Kicking the tax can

Some school districts are experiencing sticker shock heading into Town Meeting. Their projected tax increases for the next school year seem out of line with their proposed spending increases. A few different things can cause this, but one big factor was the Legislature’s decision last year to use one-time funds to lower tax rates for the current school year.

School tax rates are determined by per-pupil spending. But from year to year, spending and tax rates don’t necessarily track one another. For one thing, property taxes are the shock-absorbers for the funding system. Tax rates for other sources of education revenue, such as the sales tax or rooms and meals tax, are fixed. So if they fall short in any given year, property taxes have to make up the difference and rates go up accordingly.

Property values also affect school property tax rates. If values go up, school taxes will go up without a change in the tax rate.

In recent years, we’ve also been experiencing the effect of using so-called one-time funds to take the place of property taxes in the Education Fund. This has kept property taxes and property tax rates lower than they would have been. For fiscal 2026, the Legislature used $78 million from the General Fund and another $32 million in reserves to buy down the tax rates.

While that provided immediate relief for homeowners, it only pushed the shortfall into the next year. The projected tax increases school districts now face are needed to cover fiscal 2027 spending increases, which, anecdotally, appear to be modest, and to fill the gap created by the use of one-time funds this year. Already the governor and the Legislature are talking about another infusion of one-time money to hold down school taxes for next year.

One consequence of these tax rates buy-downs is that each December the tax commissioner issues a dire warning about a looming property tax increase. The governor, in turn, calls for school funding reform to reduce education spending.

In December 2024, the commissioner warned, based on preliminary school budget projections, that the average property tax bill would rise 14 percent for fiscal 2026. Some school boards presumably responded to the pressure. But after the rate buy-down, the average tax bill increase was only 1.1 percent, according to the Legislature’s Joint Fiscal Office. In the December 2025 letter from the commissioner, the warning was that property taxes would rise 12 percent in fiscal 2027. But this isn’t another double-digit increase in school taxes. It’s this year’s increase being pushed off to next year.

If Montpelier does follow through this session with another buy-down and forestalls next year’s projected tax increase, we can expect the December 2026 letter from the commissioner to forecast another big tax hike.

That $78 million transfer from the General Fund to the Education Fund did lower property taxes this year. The governor has talked about a similar transfer for next year. These payments are viewed as one-time bailouts. They also could be seen as an overdue rebalancing of the education funding system.

In the early 2000s, when we adopted the current system, 60 percent of the revenue in the Education Fund came from property taxes, and 40 percent came from General Fund sources—dedicated taxes or direct transfers. The ratio has fluctuated, but generally shifted more of the burden onto property taxes. This year’s buy-down lowered the property tax share to 64 percent from 67 percent. But it will jump back up to 68 percent next year unless the General Fund picks up more of the cost.

Maintaining that 60-40 split would provide real long-term property tax relief by ensuring any spending increases are fairly distributed across the revenue sources.

In the meantime, if Montpelier does decide to do another round of buy-downs, at least it should target the relief to homeowners who need it. High-income Vermonters already pay a smaller share of their income to support education than their less well-off neighbors. Increasing fairness is an important part of tax relief.