In the past few years, Vermont has gotten a taste of what it would be like to have a state that worked for everyone who lives here. Thanks to extraordinary federal relief in the wake of the COVID-19 pandemic, the state received billions of dollars that allowed policy makers, at least for a time, to acknowledge and address gaps that had been lingering for decades: health care, child care, livable incomes, and clean water to name a few. Read more

Twenty years ago, Vermont lost a valuable tool that let the state easily adjust state revenues to respond to fluctuating demands for public services. It’s time to find a replacement.

In 2002, the state ended the simple, straightforward system for assessing personal income taxes that had been in place for more than 30 years. Vermont stopped using the “piggyback,” whereby the amount of income tax a person owed to Montpelier was calculated from the amount owed to Uncle Sam. Typically, the rate was about 25 percent of a person’s federal tax liability. But it varied, which was the beauty of that system.

Vermont started using the piggyback in 1968. As a result, it had one of most progressive personal income taxes in the country because the federal income tax was much more progressive than typical state income taxes. Under the federal system, income is taxed in tiers, and income in the higher tiers is taxed at higher rates than the income in the lower tiers. Such systems are fairer because they better reflect people’s ability to pay. Thanks to the piggyback, Vermont’s income tax system mirrored the progressivity of the federal system.

We saw first-hand how the expanded 2021 federal child tax credit (CTC) reduced child poverty in the country. The additional income to families from refundable state credits like CTCs have also been shown to improve child development and educational outcomes and boost local economies. Seeking these benefits for the state, the Vermont House initiated a state CTC earlier this legislative session for kids six and under. But the state Senate has cut back the House bill and would end the credit in 2025.

In order to lower the price tag, the Senate’s version of the CTC, passed last week, would help fewer children and families than the House plan. The Senate reduced the amount of the credit, disqualified six-year-olds, and lowered the income threshold for qualifying families, cutting nearly 10,000 kids from the benefits of the credit.

The Vermont House, Senate, and governor’s office are thrashing out their differences over state appropriations for the coming fiscal year that will total roughly $8.3 billion. We’re all aware that a massive amount of federal aid has poured into the state in response to the COVID-19 pandemic. But it’s worth pausing for a moment to grasp the magnitude and the potential of all of that aid.

In the five years prior to COVID, Vermont’s annual spending averaged about $6 billion a year. Since COVID, the budgets have been: $6.3 billion (FY2020), $7.2 billion (FY2021), $7.9 billion (FY2022), and $8.3 billion (FY2023, pending).

Much of the early COVID money—and not all of it flowed through the state’s coffers—was used to protect people from the virus and treat its victims, but it also was intended to protect states from economic collapse. States faced extraordinary and unexpected costs, and fortunately the federal government stepped up to foot the bill.

Then came the American Rescue Plan, which extended and expanded some of the earlier programs, but also contained some elements of a traditional economic stimulus plan. As part of that plan, Vermont received $1.05 billion, essentially, to spend as it saw fit.

Does Vermont want to help families with children living in poverty?

So far we’ve gotten a mixed message from policymakers on this question.

But there is still time for the Legislature to act decisively.

Gov. Phil Scott wants to use a $96 million surplus in the Education Fund for a little tax relief for homeowners and to expand job training. Another scenario laid out by the tax commissioner in December was, in essence, to just lower everybody’s school taxes for one year. These aren’t the only options, nor the best ones, which is why the Legislature needs to create an Education Fund Advisory Committee to oversee the long-term stability of the education finance system.

Governor Scott proposed last week that half of the surplus—about $48 million—be returned to resident homeowners in the form of a rebate. He recommended a flat amount of $250-$275 to each household. If you were going to issue rebates, that would be a better way to do it than, say, a small percentage reduction in everyone’s tax bills. The percentage approach favors those with higher tax bills, i.e. those with more valuable property or higher incomes. A fixed rebate is better for lower-income households, but better still would be to set a maximum income threshold and to include something for renters.

The Legislature is actually looking at two big changes to education funding this session. There are misconceptions about each, but both, if done right, can strengthen the school funding system and make it fairer.

The change that has generated the most attention and discussion is a plan to provide more money to students who require additional resources, such as English-language learners, kids from poor families, and those attending small, rural schools. The money isn’t really the sticking point, although there are questions about the latest cost estimate for teaching English as a second language. The main point of disagreement is how to distribute additional resources to the districts that need them. One approach, student weighting, is more complicated for voters and tends to favor high-spending school districts. The other option, cost equity aid, would provide fixed payments per pupil for various categories of students, which would be more transparent and easier for voters to follow, and it wouldn’t exacerbate disparities in per-pupil spending among districts.

The other important change being considered doesn’t involve the distribution of education funds, but how those funds are generated.

Last week the Vermont House passed a child tax credit bill. If the legislation becomes law, it would go a long way toward helping over 34,000 families with children, especially the lowest income households, meet their basic needs.

The bill, which creates a $1,200 refundable credit beginning this year for kids six and under, is modeled on the expanded 2021 federal child tax credit, which was refundable and paid in monthly installments. A refundable credit ensures that families with no or low earnings get the full credit.

Twenty-five years ago the Vermont Supreme Court declared the state’s education funding system to be unconstitutional. More than a third of the state’s residents are too young to remember what was happening back then. And more than half of Vermonters now over 25 moved here from somewhere else. It’s safe to say, for many Vermonters, the old Foundation Plan and the ruling that ended it are distant or non-existent memories.

A brief retrospective is in order.

Gov. Phil Scott urged legislators Tuesday to make rebuilding Vermont’s labor force a top priority this session. The labor force was down by 24,000 since February 2020, the governor said before laying out a laundry list of investments—from both federal and state funds—to boost training, incentives, and job opportunities to attract more workers.

Vermont’s labor force had been declining before the pandemic, so the governor is right to focus on the problem early in his Budget Address. But the solution to the current labor shortage is not all about workers. The governor could have reminded employers that they have a role, too.