends, say, 25 percent more than the base amount per pupil, then the local tax rate will be 25 percent higher than the base rate. The current base income tax rate is 2 percent of household income, and the base amount per pupil is just under $12,000. So if education spending in your town was $15,000—25 percent higher than the base amount—your income-based school tax rate would be 2.5 percent of your household income.

    The income option applies to taxes on a primary residence and up to two acres of land. Property taxes are due on land beyond two acres.

    The equity this system provides is that towns with the same education spending per pupil have the same tax rates. And in towns with different levels of spending, the tax rates are proportional: If Town A spends 10 percent more per pupil than Town B, Town A’s tax rates will be 10 percent higher than Town B’s. The equity for individuals is that taxpayers living in towns with the same education spending per pupil have the same tax rates.

    As I said, about two-thirds of Vermont resident homeowners qualify for the income-based school tax. People in the highest income brackets pay the property tax, and for many that means the share of their income going to support education in Vermont is less than the percentage of household income being paid by families living on $70,000 or $80,000.

    We think a fairer and simpler system would be to do away with property taxes on primary residences and up to two acres of land. Just have all Vermont residents pay the local income rate based on local education spending per pupil. It would be easy for everyone to see the connection between local spending and their tax rate. It would move Vermont away from reliance on the property tax, which falls hardest of low-income families, and base our school taxes on ability to pay.

    Thanks again for you comment, and please let me know if you have further questions.

    -Jack

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