Property Tax Increase – Unnecessary, Unwise, Unfair

Apr. 29, 2009
By PAUL CILLO

Desperate to fill an estimated $250 million hole in the state’s general fund for next year, the Legislature is on the verge of accepting the governor’s plan to increase property taxes by $60 million or more.

Much of this revenue is to cover obligations to retired teachers. That money historically has come from the general fund, which raises revenues from a variety of sources, the biggest being the income tax. Under the new plan, teachers’ retirement and some other general fund obligations would be paid from the education fund.

No matter how the administration tries to cloud the issue by blaming local schools boards for high property taxes, taking money from the education fund to pay for general fund obligations increases property taxes.

Governor Douglas says he wants to reduce property taxes. In his Inaugural Address in January, he told Vermonters:  “Property taxpayers cannot wait another year for relief.”  But what he’s proposing will shift more costs to the property tax.

Vermont business leaders, at a press conference last week, called on the Legislature to resist raising taxes that would further burden struggling small businesses during the recession. But the planned new tax increase — on business property, primary residences, farms, and other property — does just that. The plan would shift the burden from the wealthy onto low- and moderate-income Vermonters and small business owners who can least afford it during the recession.

The good news here is that Montpelier now appears to understand it can’t cut its way out of this budget hole; it needs to raise revenues. The bad news is the property tax is the wrong tax to raise, for three reasons:

1. The property tax is over-used.

Property taxes raised more than $1.2 billion in 2008 for municipal services and schools-more than twice the state’s income tax revenue and nearly four times the sales tax’s. Unlike other state taxes, property tax rates are adjusted each year to raise the amount of money needed to pay for local services. While general fund tax rates have been relatively stable, the property tax has increased regularly over the past decade to pay for spending decisions made by town voters.  It would make more sense to raise taxes that haven’t seen recent increases than to turn to the one that has.

2. The property tax is still regressive.

Even considering income sensitivity, the provision that allows many Vermonters to pay their school taxes based on income, the wealthiest Vermonters pay a lower percentage of their income for property taxes than others do.  That is the definition of a regressive tax.

Shifting more costs from the general fund onto the property tax means shifting costs from the wealthy to low- and moderate-income Vermonters.

3. There are other options.

The Legislature has better ways to raise the revenue to balance the budget.  First, eliminate the capital gains loophole. Forty percent of capital gains, which accrue mostly to those with the most money, are not taxed in Vermont. The governor supports closing the loophole as a matter of fairness — and the change would raise $35 million this year.

Second, increase the income tax rates for those with income of $200,000 or more.  This is the group that received a huge federal tax cut during the Bush years; these Vermonters saved $152 million in federal tax in 2006 alone.  The Legislature could take back some of that tax cut to fill the hole and maintain essential services for Vermonters.

These two options are smarter than using the property tax because they don’t hit those who are struggling in this recession. Those with capital gains and incomes of $200,000 or more are those who are still benefiting the most from the current economy despite the downturn.

Increasing property taxes now is unnecessary, unwise, and unfair. The governor should drop this plan, and if he doesn’t, the Legislature should stop it.

Paul Cillo is President of the Public Assets Institute, a nonprofit, Montpelier-based think tank that analyzes state tax and budget issues (www.publicassets.org).