Last week was Governor Scott’s State of the State Address, which seemed to be well received be legislators and commentators on both sides of the isle. However, a few things jumped out at me, one of which was the Governor’s hold-the-line stance on statewide property taxes. Historically, this is difficult to promise. Despite having a statewide system, Vermont property taxes are quite complex in how they impact Vermonters’ actual tax bills.

We actually have three statewide tax rates: residential, income-sensitized, and non-residential. Both the residential and income-sensitized rates are applied to a local multiplier (which is determined by a district’s per pupil spending) while non-residential is a flat statewide rate. To make this even more tricky, the local multiplier that effects residential and income-sensitized rates is calculated using a statewide base that is set by the Legislature. Complicated, isn’t it?

The Governor and Legislature could, theoretically, hold all three statewide rates level, but decrease the base amount, forcing local tax rates to be substantially higher – they would get to claim victory, but Vermonters still take the hit. We likely won’t know the details of what the Governor has in mind until his Budget Address, but I would suspect that his plans are a little more elaborate than this. They are likely to include a teacher’s health care proposal that he pursued last year, in addition to a mechanism that reduces student/teacher ratios. We may even see the resurgence of an idea he proposed in his 2017 Budget Address that forced school districts to level-fund; this idea was roundly criticized by legislators at the time.

Whatever mechanism the Governor chooses to pursue, he will have his work cut out for him. The December letter from the Tax Commissioner – an annual review for legislators of the Education Fund with proposals for increases in the non-residential and base rates – indicated an average statewide increase of 9.4 cents on residential property tax payers. A large increase such as this, despite all the Legislative attention this issue has received, begs the question: “how did we arrive here?” The Legislature likes to point the finger at local school districts, and school boards point the finger back at the Legislature. Who is right?

Since 2012, general education spending in Vermont has grown 20% to $1.4 billion, averaging about 2.9% growth per year. Special education spending has kept pace at about 21% growth and Legislature-funded items have grown more quickly at nearly 26%.

Education Fund Spending (millions):

Average homestead property tax rates have grown at almost 19%, roughly keeping pace with growth in general education spending. However, non-homestead rates have grown significantly slower at only 13%, and income-sensitized rates – after peaking in 2016 – have actually declined slightly. Averaging all of these brings us to a 16% increase in all property tax revenue since 2012.

Property tax breakdown:

Sales, purchase and use (consumption) revenues into the Education Fund have exceeded this growth at 22%, but only comprise a small portion of all Education Fund revenues. The General Fund transfer is nearly twice the size of the consumption taxes, but has only grown 14%.

Education Fund breakdown:

Essentially, all of this means is that homestead property tax rates are becoming an increasingly larger share of all education fund revenue. Conversely, income-sensitized rates have decreased over the past three years. Nearly two thirds of all taxpayers pay based on household income, which means that most Vermonters have actually seen slight decreases in their property taxes while those who pay based on property value have seen moderate increases.

So, if average statewide property taxes have remained relatively stable over the past couple years, why is this year’s increase slated to be 7%? Well, the main reason is that the Governor and Legislature have artificially reduced statewide property taxes using one-time funds and those funds are now depleted. Further, the Legislature has not adequately funded the Education Fund to the tune of $70 million over the past three years. In order to meet spending levels, the state has had to dip into reserve funds which now need to be replenished.

This creates a situation where, even if school boards were to level fund, lawmakers would still be forced to increase statewide property taxes to compensate for previous-year’s deficits. Another revenue source would need to be identified in order to hold the line on property taxes.

So, who is to blame for this year’s increase in property taxes? Well, there is blame to spread around, but it in large part lands on the Legislature. They have artificially reduced statewide property taxes and made incorrect assumptions about local spending trends, running up large deficits they now have to pay for. However, while school boards have actually reduced spending since 2016, their budgets grew at a pretty steady clip up until that point (despite student losses of nearly 20% over the past two decades). At the end of the day, even if school boards hold their spending level in 2019, your taxes will likely go up because Lawmakers have underfunded the Education Fund.

All said, this makes for a difficult backdrop for Governor Scott to hold the line on all taxes. It will be interesting to see what mechanism the Governor will recommend in his Budget Address this coming week.  

Ben Kinsley

Executive Director
Campaign for Vermont Prosperity