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Last week, the Governor vetoed H.887, An Act relating to homestead property tax yields, non-homestead rates, and policy changes to education finance and taxation (also referred to as "the yield bill”). This bill is required annually in order to establish the property tax rate applied statewide. This, in turn, is determined by the level of funding approved by voters at the local level.
You likely have heard about this bill because it includes a significant increase in this year’s property tax rates. There are many reasons for this increase, and blame can be spread all across the political spectrum. But right now, rather than pointing fingers, I want to explain what this veto could mean for property tax rates and how it may affect you.
First, some historical context and an explanation of the “too complex,” and yet most equitable, school funding system in the country.
History of School Funding in Vermont
In 1997, Act 60, also known as the Equal Educational Opportunity Act, was enacted into law in Vermont. Before Act 60, all school funding was collected at the local level. Towns that had a lot of property value (industrial, commercial, recreational/tourism infrastructure, and so on) and relatively low student populations were able to set very low property taxes for their residents. For towns and cities with bigger student populations and lower property values, the choice was between setting much higher property tax rates for residents or creating fewer educational opportunities for their students.
The Brigham decision at the State Supreme Court found the inequity of Vermont’s local funding system was unconstitutional, leading to the creation of Act 60. This law, as well as it’s subsequent amendments (Act 68 and Act 130), created a complex yet important formula for education funding to help level the playing field and ensure that no student be denied a quality education based on the town that they live in. It also ensured that no town would need to tax its citizens at disproportionately exorbitant rates in order to properly fund their education system.
Act 60 also included a provision that would limit the tax exposure to an individual or family with low or moderate income. Because of this, 65-70% of Vermont property taxpayers pay for education based on their income rather than purely on their property tax assessment. This was designed to protect seniors with moderate, or low, fixed incomes from having their property taxes drive them from their homes. It also was designed to protect other working-class folks when property values, and therefore taxes, were going up faster than their incomes could support. A common misperception is that “income sensitized” taxpayers' taxes don’t go up. They do. The income tax rate is also adjusted upwards when the property tax rates go up.
The law created two property tax categories. One is the primary residence with up to 2 acres (called the homestead rate). The second category includes all other property (called the non-homestead rate). The non-homestead rate includes commercial and industrial property, farm and forestland, rental housing properties and anything other than the homestead properties. About 60% of Vermont property value is in the non-homestead category and 40% is in the homestead category.
So, what does H.887 do and what does the veto mean?
Each year, the legislature must pass a yield bill to fund Vermont’s education system based on the aggregate spending produced by the passage of local school budgets. Because the money that supports school budgets comes from a common pool of resources from across the state, the tax rates are determined by a mathematical formula, not the politics that some have tried to create.
Some of the money in the education fund comes from sales taxes and other sources, while a significant portion of it comes from property taxes. Each year, the property tax rate is determined by the total amount of money needed from property taxes in order to fully fund our education system once the other revenue sources are accounted for. The only way that the property tax rate can be adjusted is if the Legislature and Governor decide to raise other additional taxes/revenue (such as sales tax, cloud tax, or something else) to add money to the education fund to reduce the amount needed from property taxes. They can also set different tax rates for homestead and non-homestead categories, though the legislature generally tries to keep the rate increases the same. The only other way to make significant changes is to completely change the concept of of a statewide system. This is a very difficult proposition because of the need to still meet the equity provisions of the Brigham decision.
You likely heard that the increase to statewide property taxes this year, based on local school budgets, was estimated to be 18%. In order to decrease this burden, the legislature worked to find other ways to raise revenue for our education fund. With those additional funds (software tax and 3% Air BnB tax and a one-time use of $25 million in state funds transfer) the yield bill resulted in a 13.8% rate increase for both homestead and non-homestead properties. While everyone wishes it could have been lower, during the session, there were no other realistic proposals from the Governor that would have lowered tax rates further while still fully funding our schools in a responsible way.
There have been proposals over the years to make sure those that are wealthier would pay a percent of income into the education fund like most other people. These proposals have been rejected by both the legislature and past Governors as well as the present Governor. What some do not know is that folks who are wealthier, even those in incredibly valuable homes, pay a lower percentage of their income for the education of our kids than the rest of us. In the past, that has meant a $30,000,000 or $40,000,000 tax shift onto working class people and away from the wealthiest Vermonters. Today, it is even more than that. This tax shift is important as you will see shortly.
What happens if there is no yield bill?
It is critically important to note that there are underlying property tax rates set in statute that are the default rates if the legislature and Governor do not change the rates to reflect that years' spending per pupil by school districts all across Vermont. And this is what leads to the impact set forth by the Governors veto of this annual required bill.
The tax rates for homestead and non-homestead properties were slated to rise by 13.8% under H.887. Instead, with the veto, the rates will revert to the underlying statutory rates. This means that the non-homestead property tax rate will increase by 30% (16.2% more than in the underlying bill) and the homestead rate will actually decrease 12% (a 25.8% decrease from H.887).
While such a steep decrease on the homestead tax rate might seem like a fantastic thing, there are a lot of additional factors to consider. For one thing, rental units, which are in the non-homestead category, would see an even more dramatic rate increase (30%), and rental prices could rise steeply if landlords pass along that 30% increase to renters. Businesses and manufacturers will also see a steeper tax increase (30%) than they would have under H.887.
Additionally, these rates will not raise enough revenue to fund the school budgets. According to a recent report by the Joint Fiscal Office the veto leaves an $82 million gap in the funds needed to pay for educating our kids!! Were that gap to be filled by raising the rates on homestead properties, that would bring the property tax change back up from the negative 12% to an increase of 4%. Therefore, with that “simple” solution, non-homestead rates would go up 30% (including all businesses, rental properties, second homes, forestland and farmland) and primary residences would have rate increases of 4%. There is a “stabilization reserve” which has $52 million in it. However, if that is used it will damage the states credit rating and it will only be passing the buck to next year when we would see an even larger tax increase.
What is the Governor’s counter proposal?
Yesterday, members of the Governor’s team, not including the Governor, sat down with legislative leadership to discuss their proposal. Included in the administration’s proposal is:
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$124 million of one-time funding injected into the education fund,
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Getting rid of universal school meals, a $20 million program
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Using the entire education fund stabilization reserve
According to the administration, this plan would bring down the average property tax increase to 4% to 6%.
While I am glad that the Governor has finally brought forth a counter proposal, the actions outlined would not be fiscally responsible for our state. Using one-time funding will bring down this year’s property tax rate, but it will also push a huge debt load and tax increase into next year. This creates a faux tax decrease while burdening next years budget setting up future legislatures to spend more money than the local spending would have suggested. Most fiscally responsible people would consider such an idea to be the opposite of responsible budgeting.
Spending the entirety of the education fund’s stabilization reserve would also be fiscally irresponsible for Vermont. Not only would it essentially just defer tax payments to future years, but it would also negatively impact Vermont’s bond rating (similar to a credit score), costing Vermonters even more in the long run.
Making significant changes to the funding formula is no easy task. That is why such changes have not been made for decades. H.887 put together an aggressive timeline with a knowledgeable body to review possible change for the next legislative session. Once again, the Governor’s veto removes that planning possibility as well.
The property tax burden is too high for many Vermonters. The cost of living is too high for many Vermonters. The price of housing is too high for many Vermonters. Shuffling money around and using one-time funds will not help us solve our problems and will only result in more issues down the line. We need responsible leadership that can create long-term sustainable solutions and not further erode the education of our children. There are people in our state who can afford more and have not been paying proportionately to their income for years. We should explore ways to change our education funding system to be more progressive and lower the tax burden on ordinary Vermonters.
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This newsletter is probably the most important newsletter of the year. The world of politics is complicated and can be frustrating. Sometimes, the politics and policy are rhetorical. However, in this case, the actions by the legislature and the veto by the Governor have real, direct, immediate impacts on every Vermonter and their pocketbooks, wallets and bank accounts. The veto of the yield bill without a realistic and financially sound alternative plan has created turmoil and uncertainty on how our schools will be funded and how our kids will get their education.
You can contact your legislators to let them know your thoughts about this topic. The veto session begins next Monday, June 17th, so there are only a few days left to add your voice to this conversation.
Lt Governor David Zuckerman