Public Assets Institute > Policy Areas > Education > School taxes can be simpler and fairer

School taxes can be simpler and fairer

Simplicity, equity, and let’s-just-call-it-what-it-is.

Those were among the key reasons the Vermont Tax Structure Commission recommended recently that the state abolish the homestead property tax and move to an income-based school tax for all resident homeowners.

We support the Commission’s recommendation. We also urge everyone, but especially policymakers, to read the final report. It addresses many persistent questions that have swirled around education funding for almost 25 years.

The Commission’s first recommendation around education funding is to abandon the hybrid system of homestead taxes for homeowners. Low- and moderate-income homeowners pay school taxes that are adjusted to reflect their income—that is, their ability to pay. Higher income homeowners pay a traditional property tax, which, for many of them, is less than the income-adjusted tax would be. 

The Commission said the current system has resulted in “bewildering complexity.” It called for using a single tax base—which in theory could be either property or income—and the commission said after thoughtful analysis: “to maintain equity, that single tax base should be income.”

Under the current system, along with the school property tax rate, an income tax rate is calculated for each town based on its per-pupil spending. Towns with the same per-pupil spending have the same tax rates, and if Town A spends more or less than Town B, its income tax rate is proportionally higher or lower than Town B’s rate.

In theory, it sounds simple. In reality, it requires hard-to-follow income adjustments to homeowners’ property taxes. If we moved to a system where all residents paid the income-based school tax, everyone would know by Town Meeting Day the income rate they’d be required to pay if they approved the budget proposed for the coming school year. Ideally, we’d have a system where school taxes could be withheld from people’s paychecks, just as income taxes are now, and school tax bills could be settled each spring during tax season.

While the Tax Structure Commission made a good case for an income-based school tax, it also challenged some of the conventional wisdom surrounding the property tax—namely that property value is a good measure of people’s wealth and their ability to pay. It is not.

The Commission’s full analysis of “Income, Assets, and Ability to Pay” is available here. Its conclusion is that for families with few assets, the value of their home overstates their net worth and ability to pay because it doesn’t take into account mortgages and other household debts. And for families with high net worth, the value of the primary residence represents a small fraction of total assets and therefore understates the ability to pay.

Finally, whether it’s the current hybrid system or other ideas for school finance that proved unworkable, the report notes the contortions Vermont has put itself through to devise property tax systems that behave like an income tax. We have tried adjustments, caps, rebates, and prebates—all of which, one way or another, were tied to people’s incomes because policymakers have recognized for over half a century that ability to pay goes hand in hand with fairness.

If we want a tax that behaves like an income tax, let’s just have an income-based school tax. It will be simpler, fairer, and we can just call it what it is.

Posted by Jack Hoffman on April 1, 2021 at 12:07 pm

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