Vermont’s education finance system, though still hailed by many as “the most elegant and equitable in the country,” is increasingly being assigned another descriptor: antiquated.
The state has a statewide property tax system that evens the playing field from town to town, but increasingly critics — and even supporters of Act 68 — say the formula is getting out of whack.
Legislative leaders say re-evaluating the 16-year-old system ranks high on their priority list. The impetus? A persistent increase in property tax rates, driven by school spending and declining enrollment. Fiscal analysts are forecasting that the statewide rate could rise by as much as 7 cents in fiscal year 2015.
On Thursday Gov. Peter Shumlin called for a symposium on the subject in January during a meeting with the editorial boards of the Times Argus and Rutland Herald.
The governor pinpointed one “weakness” he wants fixed: In his view, lower income households don’t see a high enough increase in their tax bills to dissuade them from approving larger school budgets.
“The folks who qualify for income sensitivity are inoculated from property tax increases,” Shumlin told the editorial board. “When property taxes go up right now, you have a very small percentage of the population that’s actually paying the increase.”
Vermont’s education finance system is structured so that households that make less than $90,000 a year pay an education tax based on their income, instead of on the assessed value of their property. For fiscal year 2014, the income-based rate was set at 1.8 percent, and the property tax rate was set at 94 cents per $100 of property. The rate for non-homestead property is $1.44 per $100 of value.
The statewide base property tax rate has increased by 7 cents since FY 2009, while the base income rate has stayed at 1.8 percent during the same time period.
But when towns pass school budgets that exceed the base per-pupil amount set in statute, the tax rate for every resident in that town increases by the same proportion, whether they are paying based on income or property.
Only one category of homeowner might see relief from a direct proportional increase in their tax rate when a town passes a school budget above the per-pupil base rate. Households that make less than $47,000 are eligible for a homeowner rebate, which effectively caps the amount they pay in taxes at a certain percentage of their income. Roughly 30,000 households fall in this category.
Shumlin did not respond to several requests for an interview on Friday to clarify his comments about “inoculation.”
A smaller number of property taxpayers pay a larger share into the Education Fund. Roughly 60 percent of households are eligible for income sensitivity, and in fiscal year 2013, 14 percent of education tax revenue came from this group, while 29 percent came from people paying based on property value.
Jack Hoffman of the left-leaning think tank, Public Assets Institute, says that the system was designed that way for good reason. “Vermont has a system where the majority of resident homeowners pay for school budgets based on their ability to pay,” Hoffman said. “Ability to pay we think is the fairest way to finance what’s really an important fundamental responsibility of society.”
In recent years the percentage of education revenue coming from households paying a property tax has risen from 26 percent to 29 percent, while the share paid by commercial and out-of-state property owners — who are subject to a separate rate that isn’t tied to the spending of a particular district — has fallen from 60 percent to 56 percent. Meanwhile, the portion contributed by households paying based on income has stayed roughly the same.
Rep. Janet Ancel, D-Calais, is chair of the House Ways and Means Committee, which is a clearinghouse of ideas about education finance reform.
“I think whether people are actually buffered from the effect of their decisions is one that reasonable people disagree about,” Ancel said, in response to the governor’s comments.
But like Shumlin, Ancel thinks the system needs revisiting.
“I also think it’s a problem that overall statewide spending has gone up, while enrollment has gone down, and we need to understand why that’s happening and whether there is a way we can spend the money we have while maintaining the quality of our schools,” Ancel said.
But, she added, “I don’t think you can pull any one factor out and say this is the problem. It’s more complicated than that.”
Last year, her committee passed a bill that made piecemeal changes to tamp down school spending. It was almost entirely dismantled in the Senate during the final few hours of the session, but that hasn’t dissuaded House Ways and Means from setting out on the hunt for a more systemic overhaul.
Numbers are already being run on a proposal offered by Rep. Jim Condon, D-Colchester, that would establish a significantly lower flat property tax rate for all homeowners and create an education income tax, adjusted upwards or downwards depending on local spending decisions. Similar proposals have been floated but rejected in the past.
House Speaker Shap Smith maintains that Vermont’s education finance system is “one of the most elegant in the country,” but, he added, “It’s fair to ask the question, is the mechanism still working?”
Whether that line of inquiry will lead lawmakers to make wholesale changes during the upcoming session is an “open question,” Smith said, but he thinks it’s more likely to happen in 2015 than in 2014.
“Our system really is one that is targeted towards equity in a way that no other system is, but I think we need to dig deeper into the question of whether the system’s focus on equity is also getting us equitable results and opportunities for students,” Smith said. He added that lawmakers should ask if there is something about the education financing system that is allowing spending to grow at a rate that it might not otherwise grow?”
Sen. Tim Ashe, D-Chittenden, who chairs the Senate Finance Committee, said it would be “premature” to discuss any reforms he is considering.
But Senate President Pro Tem John Campbell sees the issue as a “major priority” for the upcoming session.
“I really believe we are at a tipping point,” Campbell said. “Vermonters are faced with tremendous fiscal challenges, and I certainly do not want to have this one continue to grow unchecked.”
Campbell said he is waiting to see what comes out of the symposium before throwing his political capital behind any one proposal.
“Until we get the data it will be hard to predict what the Legislature will do. There clearly will be suggestions of things that will not be politically popular, and that’s where leaders will have to lead.”
According to Campbell, the event will feature the same consultant, Lawrence Picus, who evaluated the state’s education finance system in 2012. Suggestions from outside the Statehouse, Campbell said, might make them more palatable.
One outside group, the right-leaning Campaign for Vermont, a 501(C)4 organization, says at a time when student enrollment has dropped significantly, expenditures have increased dramatically.
In a statement to the press, Tom Pelham, a co-founder of the group, said school districts have voted for education budgets that have increased Education Fund expenditures by 8.3 percent, or $112.2 million, over the last two fiscal years, despite a continued decline in the student population of nearly 2 percent. The data is from the most recent Joint Fiscal Committee Education Fund outlook.
Pelham urged Mary Peterson, the commissioner of the Vermont Department of Taxes, on Friday, to ask the Legislature to adjust all three base tax rates similarly and “in proportion to the rate of net spending increases voted by school districts after adjustment for non-education tax revenues.”
“Between 2012 and 2014, the effective increase in the Homestead Property Tax Rate has been 11 percent, from $1.27 to $1.41, and for the Non-Homestead Property Tax Rate 4.3 percent, from $1.36 to $1.44,” Pelham said. “In contrast, the effective increase in the Household Income Rate has been only 2.7 percent.”
Editor’s note: This story was updated to include information from the Campaign for Vermont at 12:07 p.m. Nov. 24.
