School taxes may be more complex, less fair

Mar. 14, 2010, Times Argus
By PAUL CILLO

Montpelier’s goal this year should be to make the education tax system simpler and fairer for all Vermonters. Instead, in the haste to cut General Fund spending, Gov. James Douglas would make it more complicated and less fair – increasing taxes on middle-income Vermonters and lowering them on those with higher incomes. Sound crazy? It is.

Most Vermonters agree that the fairest tax is one that’s based on the taxpayer’s ability to pay. That way, a family’s school tax obligation goes up or down as their income goes up or down.

Property taxes don’t work that way. They’re based on the value of the house. But when Vermonters lose jobs and income — as many have during this recession — school taxes on this fixed asset can become an unsustainable burden.

That’s why the education finance law introduced “income sensitivity” in 1997. It allows most Vermont homeowners to pay their school taxes based on the amount of their household income rather than on the value of their house. This was not intended as a program for low-income Vermonters, but as a way to make the system fair for all working Vermonters — and consistent with the Vermont Supreme Court’s 1997 Brigham decision.

Here’s how the system works. Each town school district votes in the spring on the amount it wants to spend per pupil in its schools. Based on the town’s spending decision, the state sets the tax rates on both the fair market value of homes and the household income of residents in that town. Higher spending per pupil results in higher rates on both homes and household income. The same spending per pupil in any two Vermont towns results in the same tax rates in those two towns.

Even with the current income sensitivity system in place, however, a 2009 Vermont Tax Department analysis shows that middle-income Vermont households were paying nearly six times the percent of income for school taxes that their wealthier neighbors pay. Middle-income households pay 2.9 percent, on average, while those with the highest incomes pay just one-half of one percent.

Nevertheless, as part of his fiscal 2011 budget, the governor has proposed lowering school tax rates for households with incomes above $90,000 and raising them for those earning between $60,000 and $90,000. A family of four with two workers each making Vermont’s average annual wage of $38,000 would fall right in the middle of this tax-increase category.

Douglas also wants to require more Vermonters to pay school taxes on both their property and income. Currently, Vermonters with household incomes above $90,000 who pay based on income must also pay school property taxes on their house value above $200,000. Those below $90,000 can pay based on income only. Under the governor’s plan this latter group who pay based on income would have to pay property tax on their house value above $400,000, too. It appears that the House is moving to adopt at least this part of the governor’s plan.

Both of these changes, however, increase taxes on middle-income Vermonters in order to provide a tax break for those with higher incomes. The Joint Fiscal Office estimates that about 30,000 Vermonters would see higher taxes from these changes.

One of the governor’s key complaints about Act 68, which he signed in 2003, is that it’s too complicated; no one can explain it, he says. But the system he proposes is even harder to understand. Instead of one property rate and one income-based rate for each town, his system would have a three-tiered income-based tax rate as well as the requirement that those with incomes less than $90,000 also pay property taxes on their homes’ value above $400,000.

Under this system, it would be virtually impossible for voters to determine what they owe at the time they vote on their school budget. And if school boards cannot explain the tax consequences of their spending decisions to voters, local control becomes meaningless.

The Legislature is discussing these proposals; the House is seriously considering adopting parts. Montpelier is taking the system in the wrong direction. What would make the system less complicated and more fair would be to simply have all Vermont residents pay school taxes based on their ability to pay.

Paul Cillo is president of the Public Assets Institute (publicassets.org), a non-partisan, nonprofit fiscal policy think tank based in Montpelier.