Editor’s note: This commentary is by Moshe Braner, of Essex, a political independent who works as a statistical analyst.
The proposal for a new education tax formula is being described by Reps. Mitzi Johnson and Janet Ancel as making the education tax “simple and transparent.” But we’re only told totals and averages, not who will win and who will lose.
They say the statewide property tax base rate will decrease. But the education tax bill as a whole, including the local and income tax components, cannot go down on the average, if we’re still going to fund the schools at the current level.
Spending in the average town is much higher than what is considered the “base rate.” A cryptic published table says $99 million is proposed to come from the “base homestead property tax,” and $235 million from homestead property tax based on (presumably) local spending beyond the “base rate.” Thus, the average property tax rate will be triple what’s stated — and that’s not counting the income tax part.
In the higher-spending towns the additional property tax under the proposal will be “steep,” they say. Discouraging excess spending is a good idea, but levying these extra property taxes with no regard to people’s income is a rather blunt tool. How many will pay more than they pay now? A phasing-in of this penalty over time may help, but given the realities of school budgeting, the spending will not come down much and the penalty will materialize.
The “base rate” could be adjusted each year by the Legislature to reflect statewide trends, as they do now. But that is neither simple nor transparent, and leaves the actual future local tax rates a mystery while towns develop their school budgets.
Those with low income will only pay the property tax on some portion of the value of their property, varying by income. What are the details on that? And what happens to those with incomes higher than $47,000? Fall off a cliff?
The average statewide base tax rate is meaningless. We need to look at specific examples of individual households. Focus on a high-spending town, where the issues are stark. Have to guess what the unstated rules would actually be. Let’s assume that “steep” means adding twice the percentage that the spending is above the base rate. The example town spends 50 percent more than the base rate per student, thus pays double the base property tax rate. This may underestimate the steepness, if the average rate will be triple the base — thus even more in a high-spending town!
Homeowner A makes $50,000 and lives in a house worth $200,000. (Here in Chittenden County that would be a rather modest house.) Let’s guess that at this income level the property tax would be on 70 percent of the homestead value. Tax bill: 1.35 percent of $3,000 (the income above $47,000), that’s only about $40 in income tax. But the property tax part is 83 cents, times 2 due to local spending, times 2,000 (house value), times 0.7 (income-based adjustment) = $2,324. Total: $2,364, i.e., 4.7 percent of income. A huge blow to a family with $50,000 income, that already pays a $200,000 mortgage since there is no affordable housing.
Homeowner B makes $100,000 and lives in a house worth $300,000 in the same town. (That’s an average house around here.) Assume 100 percent of the property is taxed at this income level. Tax bill: Income part: 1.35 percent on the portion above $47,000, about $715. Property tax: $0.83 x 2 x 3,000 = $4,980. Total education tax bill: $5,695, or 5.7 percent of income. Ouch! (And this is not including municipal tax.)
Homeowner C makes $200,000 and lives in a $400,000 house. Income tax: 1.35 percent on the portion between $47,000 and $125,000, and 1.95 percent on the rest, about $2,515. Property tax: $6,640. Total: $9,155, or 4.6 percent of income. Slightly less, as a percentage of income than low-income homeowner A, and a lot less than homeowner B who has half the income.
Homeowner D makes $400,000 and lives in a $600,000 McMansion. Income tax: about $6,415. Property tax: $9,960. Total: $16,375 — a lot, but only 4.1 percent of income — lower than homeowners A, B and C.
Compare that with the current system: Homeowner A now pays an income-sensitive tax that is about 3 percent of income (2 percent plus the 50 percent extra local spending). The proposal would increase this low-income homeowner’s bill by about 50 percent. Homeowner B now pays about $3,000 (3 percent of income) — or more (I am not sure how “income sensitivity” phases out at higher incomes). Under the new proposal this will almost double. Homeowner C now pays a property tax rate of about $1.59 plus 50 percent (due to the local spending), or about $9,540 — it would be somewhat less under the new proposal. Homeowner D now pays about $14,310, or 3.6 percent of income.
So it seems that in a high-spending town the proposal is a net shift of some of the tax burden from upper-middle incomes onto lower and middle incomes and onto those with very high incomes.
My guesses may be wrong. The proponents need to flesh out the proposal, using relevant examples, not totals and averages. If it is a change from the present system, there will be some winners and some losers — that is the whole point. Tell us who will win and who will lose, and why you think that is good and just.
But for a truly simple and transparent tax that relates to ability to pay, we should instead abolish the homestead property tax altogether, and replace it with a tax on income (from all sources) that is proportional to the local spending. The rates can be progressive, but even with the same rate for all income levels it is far better than the regressive property tax, and less volatile than the sales tax.
Moreover, if we want to rein in the spending, we should make the property tax on business and second-home owners proportional to local spending. This can be phased in over time. Those taxpayers cannot vote on the local budgets, but they have a large influence on local decisions. They pay municipal taxes proportional to local municipal spending that they don’t vote on.
