The property tax is the problem

Recently, residents of the town of Windham wrote about how their neighbors on fixed incomes saw a nearly four-fold increase in their property tax bills after a town-wide reappraisal this year.

Concerned that big hikes would force folks out of their homes, the authors wondered why these low-income Vermonters, who according to Vermont statute should pay no more than 4.5 percent of the income for property taxes, were now facing bills as high as 16 percent of their incomes?

It’s a good question.

The answer lies buried in the technicalities of our property tax system, specifically the one-year lag in how the Vermont Tax Department calculates property tax credits that the authors referred to in their commentary. The income-based tax credit you get this year is based on last year’s property taxes. So if your property taxes increase dramatically as they did in Windham the credit will not be sufficient to protect you from a big jump in your bill.

Unfortunately, the lag is just one part of the problem that makes the property tax system so unfair and incomprehensible. Act 73—the new education transformation bill enacted by the Legislature this year—will eliminate Vermonters’ option to pay their school taxes based on income, so more Vermonters will find themselves in situations like those in Windham.

Act 73 creates a new homestead exemption. Vermonters with up to $115,000 in household income will pay based on a percentage of their home’s value (up to $425,000). As income goes up, that percentage goes up; those with household income of $115,000 or more pay the full property tax bill on their home. And because the bills are tied to property value, the next reappraisal would very likely result in another big tax spike.

The problem is the property tax. It is based on the value of a primary home which is not a good indicator of a Vermonter’s ability to pay. Property values often rise faster than income, and besides, we pay our taxes out of our income, not by selling off a portion of our home. And for most Vermonters, the value of their home is greater than their net worth because they have mortgages and other debt.

There is an alternative system that is much simpler and that better reflects the way Vermonters live. An income-based education tax would eliminate the spikes in education taxes caused by reappraisals and align education tax bills with Vermonters’ ability to pay. That’s why most Vermonters support paying school taxes based on income, according to polling done over the past three decades. Public Assets Institute has analyzed how an income-based system would work and has published several reports that explain it in understandable terms.

But with Act 73, the Legislature and governor are moving in the opposite direction by basing school taxes less on income and more on a home’s property value. More reliance on the property tax makes the tax system more complex and less fair and makes Vermonters more vulnerable to changing property values as upper income people continue to bid up Vermont property for a second home, for a short-term rental property, or for a primary residence.