Public Assets Institute > Policy Areas > Education > All taxes are ‘income taxes’

All taxes are ‘income taxes’

In the wake of the defeat of 34 school budgets on Town Meeting Day, the Legislature has been reexamining how the state collects revenue for public education. One change lawmakers are considering is to have more residents pay school taxes based on income rather than the value of their primary residence.

This is a good idea, because it’s the fairest system.

Vermont residents will receive about $29 billion this year in total personal income. That’s not all ready cash—it includes pension contributions, for example. But it’s out of this $29 billion that Vermonters pay their taxes for schools, roads, police protection, the courts, municipal services, public health and welfare, and other state services. School taxes from Vermont resident homeowners total $420 million for this school year.

Currently, about two-thirds of Vermont homeowners pay their school tax bill as a percentage of income rather than as a property tax on their primary residence. The rest, mostly people with higher incomes, pay based on property, which for many of them is less than the income-based school tax.

But whichever way the taxpayer does it—income or property—they all have one thing in common: they are paying the tax out of income, like any other household expense. Certainly for individual homeowners, the property tax is not paid out of a separate revenue stream.

The question for lawmakers, then, is not whether the tax should be a property tax or an income tax. The question should be: What is the fairest way to calculate individuals’ school taxes?

Two hundred years ago, property was a reasonable yardstick for measuring what people could and ought to pay to support public services like public education. But in the early 1970s, Vermont realized that rising property values were forcing older residents on fixed incomes out of their homes. The state instituted the Homeowners Rebate Program, which recognized that income was a better and fairer measure of a person’s ability to pay taxes. For the majority of Vermont homeowners with incomes below about $110,000 a year, Vermont’s current education funding system incorporates this principle of ability to pay.

Increasing the number of Vermonters who may pay based on income would be a move in the right direction. In the 21st century, income is the best measure of ability to pay. And ability to pay is the fairest way to determine Vermonters’ taxes.

Posted by Sarah Lyons on March 20, 2014 at 3:16 pm

Comments are closed.