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Last week, the Ways and Means Committee abruptly reversed course on reforms to the education finance system. The new plan introduces an income tax surcharge and retains the income sensitivity program.
Legislative leaders have said the goal of education finance reform is to lower property taxes. They have also said they want to help voters better see the relationship between property tax bills and school spending.
The new proposal, which was hurriedly pushed through Ways and Means last week, does neither. Property taxes would be reduced by 10 percent. The income sensitivity program, which has been blamed for rising education spending, would continue, lawmakers have said.
Several other key legislative goals, however, are met by the plan. Tax rates are evened out between towns, and low-income Vermonters are protected.
Gov. Phil Scott is no fan of the plan, however. He said at a press conference Thursday that he is concerned that the income sensitivity program gives people a false sense of security. “That everything is OK when, I think, our spending is a bit out of control,” Scott said.
The governor said it looks like “a way to make the whole picture murky, that without cost containment on the other end, that it was all for naught. But again, I’m willing to consider almost anything, but cost containment is something that we have to be serious about.”
The House Education Committee is expected to take up suggested short-term and long-term cost containment proposals from the Scott administration after the Town Meeting Day recess this week.
School districts were expected to increase spending by 3.5 percent this year, according to estimates from the Tax Department and the Agency of Education. In December, the state faced a school spending gap of $80 million, based on school spending projections. But it turns out, per pupil spending is growing slowly, at a rate of less than 1 percent.
The gap between projected education revenues and school spending has narrowed to $30 million, meaning that the statewide property tax will need to go up slightly to cover the difference. Scott has said he will not accept any increases in taxes or fees.
Rep. Janet Ancel, D-Calais, chair of Ways and Means, said there isn’t anything that can be done about tax rate increases for fiscal year 2019.
Lawmakers are, however, making dramatic changes in the formula for 2020 that they say will protect low-income Vermonters and rein in spending significantly.
The original reform package proposed by Ways and Means last month lowered property taxes by half, added a new school income tax and eliminated the income sensitivity program. (About 70 percent of Vermonters are currently eligible for the income sensitivity program.)
After weeks of examining the impact of the tax formula on Vermonters, Ancel said she couldn’t find a way to eliminate the income sensitivity program without hurting low-income Vermonters, especially those who live in towns that have a high rate of school spending.
The new plan that Ways and Means approved Wednesday introduces an income tax surcharge ($59 million). It replaces a transfer of general government funds ($322 million) with 100 percent of the sales and use tax and 25 percent of meals and rooms ($445 million). It also changes the way tax rates are calculated, eliminates the excess spending threshold and introduces a new cost containment mechanism. It takes most programs out of the education fund that don’t have anything to do with preK-12 spending (-$21.5 million) and divides the normal cost of teacher retirement ($7.7 million) among districts based on spending decisions.
Most significantly: It keeps the income sensitivity program for residents that earn up to $147,000 a year, allowing them to pay for schools based on a percent of income instead of the full value of their property.
The Joint Fiscal Office last week showed lawmakers how the new formula would affect people living in districts that spend less per pupil, more per pupil and those that spend at the highest levels. See page 10 of this report.
The analysis modeled the impact on households with incomes of less than $10,000 to more than $147,900 for each type of school spending, low, middle and high. They used specific towns for the analysis, but kept the names of districts anonymous.
The charts looked at “high spending” districts. The first spent $18,600 per equalized pupil and the second spent $19,600.
When JFO applied the original changes to the formula, every household in the town spending $18,600 per pupil had higher property taxes. In the second town, the one paying $1,000 more, every group except households with annual incomes between $120,000 to $147,000 had higher property taxes.
In school districts that spent $15,600 per equalized pupil, property owners with less than $75,000 a year in income would pay more property taxes than they do under current law; households with income ranging from $85,000 to $147,500 would get a tax break; and those with higher income would pay more on property.
Towns that spent $13,500 per equalized pupil and $13,000 per equalized pupil had property tax decreases for every income group surveyed, according to JFO.
Ancel was concerned about low-income people living in higher spending school districts. “We were not ready to do that,” she said.
Ancel said she looked for a way to soften the blow for lower-income residents. “I tried everything. I didn’t feel we could come up with solution that is fair to taxpayers and preserves the progressivity of the system,” she said.
The only approach that worked, she said, was an income tax surcharge and retention of the income sensitivity program.
Rep. Scott Beck, R-St. Johnsbury, said lawmakers recognized that the income sensitivity program benefits some well-heeled property taxpayers. Two groups under the current income sensitivity program pay less: People with high incomes and low property values; and people living in homes worth $500,000 or more that have annual income of $10,000.
Paying school taxes based on income and property “would get at these equity issues,” Beck said.
“They were disappointed they couldn’t get income sensitivity out. I am, too,” Beck said. “Equity is very important, it bothers me there is still inequality in the system, but I’m happy it gets rid of district inequality,” he said.
In the current statewide property tax system, there is significant school district inequality across the state. Districts that spend less per pupil pay higher tax rates to cover costs in high spending districts.
A formula with a base spending amount — based on a per pupil spending rate — solves that problem, he said.
The statewide base spending rate will be set at $11,916 per pupil, which is lower than per pupil spending in any district. Under the formula, taxpayers will pay more for each additional dollar they spend on students.
“Every increase in education spending per equalized pupil has a tax consequence,” Ancel said, adding. “It is no longer exclusive to high spenders. It is more effective cost containment that is fairly applied to everyone.”
The committee’s plan is almost identical to the Beck’s proposal last year. “This proposal — without the surcharge — is something I’ve been working on since the summer of 2015,” he said.
Not everyone is convinced there is enough cost containment in the bill. Rep. Kurt Wright, R-Burlington, who voted for it, worries about creating the illusion that there is more money available for schools to spend because the average property tax bill will go down 10 percent.
“It is theoretical. They think they can predict behavior of the school boards and voters” by making money more expensive, Wright said.
Scott isn’t happy that lawmakers have rolled the education funding plan into the income tax reform bill, H.911, which features a Social Security tax break his administration proposed. The governor said putting all of the tax changes in one bill complicates the issue.
Often, major tax provisions are floated as standalone bills to ensure passage. Not this time. Ancel said she couldn’t separate the two tax reforms because they build on each other.
“It was entirely a practical solution, not a strategic one,” she said.
Scott said a school income tax might reduce property taxes, but the same amount of money will need to be raised.
“At the end of the day, if we are not spending less we are going to pay just as much. It is just going to come out of a different pocket,” the governor said.
That’s true, Beck said.
“This is tax reform. It is not raising any more money or any less, it is just raising it in a different way, by adding new revenue streams,” he said.
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