Editor’s note: This commentary is by Art Woolf, who is an associate professor of economics at UVM.
[T]he Vermont Legislature appears to be ready to deal with the problem of rising property taxes — or at least to appear to be doing something to deal with the problem.
Whatever plan the Legislature comes up with is unlikely to succeed unless it’s based on an understanding of exactly what the problem is and how it became a problem. It’s becoming increasingly apparent to most people that the underlying cause of escalating property taxes is high school spending.
In the late 1990s Vermont spent 10 percent more than the average state to educate each student in our schools. By the mid-2000s, that gap had increased to 35 percent. In school year 2013-14, according to statistics compiled by the National Education Association, Vermont spent over $20,000 per student, 80 percent more than the national average of just over $11,000.
During the 2000s only one state increased its per pupil spending faster than Vermont. Mathematically, spending per pupil is simply total spending divided by the total number of students in schools. The denominator of that fraction has been falling by about 1 percent per year, and since 2000 Vermont’s student enrollment has declined by more than 15 percent.
But our spending per pupil has not increased solely because of a reduction in students. Our total education spending, the numerator of that fraction, has also grown, indeed it has grown faster than almost every other state, so our high spending per student is as much a reflection of high overall spending as it is the decline in enrollments.
The most important reason for the rapid growth in overall education spending was the passage of Act 60 nearly two decades ago. That law essentially put education on sale in Vermont by significantly reducing the impact of higher school spending on property taxes for a majority of homeowners. Not surprisingly, when the price of education went down, Vermonters bought more of it. It was easy to approve higher school budgets, even as enrollments were falling, when someone else was paying most of the bill.
The housing boom of the late 1990s and 2000s also contributed to spending growth. Vermont housing prices doubled during that era, from an average of $100,000 in 1997 to $204,000 in 2007. As housing values rose, education property tax revenues could increase without any property tax rate increase. Residents of a home valued at $204,000 paid a lot more property taxes than they did when their home was worth $100,000. In fact, they would pay more in property taxes even if the tax rate on their home went down. And that’s just what happened. In the early 2000s, the Legislature was able to reduce the statewide property tax rate several times and the education fund still received more tax revenues. That’s any politician’s dream tax.
If our elected representatives correctly diagnose the source of the problem as being on the spending side of the equation, rather than the revenue side, the solution becomes much more difficult.
Then, when the housing boom ended in 2007, that free source of tax revenue died with it and we’re now seeing the consequences. Indeed, that process is working in reverse. Property values have been falling and the Legislature has to raise the statewide property tax.
Today we’re seeing the combined effects of rising school spending and a stagnating property tax base; not just for housing but for commercial and vacation real estate as well.
If the Legislature diagnoses the problem solely as one of high residential property taxes, it will only shift the problem to some other tax. It may raise the tax rate on non-residential property, including vacation homes, or use the income tax to squeeze more money out of upper income Vermonters.
If our elected representatives correctly diagnose the source of the problem as being on the spending side of the equation, rather than the revenue side, the solution becomes much more difficult.
Our high per pupil spending, and high total spending growth, were both caused by an unanticipated, but not unforeseeable, impact of Act 60, which was to insulate most Vermonters’ pocketbooks from the full impact of their school budget voting decisions.
If we want to reduce spending growth, then Vermont taxpayers are going to have to feel the full impacts of what they are voting to spend on their schools. It’s impossible to spend 80 percent more than the national average without someone feeling the pain. It may be taxpayers, or some group of taxpayers, or other government programs that are being sacrificed to pay for the high school spending level.
That means that if people want to spend 80 percent more than people in other states on their schools, they’re going to have to pay higher taxes; and most likely higher property taxes. But higher property taxes, or the threat of higher property taxes, will, in turn, put pressure on school boards to figure out how to cut spending in ways that best suit their specific local conditions. It may mean reducing staff, or cutting the growth of wages and benefits. Or it may mean closing schools in order to reduce costs.
That may be a non-starter politically. But cost controls imposed by Montpelier, one policy that is already part of the bill the Legislature is considering, takes the decision away from local voters and ignores the specific features and differences in different towns around the state.
In the long run, a centralized solution to today’s perceived problem is likely to lead to other problems in the future. Just as it took 20 years for the flaws in Act 60 to become apparent, it may take a decade or longer for whatever solution the Legislature comes up to show its flaws.
