A case for tax reform in Vermont

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As the legislative session draws to a close, the question of which costs should be paid within the Education Fund (EF) and what property tax rates will be is still under discussion. All factions in Montpelier profess to defend education property taxes from further increases. But when it is convenient the same groups seem to do their best to shift added costs onto the education property tax, which tends to drive up property taxes. There have been proposals to shift higher education costs, child care costs, and teachers' retirement costs from the General Fund (GF) to the EF.

Now why is this when controlling increases of property taxes is of importance to most Vermonters? I think it is because there is an asymmetry between how property taxes are set and how GF tax revenue is raised that makes the EF a tempting place to put costs. I also think that certain inequities and inefficiencies in the income tax contribute to the problem. I think that we need to keep non-education costs out of the EF, and we need fundamental tax reform of both the education property tax and the income tax.

To raise revenue for state operations the income tax and sales tax rates are set and not often changed. Therefore revenue for the GF depends on the amount of income or sales, and spending is constrained by that varying level of revenue, unless rates are raised. This can make it difficult to finance state spending whenever the growth of desired spending is faster than revenue.

In the EF, total spending is set first, and then base education property tax rates are set to raise enough to cover that. This is because education spending has to be relatively constant to ensure ongoing capacity to educate Vermont's children.

So if a program cost can be transferred into the EF, it is easier to get it automatically funded every year when property tax rates are set. Before Act 60, before there was a state EF, the costs of the Current Use (CU) and Income Sensitivity (IS) programs were funded in the GF. Current use supports ownership of property that is productive for forestry or agriculture by allowing property tax payment based on property income, with the difference made up by education property taxpayers as a whole. Income Sensitivity supports homeownership by allowing some homeowners to pay based on their income as well as the value of their property, and the difference is made up again through higher property tax rates overall. Since Act 60 the costs of both CU and IS have been shifted into the EF even though they are not education.

This creates a vicious cycle of higher costs and higher property tax rates and then even higher costs within the EF. Both of these programs provide support for certain property owners by covering part of their property taxes. The higher that property taxes are, the higher the costs of such support payments. Both of these programs have important policy goals, but they are not education. Together these programs cost around $210 million, so that if they were removed from the EF base property tax rates could drop by 21 cents.

I have a proposal for tax reform of both the property tax and the income tax that would shift the responsibility for paying for CU back to the GF where it started, and shift the responsibility for providing support for homeownership onto the income tax system. I would do this by replacing federal deductions and exemptions that have been passed through with a standard credit for all Vermonters and with a housing credit for middle and low income taxpayers to replace IS.

Once CU and IS are out of the EF property tax rates will come down so much it will cost less to meet their policy goals. I would put in place a cap on the rate of growth of EF spending, to limit future growth of property taxes.

The result would be lower taxes and lower spending overall. The income tax system would be more equitable. Some Vermonters would likely pay more in income taxes due to the elimination of itemized deductions, but they would likely pay less in property taxes, so it can balance out.

Clearly the components of this tax reform proposal cannot be presented fully in this context. I hope to push for an exploration of the proposal in the next legislative session. In my opinion, not only must we avoid putting additional costs in the EF and driving up property taxes, we should remove those inappropriate burdens that are already there.

Cynthia Browning (D-Arlington) represents the 4th Bennington District in the Vermont House of Representatives.

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