Ancel: New income tax would cut property tax by third

by Representative Janet Ancel (D-Calais), Chair of the House Ways & Means Committee Vermont has a unique system of funding education. We can be proud of the fact that it is progressive and that it meets the requirements of the Vermont Supreme Court’s decision in Brigham, which says that it is a state responsibility to ensure access to substantially equal educational opportunity for every Vermont child.

But over the years our system of paying for education (known as Act 60/68) has grown more complex and hard to explain or understand. Household income, circuit breakers, income sensitivity, CLA, excessspending, income yields, the look back — these all contribute to a loss of faith in the basic fairness of the system.

At the same time, there have been continuing efforts to reduce reliance on the property tax and depend more heavily on an income tax, which better reflects ability to pay.

When public confidence in the fairness of the education finance system is eroded, support for our schools is eroded as well.

This legislative session, the House is working on a proposal that will reduce reliance on the homestead property tax, that will better reflect ability to pay, that respects the requirements of Brigham, that maintains local control, that is simpler and more transparent, and that maintains the overall progressive structure of the current system.

Our proposal will better reflect local budget decisions with locally adjusted tax rates. Because we will also recommend a change in the way property tax rates are set to better reflect spending decisions, the actual impact will vary from town to town.

This is a heavy lift. There will be winners and losers at every income level. But when faced with a projected 7% increase in homestead tax rates and having heard from taxpayers that they feel overwhelmed by increases in their property taxes, we believe it’s time to act.

Here are the basic elements of the proposal:

1. An education income tax will be created. It will have progressive rates, with a zero rate for income below $47,000 and it will apply to adjusted gross income. It will include a mechanism to protect low-income homeowners and will maintain a progressive tax structure.

Unlike the property tax, the education income tax will be subject to wage withholding whichwill be an advantage for taxpayers.

The education income tax will be fixed statewide, will not be affected by local spending decisions, and will replace income sensitivity.

2. The homestead education property tax will be adjusted by local spending decisions. Overall, it will be significantly reduced by an AVERAGE statewide of more than one-third. The impact in individual towns will vary depending on their local spending decisions.

The method for adjusting the homestead rate will be modified so that additional district spending will be more expensive than under current law, eliminating the need for an excess spending penalty and more closely tying a district’s homestead tax rate to it spending.

Under the current system, most voters with incomes under $47000 are insulated from the impact of their votes. Under this proposal, every voter on the school budget will feel the consequences of their vote.

3. The non-residential property tax (which applies to any property other than a homestead) will continue as it is – uniform across the state- with the same relative share of contribution to the education fund.

4. We are considering a system for separating the municipal and education tax bills. The towns will continue to administer and collect the education tax but the distinction between municipal and school taxes will be clear to voters.

5. We are also considering ways to eliminate the general fund transfer to the education fund. We would substitute instead 100% of the sales tax and may also move some education fund obligations to the general fund. Among other things, this change would provide a healthy mix of revenue sources for the education fund — income, property and sales. The general fund would rely on income and meals and rooms, as well as a mix of fees and other miscellaneous taxes.

These are significant changes. Our intention is to make the system better — more fair, simpler to understand, more direct. We welcome your thoughts and questions as we continue to work on this proposal.