The House Ways & Means Committee pushed through an adjustment this week to Act 127 that would remove a 5% tax rate cap and instead put in a graduated 'step-down' program that phases in the tax rate impact of the legislation over a five year period. This is the first in a series of actions that the Committee is considering to address the historic school spending and property tax increase this year.

Tuesday

The Committee met on Tuesday with Chairwoman Kornheiser introducing the topic of the day – how to replace a tax rate cap that was part of Act 127 in order to restore “that linear relationship in the [Education] Fund so that we can make changes in the future.” They were also joined (on Zoom) by the House Education Committee.

Legislative Counsel outlined a mechanism that would create a “step-down” in the tax rate impact over a five-year period – essentially phasing in the increase in property taxes over multiple years.

The Joint Fiscal Office (JFO) walked through what the newly proposed transition mechanism would look like, which responds to the relative change in tax capacity and spreads it out over the implementation timeframe of Act 127 (5 years) in the form of a tax rate discount. The cost of this proposed mechanism is estimated at $30M in FY2025. Statewide property tax rates would need to be adjusted up to cover this cost.

Committee members wanted to know what the impact would be on specific districts and JFO, it turns out, had already done some modeling on this. Most of the Chittenden County towns would receive this discount, along with many wealthy communities.

Representative Ode noted, presumably in response to media coverage, that the Common Level of Appraisal (CLA) is ensuring “that property values are taken into consideration so there is fairness from town to town.” Kornheiser agreed, pointing out that they have not changed the CLA in this bill.

Representative Sims asked about the 5-year term. Kornheiser noted that is what was modeled because the Committee had already suggested a five-year phase-in via Act 127. She commented that it would be difficult to see tax relief if they shortened the timeframe too much.

Chairman Conlon recalled that in the lead up to Act 127, they tried to calculate what the cost was going to be for the Education Fund for those using the 5% cap. The number he remembered was $17M in FY2020 (which was way off) to put this in perspective. He called it “well within the ballpark of what we were talking about contributing to making that transition a little less challenging,” under the current proposal. Kornheiser agreed with his recollection.

Kornheiser indicated they were moving fast to pass this language. The Senate has been kept apprised and the Administration also is in the communication loop as “they have concerns also about property taxes.” However, she cautioned the Committee about offering any relief to school districts at this stage. Things are still too uncertain.

She added that it was likely that when school districts “learn about this new system after we pass this they are going to want to make different budgeting decisions than they have made right now.” She continued that “some may want to spend more, some less.” and others may be allowed to move out their budget votes under a new allowance we have drafted.

NOTE: Apparently there is language being presented to the House Government Operations Committee that would allow school districts to delay votes on their budgets.

Legislative Counsel explained that there is also a $1.00 floor for local tax rates in this draft language which would prevent any district from receiving a discount that would push them below the statewide $1.00 tax rate.

Representative Beck wondered how that would work for income sensitized payers. JFO admitted there is no mechanism for this yet and they will need to address it.

Representative Demrow asked whether the tax rate discount applied before or after the CLA. The answer from JFO was that it would apply after, but there is no statutory language to make this clear.

JFO presented an updated education fund outlook with the new modeling, which still reflected a 19.99% uniform increase in property tax bills for FY2025. The main change in this week’s numbers are that the 5% property tax cap is no longer pushing tax burden to the non-homestead tax rate as it was in previous versions of the outlook.

Beck asked who would be paying for the $30M cost to create this “step-down” program. The answer from JFO was that it would be financed by increasing 1/16^th of a cent on the statewide average rate.

            NOTE: This is in addition to the 3 cent increase from the spending increase for this year.

Demrow suggested that changes may come from reduced budgets and that may absorb some of the $30M cost. Sims cautioned that they “don’t imply that schools have padded their budgets and we all recognize the pressures they are under, ESSR funds disappearing, inflation of healthcare costs,” etc.

Nicole Lee (Director of Education Finance, Agency of Education) walked through the modeling for the districts that would be impacted by the new mechanism, including the changes in student count from the new weighting formulas by district.

Thursday

The Committee came back to this topic on Thursday to hear from Amy Minor (Vermont Superintendents Association) and Flor Diaz Smith (Vermont School Boards Association). Both of their organizations had supported Act 127 but agreed that the 5% cap needed to be repealed. They were not yet in a position to support or oppose the new stepped discount proposal but acknowledged the reasoning behind it. Concerns persist about the “pace and process” of the work being done.

They complained about the disruption of the budgeting process. They worried that this shift would erode “voter trust.” Minor admitted that school districts were not considering their impact on the overall education system while forming their budgets.

Diaz Smith took issue with the perception that school districts were taking advantage of the Act 127 cap and highlighted the challenges that schools are facing.

They encouraged Legislators to support local school officials by “making the mechanism as least disruptive as possible” and to set the property tax yield “as high as possible” by finding additional tax revenues to buy down the property tax rate.

Friday

Returning on Friday morning, the Committee did one more walk through of the bill and then voted it out 12-0-0 with no discussion. It’s still not clear how income rates will be calculated in FY2025, but it was clear that the step-down provisions (80% of the discount available in FY2026, 60% in FY2027, etc.).