House Wants Input on School Income Tax

Sunday, February 18, 2018

Montpelier — Changes to the education tax formula have been touted by the House Democratic leadership as a way to fix a shortfall in the education fund without raising property taxes.

House Speaker Mitzi Johnson, D-South Hero, recently began a public campaign to back a proposal that promises to slash homestead property taxes in half and introduce a new school income tax.

The House Ways and Means Committee will hold a public hearing on Wednesday night to hear what Vermonters think of the plan.

The homestead property tax rate would be reduced by 48 percent to an average of 82 cents per $100 of assessed value, from the current rate of $1.594, and the rebate system would be eliminated. The non-residential tax formula will not change and will be set at $1.591 this year. In addition, money from the state budget — $323 million — no longer would be transferred to the education fund.

To make up the difference, the House proposes to assess a tiered school income tax that would be applied to wage earners, business owners and people with investment income. Renters would also pay the tax and would be eligible for rebates.

The first $47,000 of household income is exempt under the plan. Incomes of $47,001 to $125,000 will have a tax rate of 1.2 percent. Incomes above the $125,000 threshold will pay a rate of 1.65 on that additional income, up to $4 million. People who have incomes under $47,000 and own homes valued at more than $400,000 also would pay into the system.

Rep. Janet Ancel, D-Calais, chairwoman of the House Ways and Means Committee, said nothing in the plan has been decided yet. The House is looking to finalize the proposal after it hears comments from the public.

“This does not represent formal action on the part of the committee,” Ancel said.

Under the proposal, the total amount of homestead property taxes collected by the state, which this year supports schools to the tune of $634.1 million, would be cut to $234.9 million, according to projections from the Joint Fiscal Office.

The gap will be made up largely through a new education income tax, which is projected to generate $172 million. In addition, 100 percent of sales and use tax revenues (about $400 million) would go to schools.

Twenty-five percent of state revenues from meals and room taxes would provide $44.6 million in funding.

The House Democrats’ proposal is based on fiscal year 2019 projected levels, which includes an estimated 5.8 cent property tax increase to cover a $50 million deficit and a projected 1 percent growth rate in school spending. The total amount of education spending for next year is estimated at $1.63 billion for next year.

The Scott administration has said the plan is a non-starter because the new formula merely moves money around. Republican Gov. Phil Scott has said lawmakers need to reduce overall spending on schools to cover the deficit and growth in school spending.

Savings on one tax would be canceled out by a new tax on income that would be assessed on all Vermonters, according to Adam Greshin, the commissioner of the Vermont Department of Finance and Management.

Scott has said he is open to changing the funding formula, but he doesn’t want to increase the amount of total spending on education in fiscal year 2019.

The administration has urged lawmakers to implement a cost containment plan and gave lawmakers a list of possible areas to reduce spending in January that total $75 million. Legislators have not said which, if any, of the proposals they would accept.

House Democrats argue the new formula has a built-in cost containment mechanism that directly impacts voters who are making decisions at the polls.

Under the current formula, about 70 percent of Vermont homestead property taxpayers have been insulated from the impact of tax increases because of a generous rebate program that is based on income. The income sensitivity program goes away in the House plan.

On average, the tax rate for towns would be 82 cents, which includes school spending a set threshold for per-pupil spending.

That threshold is $12,253 for per-pupil spending next year. All Vermont school districts are believed to be spending above that level. The first $12,253 costs 0.25 cents total toward a statewide base tax rate for all districts.

For every $56 spent above the base per-pupil threshold, school districts must pay an additional penny in property taxes.

If a school district spends $17,253 per pupil, or $5,000 above the threshold, that amount is subject to a yield rate of $5,600 per pupil. The additional spending of $5,000 is divided by $5,600 yielding a tax rate of 89 cents for the local district. The total tax rate for the district is $1.14, which includes the statewide base tax rate of 25 cents.

Republican Rep. Scott Beck, R-St. Johnsbury, a longtime critic of the current funding system, backs the mechanism.

“This is the core cost containment in this proposal,” Beck said. “It’s going to reconnect votes to their spending decisions.”