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October 18th, 2018

Guest Opinion: The Property Tax Is What’s Wrong with School Taxes

By Jack Hoffman

It was a messy finish to a messy legislative session, but Vermonters can take some comfort that no permanent damage was done to the state education funding system. It’s disappointing that the governor insisted on another year of pretend budgeting—using one-time revenue again to artificially lower property tax rates. But, hey, worse ideas were floated this year, and it does buy the Legislature and the administration some time. The ploy will be worth it if they use the next six months to give Vermonters what they want: a school funding system that’s much easier to understand and one that’s based on their ability to pay—that is, their income.

There are two recurring complaints about Vermont’s education financing system: it’s confusing, because people have trouble seeing how their taxes relate to the local school budget, and it relies too heavily on property taxes. But while the Legislature and the administration both claimed to be concerned about property taxes, the reform plans they offered this session were all built on the property tax.

In the Vermont House, there were a couple of plans purported to move away from property taxes and more toward income. But the plans all started with the property tax and then added various discounts and credits in attempts to adjust the tax to people’s incomes.

The governor, although he talks a lot about affordability, doesn’t seem to make the connection between school taxes and income. Many Vermont homeowners do pay at least part of their school taxes based on household income, but the governor’s plan would have increased property taxes on those families. The governor’s idea of reducing reliance on the property tax is simply to freeze the rates. But with home values projected to rise over the next few years, fixed rates will mean higher property taxes.

The biggest problem with residential property taxes is that they are not based on people’s ability to pay. Vermont has eased this problem for many resident homeowners by allowing them to pay a school tax based on household income. This income-based tax rate varies from town to town, depending on per-pupil spending. Towns with the same education spending per pupil have the same income-based tax rate, and the rates are proportional: any town with, say, 10 percent higher per-pupil spending than another town has a 10 percent higher tax rate.

The drawback to the current system is that it, too, is basically a property tax system adjusted to people’s incomes. And over the years, the Legislature has added so many tweaks and caveats and thresholds and exclusions and add-ons that it’s very difficult for the average voter to know how the school budget presented in March will affect the taxes she pays later in the year.

Vermont could have an easy-to-understand and fairer school funding system with one relatively minor change. Currently, about two-thirds of Vermont resident homeowners pay the income-based school tax and the rest, primarily upper income residents, pay the homestead property tax. If we simply had all Vermont residents pay the school income rate derived from per-pupil spending, we could eliminate—not reduce, eliminate—the school property tax on all primary residences and up to two acres of land.

At the time of Town Meeting, people would know the school budget, the amount of education spending per pupil, and the income rate based on the per pupil spending. They would know their school taxes for that year would be the income rate—the current average is about 2.5 percent—times their annual income for the previous year.

Vermonters don’t like the property tax. And they don’t like the confusing contortions that are created by trying to get the property tax to behave like an income tax. It’s time to pull the property tax out by its roots, eliminate the gobbledygook, and let all Vermont residents support our education system through a tax directly based on ability to pay.

Jack Hoffman is a policy analyst for Public Assets Institute (www.publicassets.org), a non-partisan, non-profit organization based in Montpelier.

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