Chairman Kornheiser on Tuesday asked Legislative Counsel to walk the House Ways & Means Committee through the new education finance mechanism in Act 127. It sounds like there were some side conversations after last week’s hearings about tweaking the implementation of the legislation.

The law generally redistributed taxing capacity from wealthy and urban districts to poor rural districts. Under the new distribution, two thirds of districts would benefit while one third would see an increase in their tax rate for the same level of spending. A hold harmless mechanism as added that would trigger if a school districts property tax rate increased by 5% or more in FY2025 over FY2024. If a districts tax rate is capped in FY2025, in subsequent years (up to FY2029) they would continue to be capped.

A tax rate review is triggered if a district’s spending increases more than 10% over the prior year. After hitting this threshold, a committee appointed by the Secretary of Education can review the districts budgets and can remove the cap for just cause.

Nicole Lee (Director of Finance, Agency of Education) shared that 106 districts had responded to Agency requests with high level budget numbers in the past week. The resulting increase is 14.3% in total spending against the Education Fund (which is up from 12% in the December letter that predicted an 18.5% increase in tax bills). Districts who have responded are increasing spending, in aggregate, $216,198,391 and found $31,091,740 less in offsetting revenue (likely most of that is decreasing federal one-time funds).

Representative Anthony thought that they might need to find some revenues in a “non-traditional” way to address cost drivers not directly tied to education. However, a number of these drivers are directly related to the provision of education, and he didn’t know what to do about those.

The Joint Fiscal Office presented an updated Education Fund Outlook that included some modeling to help the Committee understand what was happening in the Education Fund. This modeling compared a number of scenarios. The Governor’s recommended budget forecast all districts hitting the 5% cap and shifting the spending above the cap to the non-homestead tax rate.

Another scenario modeled was to try to reach a uniform bill change by removing the 5% cap, which would result in an average bill increase of 20.56%. However, this is based on the assumption that there would be no behavioral shifts from the result of the cap being removed.

A third scenario would attempt to protect the homestead tax rates by “buying them down” with an increase in the non-homestead tax. If tax rates were held level, this would result in a 14.3% increase in the homestead bill and a 27.05% increase in the non-homestead. It is important to point out that the non-homestead bill includes apartment complexes as well as retail and commercial buildings.

Kornheiser admitted that what is actually happening is very different than what they thought would happen. Representative Masland agreed, saying that the caps and 10% review threshold have turned into an incentive to spend up. He and others signaled interest in addressing this.

After a short break the Committee came back with the House Education Committee to discuss the property tax situation. Kornheiser reminded the Committee about her framing of looking for separate short and long-term decision making. For short-term options, school budgets are currently being warned and she wanted to hear what people heard on Thursday from the joint hearing.

Chairman Conlon commented that it was interesting to hear a lot about Act 127 and how the weighting on tax rates was perceived to be working and the impacts of things over which school boards felt they didn’t have a lot of control.

There was agreement that the 5% cap was not functioning as intended. Representative Beck commented that many of the districts that expected to be winners in the Act 127 framework are seeing their increased tax capacity erased by increased spending statewide, common level of appraisal adjustments, or both. This is leading to some districts now not trusting the process.

After an around the room, Kornheiser summarized that the Committee was contemplating cost-containment mechanisms, new revenue, and adjustments to the tax rate caps. There was frustration that multiple property types are included in the non-homestead tax rate and couldn’t be broken out for tax purposes (yet). There was also interest in pursuing a longer-term solution for a high quality and affordable education system overall.

Wednesday

Chairwoman Kornheiser opened the meeting on Wednesday calling the options the House Ways & Means Committee will be seeing “the usual suspects” and should not be surprising. She noted that the Joint Fiscal Office (JFO) will be offering a full list of “non-property tax” options for consideration.

Her approach is to use “policy mechanisms to protect some payers” in the short-term, and then as a long-term solution to “make spending more effective.” She believed that “all of that is going to happen, but likely also some new revenue is going to need to come in.”

She admitted they “sort of bought-down rates the last many years with what was essentially ‘one-time’ monies.” Even so, she acknowledged they are “likely going to need some new revenue this year to get our arms around property tax rates.”

JFO reiterated that there was “nothing new” or unexpected in the options they presented, which included:

• Excise Tax on Sugar Sweetened Beverages (sugar tax)
  • $29.8M in estimated revenue for FY2025
  • There was some confusion around whether or not maple syrup or honey would be taxed under this proposal.
• Apply the Sales & Use tax to:
  • Candy (sugar-lite tax?)
    • Only $3.7M in revenue projected for FY2025
  • Clothing above a certain threshold
    • Removing the current threshold of $110 is estimated to generate $6.8M in FY2025.
  • Prewritten software accessed remotely (cloud tax)
    • $20M projected revenues for FY2025.
  • Increasing the sales tax rate
    • Each 0.1% increase yields $9.3M
  • Changes to the sales tax base
    • Removing exemptions for groceries, medical products, energy purchases, and clothing & footwear would yield $271M in revenue in FY2025.

NOTE: As a reminder, the state would need to inject at least $216M into the Education Fund to offset the impending property tax increase. The only revenue source that would accomplish this is removing all sales tax exemptions, creating an additional regressive tax burden on goods and services that families need to survive.

Kornheiser commented on the cloud tax option that other states are starting to adopt these types of taxes so the “the competitive advantage” is not as distinct or hazardous as it previously was. Representative Beck reminded them that “the consumer pays this not the businesses providing the services.” JFO added that some states do tax customized services products, which creates the risk that products under the cloud tax could be double taxed (once by VT and again by the state in which the purchaser of the service product resides).

On the prospect of an increased sales tax, it was noted that comparisons with regional neighbors not promising. Representative Branagan added that Vermont has the lowest population and lowest average income in the comparison.

Kornheiser wondered if there is an analysis of the about the inclusion of food in the sales tax and who would bear the brunt of that. JFO explained they have a bit better but still limited view from the Earned Income Tax Credit report that estimates of the “qualifying income ranges.” It was found that in general the EITC is doing a good job of offsetting these regressive taxes.

Representative Anthony was concerned that the “prepared meals” tax is chipping away at the progressivity of the food sales tax exemptions as there are increased number of “prepared foods” that are being taxed.