Vermont Tax Commissioner Richard Westman at Twin Valley High School last Thursday evening. Mike Eldred
This year the tax commissioner recommended an increase of two cents in the statewide rate. The state saw a modest growth in the grand list of about two percent this year, far lower than in previous years. But over the next three years, Westman said, the state expects the grand list to shrink – by .09% in 2010, three percent in 2011, and by another half percent in 2012. To keep up with the loss of revenue and the steady increase in education spending, the state projects an increase in the statewide property tax of 22 cents, a rise of 26%, to keep the education fund solvent.
Based on the outlook, Gov. Jim Douglas has called on the Legislature to make property tax reform a top priority in the upcoming session. “If we wait, and don’t act this year or very soon, we put ourselves in a position where we narrow our options,” Westman said.
Revenue for education funding comes from several different sources. The largest source is property tax, providing about 70% of state education spending. A transfer from the general fund supplies about 18%, and the rest comes from other broad-based taxes. But Westman said there are no “new” sources of revenue to tap. He suggested the next education funding battle will be fought over “equity”: who pays, and who pays less. “I see a storm gathering,” he said, “and it’s gathering around eroding equity.”
Westman said a number of measures that have been put in place to reduce the tax liability of certain groups since Act 60 have actually increased inequity in the system. In 1999, the first year of Act 60, property taxes supplied only 55% of state education funding, and the general fund supplied 33% – the state’s dependence on property tax has grown despite changes to reduce the burden for some groups.
Westman outlined four programs that have shifted the tax burden under the state’s education funding law. Income sensitivity allows Vermonters who are under a certain income threshold to pay a reduced property tax bill. “Most people would agree that helping a certain group of people based on income is a good thing,” Westman said. “But it has an effect on the overall tax rate, and it’s one of the fastest growing areas of the (property tax rate) calculation.”
Westman said there is a “tremendous amount” of exempt properties in the state. Towns are allowed to exempt properties from the income tax, and reporting requirements aren’t strictly followed. The town of Middlebury, he noted, reports only $13.6 million in exempt properties – including Middlebury College. “I suspect if you went to Middlebury College and offered them $13.6 million for the campus, you wouldn’t get too far,” Westman said.
Some communities have state-approved tax incremental financing (TIF) districts that allow towns to exempt downtown areas for 20 to 25 years.
The Burlington waterfront area is exempted for 25 years, along with about a dozen other downtown areas in the state. The program is intended to encourage economic development, but Westman said it shifts the property tax burden to other communities. “When you start exempting too many downtowns, somebody has to pay.”
Westman also cited the current use program as another tax shift that was created with the best intentions. “My family has a dairy farm, and probably couldn’t afford the taxes on the farm without current use,” he said. “But the cost of current use has doubled.”
Westman said local option taxes also create inequities in municipal taxes between communities. “All of these exemptions were created for good reasons but, collectively, they’re taking the property tax and driving holes through it,” he said. “And for those who are paying the full boat on this, how much more can they carry?”
Mount Snow Valley Chamber of Commerce Executive Director and Dover School Board member Laura Sibilia asked if the state would be considering a dramatic change in education funding. “Are you hearing any consensus around the state that the education funding mechanism is completely broken?” she asked. “Dover sends $10 million to the state every year, and Wilmington sends $2 million. Our communities have been so decimated by education funding that we have no other options.”
But while Westman said he hoped the state would eventually “move in a different direction,” he said next year’s proposals would probably focus on cost-cutting, and will be “unpleasant for all.”
Wilmington School Board member Phil Taylor said that, contrary to statewide education spending trends, local towns have worked hard to keep their budgets down. Since Act 60, he said, the towns have continually cut budgets to keep increases at about the rate of inflation.
But Taylor’s voice cracked with emotion as he recalled a recent budget discussion. “Last night we were arguing about paper,” he said, “about whether we could keep our paper supplies. This is an unjust system. It’s hard for me to stomach that there is any level of fairness or education equality when we’ve been cutting (school budgets) and this year Burlington has a nine percent increase in education cost.”
“Well I’m here to tell you,” Westman said. “I think we’re moving to a place where I question the equity of the system myself.”
But Dover School Board Chair Rich Werner said Act 60 and Act 68 were never about fairness. “It was about the state getting hold of the biggest source of tax revenue it could find,” he said.
Werner told Westman that, in his attempt to explore “equity,” he didn’t take into account the added costs that towns with a large grand list bear. “The municipal rate is always higher in towns like Wilmington and Dover,” Werner said. “Towns like Marlboro didn’t want any condos; towns like Wilmington, Dover, and Stratton said ‘sure, build your condos here.’ Now we have to support an infrastructure, police, rescue, and fire departments. And all that growth is supplying a bunch of money to the state through things like the rooms and meals tax.”
Westman, who has been touring the state with his tax presentation, said he could only follow state statutes, but he said the Douglas administration would propose some changes to education funding for the next session. “The question will be what stomach does the Legislature have to move on those proposals.”
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