Public Assets Institute > Policy Areas > Vermont Taxes > Cost shift is not cost control

Cost shift is not cost control

A bill being headlined as an effort to control school costs includes provisions that simply shift costs from upper-income Vermonters and second home owners onto low- and moderate-income Vermonters. The Legislature should re-think these provisions.

H.538 contains a number of provisions that would affect school spending and taxes in fiscal 2015. While some provisions of the bill may put additional pressure on school districts to cut costs, three provisions will not.

Sec 8: Reduces the renter rebate for low income Vermonters

This provision would reduce the amount of rent assumed to be property taxes. The problem is that the Legislature has no basis for making this change. It would be an arbitrary cut shouldered by low-income renters.

Renters are treated the same as homeowners with regard to paying property taxes based on their ability to pay. Renters who qualify are rebated a portion of their rent that covers property taxes. It’s a good idea. The problem comes in how to determine the portion of rent that is property taxes.

In the past, landlords were required to report property taxes to their tenants, but that was scrapped as too cumbersome. Instead, the state now simply assumes 21 percent of rent is property tax.

H.538 would declare 19 percent of rent to be property tax thus reducing the rebate amount. If the Legislature believes the percentage is too high, it should put together a group to develop a formula for calculating the percentage every few years rather than arbitrarily changing the number. There’s no hurry; the group could present its recommendation next January.

Changing the percentage now won’t reduce education costs, only shift them to low income renters.

Sec 9 & 10: Allows homeowners with incomes above $104,000 to pay school taxes based on their incomes

It’s a good idea to extend income sensitivity up the income scale to households with income up to $133,000. That’s what Sec. 9 does by increasing the home value subject to the income adjustment.

The problem is the bill would pay for expanding income sensitivity by raising taxes on those with incomes between $47,000 and $100,000. It does this in Sec. 10 by increasing the minimum income-based tax rate from 1.8 percent to 1.9 percent. It would be better to get the money to expand income sensitivity from those in the upper income brackets.

Even with income sensitivity, according to a Tax Department study, those with incomes under $100,000 are paying on average about 2.7 percent of their income for homestead school taxes while those making $1 million or more are paying about .5 percent.

No cost reduction here either; only a cost shift from those with incomes above $100,000 to those below who are already paying a higher percentage of their incomes in school taxes than those at the top.

Sec. 11: Reduces the maximum property tax adjustment

Property taxes are regressive: lower income taxpayers pay a higher percentage of their income in property taxes. Property tax adjustments (e.g., income sensitivity, homeowner rebate, renter rebate, etc.) are in place to make the system more fair. The state has been moving toward payment of school taxes based on income since the 1970s.

People who choose to pay based on income are now credited the difference between their school property tax bill and their school tax based on income. By lowering the maximum credit amount, from $8,000 to $6,000, the Legislature is pushing up the percentage of income that some middle-income Vermonters pay for school taxes. As noted earlier, these are the people who are already paying a much higher percentage of their income in school taxes than those at the top. Another arbitrary move; another bad idea that undermines the intent of the law.

Any school cost savings here? Nope. Only more cost shifting from upper to lower income Vermonters.

None of these provisions will lower the costs of operating Vermont schools. All of them will bring more money into the Education Fund by increasing taxes paid by low and moderate income Vermonters. The beneficiaries of these policies: upper income Vermonters and second homeowners who will pay lower property taxes than they otherwise would have.

Posted by Paul Cillo on April 25, 2013 at 1:02 pm

One Response to “Cost shift is not cost control”


    Peter Shumlin needs to stop cost shifting and raise taxes on the wealthy by 1 billion. No more cuts.