Public Assets Institute > Policy Areas > Education > There’s still a chance to help the middle class

There’s still a chance to help the middle class

The Legislature is missing an opportunity this year to undo changes to Vermont’s school tax system that have made it harder for some middle-class Vermonters, including those who are retired, to stay in their homes. They’re also missing a chance to repeal a provision that punishes certain homeowners who pay school taxes based on their income.

The large majority of resident homeowners pay most or all of their school taxes based on their income instead of the value of their home. That’s because Vermont’s school financing system recognizes that income, rather than property wealth, is a better measure of a person’s ability to pay taxes.

In 2010, in response to criticism from opponents of the school funding system, the Legislature decided that some homeowners with valuable property but modest incomes should pay higher school taxes. They also decided that people with income from investments should pay more. Lawmakers changed the law that year, and now residents must pay property tax on the value of their home above $500,000, regardless of their income. And for the purposes of calculating income-based school taxes, dividend and interest income of more than $10,000 is counted double.

Both changes have been hard on retired Vermonters on fixed incomes. Sadly, some lawmakers have suggested that people with modest incomes and expensive property should simply sell their homes and move into something cheaper so they can afford their school taxes.

First of all, some of these homeowners have seen their property values rise through no fault of their own. Do we really want a policy that says middle class residents have to move when the market pushes the value of their home past a certain point? That will only lead to the further gentrification of Vermont.

And a tax policy that forces people to move doesn’t square with other state policies that are designed to keep people at home as long as possible. Home health services, respite care, even weatherization programs are geared toward helping Vermonters stay in their homes.

The rationale for the change seemed to be that anyone who could afford to live in a house worth more than $500,000 could afford to pay more school taxes. Similarly, there appeared to be a hint of resentment behind the provision to double-count interest or dividend income, as though these people were getting away with something by paying school taxes based on their income.

But the same year the Legislature made life harder for the middle class, it reinstated preferential tax treatment for capital gains, which primarily benefited people in upper income brackets, including some who live in houses worth more than $500,000. It was not clear what public policy was being advanced by reducing taxes on capital gains. And there was no evidence to show that savings from the capital gains tax cuts would be invested in Vermont and not in a hedge fund or other high-risk financial bet that provided no benefit to the state.

The House and Senate have passed different versions of a bill to adjust Vermont’s tax laws this year. In one, the House dropped the double-counting of investment income; in the other, the Senate repealed the provision for homes valued at more than $500,000. A smart compromise would have been for each side to accept the other’s proposal and repeal both provisions that have unnecessarily hurt middle income Vermonters. Instead, the proposed deal is to continue to collect property taxes on home values greater than $500,000, regardless of the homeowner’s income. And investment income will be double-counted for those under 65 years old.

Raising school taxes on the basis of residents’ ability to pay is fair, and it’s a policy that everyone can understand. Every time we add exceptions to that basic approach—treating people differently because of their age or the value of their home—we make the tax system more complicated and less fair.

There is still time for the full House or Senate to reject the current deal and move back toward a more straight-forward income-based tax system to pay for education, while helping more middle class Vermonters stay in their homes.

Posted by Jack Hoffman on May 4, 2012 at 12:10 pm

One Response to “There’s still a chance to help the middle class”

  1. Diana Peduzzi says:

    Come on guys. How many middle-income Vermonters own homes worth more than $500,000? And if someone is reaping more than $10,000 in interest on investments, in addition to any earned income, social security or pension benefits, they probably were successful earners and savers, who planned to be able to pay their expenses during retirement. (Or, they inherited) I see many instances in which the state (“we”) are paying property taxes for people with significant wealth, including ownership of businesses and second homes (not camps, but winter residences out-of-state) Tiny tax reductions go to those lower income folks who only have the size of housing that they can afford. Between the education funding formula and the current use subsidies, it’s no wonder that it is so difficult for a family to buy a little piece of Vermont land on which to build a home.