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Friend,
Recently, Governor Scott sent a letter to school leaders around the state raising an alarm about projected property tax increases next year. As most of you are aware, Vermonters faced double digit property tax increases this year in order to meet the budgets passed by school districts across the state. The prospect of another large increase this coming year has undoubtedly caused quite a bit of unease and anger by many Vermonters who are already struggling to make ends meet.
In the letter, the Governor talked about the need to contain education spending growth and his administration’s plan to engage in the earliest stages of school budget development processes in order to meet this goal.
It’s clear that many working Vermonters cannot afford another significant property tax increase. However, we also need to continue to fully fund our education system so our children can get a quality education and prepare for life after school. The question is, how can we maintain or improve the quality of our schools without putting an even larger tax burden on working Vermonters?
As I talked about in my previous newsletter, the legislature established The Commission on the Future of Public Education in Vermont to propose ways to resolve this challenge. I’ve been doing some research and meeting with folks to talk about this issue for the past several months to better understand how we’ve gotten into the position of seemingly endlessly rising education costs and what we can do to take the burden off of working- and middle-class Vermonters.
To help better understand what we need to do moving forward, it’s important to understand how education spending and property taxes are linked, and why our property taxes have risen so quickly.
What is the Education Fund?
The education fund is a pool of state resources used to pay for the education of all Vermonters. The fund has numerous sources of money, including sales tax revenues, lottery revenues, a general fund transfer and other smaller sources. The final and largest source of revenue is property tax.
Every Town Meeting Day, Vermonters vote to approve or reject the school budgets proposed by their local school boards. All of the individual district budgets are aggregated to calculate the total spending statewide. The state legislature must then pass a yearly “yield bill” that sets the statewide property tax rates in order to collect enough money into our Education Fund to fully fund those school budgets. If a “"yield bill” is not passed, the tax rates have a default that they return to. For instance, this year, had the yield bill not been enacted, tax rates would have been very different. Homestead rates would have been lower (about a 13% decrease) but rates on non-Homestead properties would have increased an estimated 30% (source). Additionally, the state would have used up its reserves (for when the economy falters,) the education fund would have been short $90 million (thus schools would have been underfunded) and therefore, the state credit rating would have gone down and therefore future bills would be even higher.
Vermont’s property tax system currently has two categories: homestead and non-homestead. Homestead rates apply to houses plus up to two acres that are the primary residence of their owner. Non-homestead rates apply to all other property in the state. This includes businesses, second homes, rental properties, commercial properties, farmland, forestland, and everything else.
Residential tax rates for each school district are based on the amount that district spends per pupil. Any district in the state that spends a certain level (let's say $17,000) per pupil, will pay the same property tax rate regardless of whether the town has high value properties or a district with low value properties. Thus, each district has an equal ability to spend the same amount per child regardless of whether it is property rich or poor community. This law, for the last 25 years, has helped keep dozens of small and isolated and rural schools open when otherwise the costs of those schools and the local tax rates required would have likely led to many schools closing.
Non-Residential rates are the same all across the state. They do not change district by district. The non-residential rate is increased uniformly across the state based on the total percentage change in spending per pupil across the state. In about 90 towns, the non-residential rate is lower than the residential rate.
Additionally, there is a provision that adjusts residential property taxes for those that have incomes lower than $128,000. This figure has not been adjusted for inflation for decades. The adjustment caps the amount of education taxes that a resident pays to an income threshold. Unfortunately, the way that this system is structured creates a few different “cliffs” that can cause a drastic difference in how much an individual needs to pay if their income increases by just a few dollars. If you’re interested in reading more about this issue, check out this report from Public Assests Institute about the “three cliffs problem”
To simplify it: property taxes are a regressive form of taxation, meaning that those with higher incomes pay a smaller percentage of their income in taxes. Therefore, any increase in property taxes brought on by an increased need for funding for our schools has a larger impact on middle to low-income Vermonters.
How have school budgets changed in recent years?
School budgets have been on the rise, but an analysis by Public Assets Institute shows that the majority of that rise is due to “rises in salaries and benefits in response to inflation; health insurance cost increases exceeding inflation; the expanding need for expensive mental health services for students; [and] the loss of federal funds the schools received as part of the pandemic-related American Rescue Plan Act (ARPA).” All of these increases are necessary in order to provide students with a quality education and allow teachers and faculty to be fairly compensated for the important work that they do. Moreover, when adjusted for inflation, education spending has remained essentially flat since 2005.
The issue is that schools are being asked to do more and provide more services for students and their communities.
In recent years, there has been a silent shift of education expenses from the General Fund (the pool of money made up mostly of income taxes, which are a more progressive form of taxation) to the education fund. This $60-100 million shift has been caused by shifting services onto schools from what is traditionally covered in other states by their Human Services Agencies, such as mental health services for students.
This shift is a result of how budgets are presented by the Administration and passed by the Legislature, and it has resulted in a significant increase in the property tax increases. These services are necessary and important, but the shift away from the Agency of Human Services budget and towards school budgets have created inequity, especially in rural areas where the cost for mental health professionals is higher due to demand. It is important to know this information because how the budget is created over many years can have significant ramifications.
It is clear that something needs to change. However, simply asking schools to control their education spending, as the Governor’s administration has done, completely misses the point. School budgets have remained flat when adjusted for inflation. There is little to no room for school budgets to decrease without sacrificing quality. What we need to do is completely rethink the way we fund our education system so that the burden does not lay on the shoulders of middle- and low-income Vermonters.
There also can be savings in the cost of education by looking at how we administer many state functions. For instance, the Agency of Human Services and our education system have a tremendous overlap with certain families. However, there are duplications in paperwork and administrative costs that could be reviewed to reduce bureaucracy and increase efficiency. Additionally, more information might be available to schools or social services that could be used to improve outcomes, thus saving money as well as improving peoples lives.
In next weeks newsletter, I will discuss a few ideas for how we can accomplish these goals. I expect this issue to be one of the most important ones that we tackle during next year’s legislative session.
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We encourage you to contact your legislators and the Governor’s office on this issue and other issues that are important to you.
Lt. Governor David Zuckerman