House committee wants to scrap income sensitivity

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House committee wants to scrap income sensitivity

Tue, 01/30/2018 - 4:55pm -- tim

by Public Assets Institute A new education funding plan taking shape in the House Ways and Means Committee is being billed as a move toward simplicity and greater reliance on the income tax to support education. In fact, the plan appears to make the connection between school spending and taxes less transparent, and it will take Vermont back to the days when only wealthy communities could afford to pay the property taxes necessary to support a good education.

Currently, about two-thirds of Vermont resident homeowners pay income-based school taxes. Tax rates vary from town to town, depending on the education spending per pupil. But there is a direct relationship between the income-based tax rates and local spending.

The new plan would do away with the current income-based school tax, commonly known as “income sensitivity.” Instead, there would be a general education income tax, in addition to the state’s personal income tax. The education income tax rates would be fixed statewide, and tiered—higher income taxpayers would pay higher rates. There would be no relationship between the education income tax and education spending. It just would be a chunk of money put into the Education Fund each year. There are no firm figures yet, but it’s not clear that the new income tax would generate more money than Vermont currently collects in income-based school taxes. If it generates less, the new plan actually would move us away from school taxes based on ability to pay.

Under the new plan, the education income tax, sales taxes, and other revenues would provide a base of education funding that is below what most districts currently spend. The balance of the money that communities need for the education of their children would come from property taxes. These property taxes would operate like the current homestead taxes: each town’s rate would be determined by the town’s per-pupil spending, and rates would rise as spending increased.

But to raise an extra dollar per pupil would be much harder under the new plan. This year, if a community wants to spend another $1,000 per pupil, it means another 10 cents on the tax rate. According to the available information about the Ways and Means plan, it would require a 22-cent increase to generate an extra $1,000 per pupil.

Initially, it appears the new plan would reduce the average property tax rate (although we don’t know yet how individual taxpayers would be affected). But over time, spending growth would fall primarily on the property tax. When the economy slows, history has shown the Legislature is unlikely to raise income or sales tax rates to pick up the slack. It will be the property tax that has to make up the difference, but increasing property taxes will be more painful than it is now. And when it becomes too painful, especially in less wealthy communities, Vermonters will stop spending what they need to support their schools and educate their children.

If the Legislature really wants to shift reliance from the property tax onto income-based school taxes, there is a much simpler and fairer solution. In fact, they could eliminate the property tax on all primary residences plus two acres of land in Vermont. All they have to do is require all Vermont residents to pay the income-based school tax that about two-thirds of resident homeowners currently pay.

Having all residents pay the locally determined income rate would simplify the funding system and make it much easier for voters to understand. It also would insure that all Vermonters contribute to educating our children on the basis of their ability to pay.

Source: Public Assets Institute 1.30.2018