The Senate Finance Committee met on Wednesday to discuss the impact of rapidly increasing housing costs. Chairwoman Cummings teed up the conversation by stating that some towns, like Stowe (as example) are seeing the number of people who qualify for income sensitivity drop, by no fault of their own. In some cases, homes have increased from $400K to $600K two years later (there is a $400k cap on house site value for income sensitivity). She mentioned the legislative goal of 80% of taxpayers being “income sensitized” (meaning they qualify for the property tax credit) and the state is now down to 64%. She was seeking solutions for how to address this long term.
NOTE: The way that income sensitivity works is that once you hit the income threshold, there is a “tail” where you still receive some tax credit benefit based on income, but it decreases as your household income increases. Additionally, the property cap applies in a way that any property value under that cap is still based on income, but above it, the property value is based on the full property tax rate. For example, what Cummings was pointing to was a situation where a family’s house value increased from $400K to $600K. Because the current property value threshold is $400K, that additional $200K would be subject to the full property tax rate. This could lead to a major increase in property tax liability with no commiserate increase in income.
Feldman noted that when they passed Act 60 in 1997 it was presented with $75K family income cap, which at the time, was around the 80th percentile. Senator MacDonald reminded them that this was a “cutoff” that continually needs to be adjusted as incomes change. However, they realized that this also created “a cliff” where families at that threshold amount often had property that, if they were paying on its value, would lead to a much higher tax liability. In response to this, they created a “slope” to ease people off the income tax liability and onto property-value liability.
Senator Bray asked about a chart indicating that $75K in 1997 equates to $142K today, according the US Bureau of Labor Statistics CPI Calculator (BLS).
Cummings added that the percentage and income threshold are “not the entire equation,” and there is a cost to raising the income. Feldman clarified that if the $400K property value cap was increased, then the other property taxpayers would “need to pay for it, that is how the Ed Fund is self-correcting.” Essentially, this means that property tax rates overall would need to increase in order to cover the cost of the income-sensitivity tax credits.
Bray wondered if they adjusted the income threshold to 80% of today’s income levels, and NOT look at house site values, if that would “push some people off the list” (presumably the list of tax-burdened families?).
Cummings noted that their goal has always been “ability to pay,” especially for older folks and those on fixed incomes. This is particularly true “now there are not alternatives for them to move to” she added.
MacDonald questioned why they wouldn’t just “tag it more to income.” At the time when Act 60 passed, Governor Dean was opposed any income tax for education because income taxes were needed for “health care bills,” but these “never happened,” he claimed. He argued that the income tax “was saved and is still there.”
Cummings noted that it was a tax capacity issue. They had looked at an education income tax last year, but they don’t have a tax capacity study to inform them about “elasticity.”
MacDonald asked if the Joint Fiscal Office (JFO) could show them “how to restore 80%” of taxpayers to pay based on income.
Richter weighed in, saying that some modeling had been done on a potential Education Income Tax and that “for some households it may be cheaper to pay on property rather than to pay on income. That is one of the challenges.”
NOTE: This could play out where a family is just under the income threshold but has a relatively low property evaluation in a low-tax municipality. What Richter is getting at here is that raising the income cap will increase the number of people that fall into that group.
MacDonald suggested shifting more of the property tax burden to non-homestead tax rate in order to reach that 80% threshold for income-sensitized homestead rates.
NOTE: This is currently a non-viable option as renters pay the non-homestead rates, so this would be a cost shift onto them. There is currently an effort to get more than two tax categories in place, but this will likely take a few years to implement.
Cummings responded that sometimes the legislature thinks they know what they are doing with a bill but “what actually plays out in reality, are not always the same thing.”
MacDonald quipped that it was “more difficult to address when it has not been addressed for a decade or more.”
Cummings noted that “the committee might have been told 80% but I have never seen 80%.” She is concerned that moving the threshold “anywhere near $142K,” would “cause a major disruption and in a tax system that is not a good thing.”
After a fair amount of discussion, the Committee agreed that this was something they wanted to look into further. Cummings suggested that they add language to H.480 to “separate out residential and commercial properties.” They also asked Richter to come back with modeling for the property tax bill that shows what it would take to 80% and also a more moderate increase from $90K to $100K coupled with an increase house value cap to $500K that could be considered for this year.
Cummings added that there is “nothing magical about 80%,” but that they need to “stop the slide.”