Public Assets Institute > Policy Areas > Education > Vermont could avoid the Jeremy Dodge problem in the future

Vermont could avoid the Jeremy Dodge problem in the future

The controversial land deal between Governor Shumlin and his East Montpelier neighbor Jeremy Dodge raises a fundamental tax policy question: Why is Dodge, or any Vermont homeowner, being asked to pay property taxes on his home to fund schools?

The short answer: Because the property tax has always funded local public services. Property taxes go back to the 18th century in Vermont, even before Vermont joined the Union in 1791. The problem: That system no longer works.

For years property taxes provided a stable revenue base for schools. But they started to create instability for Vermont taxpayers in the 1960s, as the state began to market tourism. Higher-income people from out of state were coming to Vermont, and some wanted to stay. These people were willing to pay more for a piece of land than many Vermonters could afford. Land and home prices continued to climb, and with them property taxes, making homes less and less affordable for the people who already live and work here.

That’s why in the 1970s the state initiated the property tax rebate program. The idea was to allow low-income Vermonters, especially seniors, to stay in their homes by reducing their property taxes. The program allowed these Vermonters to apply for and get a refund of some of the municipal and school property taxes they paid on their home if those taxes exceeded a certain percentage of their income.

Act 60, passed in 1997 and later amended by Act 68 in 2003, fundamentally changed the way the state funded public education in part by extending the option to pay school taxes based on income to middle income households. Since two-thirds of local property taxes were for schools, this legislation allowed most of the school taxes on primary residences in the state to be paid based on income.

The system accomplishes its goal for those who participate. But it is hardly user friendly. Essentially a property-based tax system that can be adjusted to function like an income-based system, it assumes you owe the property taxes on your home unless you take an action to let the state know you want to pay based on your income. While the Legislature has taken steps to make that process easier for taxpayers, it is still complex.

That’s the problem Dodge ran into. According to press reports and confirmed by our calculations, the annual property taxes on his homestead were about $4,500. But Dodge’s annual income, according to news stories, was only $10,000. With that income, his annual income-adjusted property tax liability should have been about $1250. Apparently he had not filled out the paperwork to be eligible, however. With $18,000 in unpaid back taxes, he was facing tax sale, and the governor stepped in and offered to buy his property. If the system were simpler, Dodge might never have been in that situation.

The Legislature would do Vermonters a big favor by eliminating the school property tax on residences and have everyone pay based on income. With this approach, individuals would no longer need to enroll to be eligible, school taxes would not put anyone at risk of losing a home, and we could get rid of a lot of needless confusion.

Things have changed in Vermont over the past two centuries. It’s way past time the tax system caught up.

Posted by Paul Cillo on June 19, 2013 at 2:59 pm

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