PAI: Who wins and who loses under the new school tax plan?

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PAI: Who wins and who loses under the new school tax plan?

Thu, 02/22/2018 - 3:45pm -- tim

by Jack Hoffman Public Assets Institute Before Vermonters can assess the new education funding bill emerging in the Vermont House, they need to see a thorough analysis of winners and losers. The plan is being touted as a major shift from property taxes to income taxes to pay for education. But looking at the proposed education revenue numbers, there isn’t much of a shift. In fact, there will be slightly less in income taxes and slightly more in property taxes going into the Education Fund than under the current system.

But individual Vermonters will see a change. Upper income Vermonters who now pay only property taxes would pay both property taxes and a new education income tax. Depending on the value of their homes, they could see a reduction in their school taxes overall. But without more data from the Ways and Means Committee, we can’t know how many of these upper income taxpayers will be better off and how much they would save.

For low- and moderate-income homeowners, the new plan will mean a shift away from income taxes and back to property taxes. Under the current system, many resident homeowners can opt to pay school taxes based on their income. About two-thirds of homeowners—primarily people with household incomes of $90,000 a year or less—pay based on income because those taxes are lower than their property taxes would be.

The current income-based system, commonly known as “income sensitivity,” would be eliminated in the Ways and Means plan. Households with income of $47,000 or less will pay only property taxes, albeit at a lower average rate than the current system. Everyone else will pay both the income tax—with the first $47,000 of income exempt from the new tax—and the property tax. For moderate-income households, depending on the home value, the new plan could mean a significant increase in school taxes.

We won’t know how much more they might pay and how many households will see increases until we see some analysis from the committee.

But, despite what you may have heard, overall the new plan will generate roughly the same amount of income-based taxes and property-based taxes as now goes directly into the Education Fund.

For years—and for political reasons—the state has calculated the hypothetical amount of homestead taxes that would have been collected if everyone paid only based on property. For next year, that hypothetical amount is $634 million. But because two-thirds of homeowners pay school taxes based on income, the state doesn’t collect that amount of homestead taxes. If it did, there would be a big surplus in the Education Fund. The actual amount projected for next year is $458 million.

A further breakdown of homestead taxes shows that for next year approximately $186 million would come from income-based taxes. That’s more than the $172 million the new education income tax is estimated to generate.

Property-based homestead taxes for next year are expected to be $272 million. The new plan—including the property tax exemption for certain low-income households—would generate a bit more, around $285 million.

Who pays the income and property taxes under the new plan is key to understanding whether it’s an improvement over the current system. Extending the income tax to upper income taxpayers appears to be a step in the right direction. But it seems that school taxes on low- and moderate-income Vermonters also should be based on their ability to pay. That’s why we need to see the full picture of winners and losers under this new plan before the committee votes on it.

Public Assets Institute on February 22, 2018