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10 April 2014

It has taken the Legislature three weeks to complete ‘cross over’ – that period when the bills which have made it through the committee process in the House and the Senate must pass from one body to the other in order to be considered in time to be signed into law by the end of the 2014 session. The House has passed many bills in the last few weeks, including the FY15 Budget, the Revenue and Transportation bills, the Pay Act, Commerce, Human Service, Judiciary and Education bills, all of which now need the Senate’s consideration.

The Education Property Tax bill (H.889) was the last to pass. We were able to reduce the Governor’s proposed tax increases as a result of school budgets coming in at 3% growth rather than the anticipated 3.8%. The bill sets the homestead tax rate at 98 cents (3 cents lower than the $1.01 originally proposed), the non-residential rate at $1.515, and the applicable percentage for income sensitivity at 1.9% of household income. The base education amount is set at $9,382 per pupil. The tax rates we’ve just passed on the House Floor pay the bill for the education budgets voted by Vermonters at Town Meeting. The challenge we still face is how to better align our increasing education costs with a declining public school population.

We were able to reduce the tax rates by adjusting various aspects of current law. Here are some details of the choices we made. The bill:
• Eliminates small school grants beginning in 2019 except for small schools which are geographically challenged. This gives these schools 3 years to plan. Beginning in 2019 the grants will be phased out in thirds through 2021.
• It creates an anchor that ties excess spending increases to inflation from fiscal year 2014 to the present, as opposed to current law which ties the increase to the previous year’s spending. If a district spends above its allowable increase, the additional spending counts twice for the purpose of calculating the district’s tax rate.
• Reduces the percentage of rent that counts as “allocable rent” from 21 percent to 19 percent. There is also a study requiring the Vermont Housing Council to propose programs that provide benefits to renters in Vermont in lieu of the renters’ rebate program.
• Extends the slope of middle-income taxpayers who benefit from income sensitivity by raising the house site value used to calculate income sensitivity adjustments for people over $90,000 in household income from $200,000 to $250,000. This would provide homeowners with some level of income sensitivity up to approximately $120,000 of household income.
• Lowers the total income sensitivity adjustment possible from $8,000 to $6,000 for homeowners under the age of 65. There is no change in the rebate cap for those 65 and older.
• Invests any fiscal surplus equally into thirds to fund the Education Fund, the Rainy Day Fund, and retired teachers’ health care.
• Expresses the intent of the Legislature to transition to an education financing system that relies on an education income tax by 2017.
• Requires the Agency of Education to submit a report to the Legislature on the history, current practices, and impacts of Vermont’s tuition system.

We believe these proposals align with our overall goals to rein in education spending, address ability to pay, and incentivize economies of scale.

I’d like to address the articulated intent to have all resident tax payers pay their statewide education tax by their ability to pay, by income. Currently 2/3’s of Vermonters are income sensitized. Section 23 of H.889 puts in statute the intent of the House Ways and Means Committee to simplify our education financing system and to shift away from over-reliance on the homestead property tax. The concept we will look at includes creation of a significantly lower and flat property tax rate for homesteads, complemented by a progressive education income tax.

Last year, we passed legislation that will give our Joint Fiscal Office access to Federal AGI data through the Vermont Department of Taxes. This change will give Ways and Means the ability to better model different rate scenarios under a new system, so that we can better determine appropriate rates moving forward. There will be winners and losers, as under any new system, and it will be important to have a clear understanding of the real-world ramifications.

Adopting a progressive income tax will eliminate the need for our income sensitivity system and will eliminate the “cliff”, the big difference faced by taxpayers who just miss qualifying for the current sensitivity reductions. Setting a lower and flat property tax rate will eliminate the need for our property tax credit system, the homestead declaration and the household income calculations. As currently envisioned, the statewide education income tax would be administered by the Department of Taxes.

Although the proposal doesn’t directly affect education spending, the hope is that a simpler system will be easier for everyone to understand and will lead to a better informed public. This plan is not set in stone, and I expect there will be many deliberations to be had. Any and all ideas are welcome as we move ahead.

I appreciate hearing from you. I can be reached by email: aclarkson@leg.state.vt.us or by phone at the Statehouse (Tues-Fri) 828-2228 or at home (Sat-Mon) 457-4627. To get more information on the Vermont Legislature, and the bills which have been proposed and passed, visit the legislative website: www.leg.state.vt.us