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Vermont: All taxed out?

New reports bust myths, shed new light on taxation

By Shay Totten | Vermont Guardian

Posted February 16, 2007

As the Legislature begins to chip away at the Gordian knot otherwise known as education funding, several new studies provide insight into the notion that Vermonters are overtaxed, and new state tax data shows that fewer people may be getting property tax rebates than some lawmakers believe.

In the past month, the Ethan Allen Institute, a free market think tank, the New England Public Policy Center, via the Public Assets Institute, a liberal-leaning organization, and the Joint Fiscal Office (JFO), have all released reports analyzing Vermont’s tax system.

Each come to slightly different conclusions, and point to different problems, and none offer any silver bullets, which comes as no surprise to anyone who has followed property tax reform efforts in Vermont in the past 15 years.

Vermont is a relatively high-tax state compared to all other states, but when it comes to use of the property tax it ranks below its New England counterparts — a group that, on the whole, relies more on the property tax than other regions of the country to fund programs.

In FY 2004, according to U.S. Census Bureau figures, Vermont’s education property tax revenue was $1,531 per person, placing the state eighth nationally. This ranking was unchanged from 1996, according to the JFO study. In addition, JFO officials found that Vermont’s per capita spending is often overstated by roughly $130 per person because the oft-cited figure doesn’t take into account the rebates people receive, only the gross charges of their tax bills.

And, according to figures from the tax department, fewer people may be taking advantage of property tax rebates than many lawmakers believe.

According to the state Tax Departments division of Property Valuation and Review, there were 190,000 residential properties that qualified as single-family homes in 2005. Though some of these could, in theory, be rentals, most are likely not.

In that same tax year,101,000 people received rebates from the state, according to the Tax Department.

That means nearly half of the property owners in Vermont either did not qualify, or did not request a rebate.

For economist Art Woolf, that’s a perplexing percentage gap given that many lawmakers believe that two-thirds of Vermonters are eligible for prebates.

“Either people are making more money than we think they are, or for some reason they are not filing for them, which would seem almost impossible at this point,” he said.

In 2005, a House study committee noted that more than 70 percent of Vermont homestead owners were eligible for the prebates and rebates, but members were concerned that not all eligible households were taking advantage of the provision.

This new information from the tax department seems to bear out their concern.

And, Woolf notes, if you look further at the size of the rebates most Vermonters received you get an even sharper idea of why so many people have raised concerns about property taxes to politicians.

According to the Tax Department, more than 60,000 people received less than $1,000 with 33,000 of those individuals receiving less than less than $500. More than 10,000 received between $200 and $299. In all, 101,829 filers received more than $106 million in rebates.

Given the low amounts that many Vermonters receive from the state, Woolf wonders if people simply aren’t seeing enough relief from rising school costs to notice.

Likewise, Paul Cillo of the Public Assets Institute believes that not enough people see a direct connection between the rebate and their property tax bill because they receive the rebate check separately from the bill. This means that, while they theoretically have been given money to help pay for the property tax bill that will come due later, they may simply deposit the check and then be shocked later when the property tax bill arrives.

For Cillo, who was an architect of Act 60 when he served in the House in the 1990s, the current education funding system needs to be tweaked, not overhauled entirely.

This year, Vermonters, for the first time since Act 60 was passed, will receive a tax bill that shows the amount they actually owe rather than the amount it would be before the rebate.

He argues that Vermonters, on the whole, are paying less in property taxes, as compared to their total income, than they were before Act 60 was introduced.

Woolf agrees with Cillo, but points out that the percentage is rising each year. By collecting taxes on a statewide level, vacation property and commercial property owners helped to ease the burden in the early years of Act 60, but with school budgets rising at greater than the rate of inflation, the “savings” most individuals realized were gobbled up within a matter of years. Act 68, passed in 2003, again helped to shift the burden, but that, too, is now shifting again, Woolf notes.

Vermont: Always a high tax state?
Vermonters, historically, have paid a greater percentage of their income in property taxes than the national average, and at times the property tax has grown faster than personal income. Both in the 1970s and the 1980s, during real estate booms, property taxes rose faster than incomes, according to a report by Woolf published in 1999 as part of Vermont State Government Since 1965, published by the Snelling Center and the University of Vermont.

During this time — from the 1960s to the mid-1990s — Vermont’s property tax burden remained above the national average, topping out in the 1970s at more than 6 percent, and bottoming out near 4.5 percent in the mid-1980s and mid-1960s.

Today, Cillo estimates that Vermonters in 2006 paid about 4.8 percent of their personal income toward property taxes, which is down from 5.4 percent in 1996, the year before Act 60 was passed.

He still believes, despite the growing pressures on the property tax and rising school budgets, that the state’s current funding scheme is fair and sustainable, with some minor tweaks.

Cillo believes that dual-income professional households with combined incomes of $90,000 to $150,000 — and perhaps largely concentrated in the suburbs of Chittenden County — are probably the ones feeling the biggest pinch in terms of property tax burdens.

“They are the ones who are getting the direct hit of the property tax, and while at this income level they are high income relative to other parts of Vermont, you’re still not considered wealthy under our current tax structure,” said Cillo. “That group is seeing a problem — at least that’s my hunch.”

Bending the curve
As the Legislature determines how best to fund education, and if it can be changed, the major focus this first half of the biennial session is on how to bend the school spending curve in Vermont.

Despite declining enrollment, and Vermonters seeing their incomes rising 3.5 percent, school budgets are going up 6.5 percent.

The Legislature is also trying to determine how much the general fund owes the education fund. By law, the general fund was to contribute money to the education fund as a way to ease some of the burden on the use of the property tax to fund education.

JFO estimates that the education fund was shorted by $7 million in the current year, and that may double to $14 million by next year.

Adding that money back into the system would help to lower the statewide property tax rate below the $1.10 for in-state residential homeowners and $1.54 for out-of-state and commercial owners. In recent years, with the education fund collecting more than it needed, the Legislature and governor were able to cut the property tax rates by several pennies per year.

Gov. Jim Douglas, Senate Pres. Pro Tem Peter Shumlin, D-Windham, and House Speaker Gaye Symington, D-Jericho, met over a period of months to find a way to address rising property taxes. In January, the trio announced a two-year framework to address rising property taxes and to find ways to bend the curve on education spending.

School consolidation is one possible remedy, which would save on administrative costs, and Douglas has proposed capping local school budgets to slow the rate of growth in spending. Meanwhile, some lawmakers are more interested in tackling some of the root causes of higher education spending, such as skyrocketing health care costs and unfunded mandates from the federal government.

“There is this assumption that Vermont spends too much, and if you look at the national states we are either third or near the top, and I think people would like us to be lower,” said Cillo. “The question is do we want to be like other states or be like Vermont. And, the fundamental problem is that in this effort to cut costs we might give up stuff we don’t want to give up for our children.”

House Ways and Means Chairman Michael Obuchowski, D-Rockingham, said his committee is looking at broader funding reforms, but is unlikely to propose any major overhaul this session.

“We’ve been doing our due diligence since the big hug agreement … and the plan is to have on paper, not necessarily in bill form, by Town Meeting Day an outline of what the committees are likely to do,” Obuchowski said of the work of his committee and that of the House Education Committee.

Obuchowski said the state’s budget problems, and not education funding, are likely to perplex the Legislature this year.

Despite the attention on property taxes and education spending, Cillo said there was more outcry or “revolt” prior to Act 60’s passage when people were focused on disparities between “rich” and “poor” towns than today. Before Act 60, for example, a person in Stratton might pay $250 on a vacation home, while someone in Stannard might pay $3,000 on a $100,000 home.

“There were front page stories about property taxes — it was the biggest topic on the horizon and today I get a sense like people are acting like this is a big issue when it seems to have been manufactured,” said Cillo. “There are issues that have to be resolved, but the sky is not falling — not like it was before Act 60.”

How high is high?
Steve Klein, the JFO’s executive director, said the new study also hones in on where Vermont falls in terms of state and local taxation.

“We’re the only state that relies so heavily on the statewide property tax, so when you compare us with other states, it’s not always apples and oranges,” said Klein. “Certainly, Vermont is a high tax state, but one of the issues that this Legislature is dealing with is what are we buying for those taxes.”

The Legislature, and others, are also trying to better determine which income classes are paying the most in taxes.

“Vermont is one of the top five or six states in the nation for taxes, and we do get a lot of out-of-staters to pay for rooms and meals and property tax through second homes and commercial property, but we don’t know how much that might be,” said Woolf.

A second phase of the study, due out soon, will take a sharper focus on how tax filers — both businesses and individuals — actually fare in Vermont and in comparative states.

“I think one of the things we’ll find is that even though the tax rates are high, it doesn’t always mean that taxes are high,” said Klein. That’s because of income sensitivity provision of education funding, and deductions allowed for personal and business income taxes.”

Though Vermont has the second-highest top marginal tax rate in the country after California, it only applies to one half of one percent of tax filers. In fact, 56 percent pay the lowest marginal rate of 3.6 percent, and 20 percent pay no taxes at all. Only 3.6 percent of tax filers, or about 10,000 households, pay the top three marginal rates.

For example, the report found that while Vermont has a high marginal rate for upper-income business filers, not all businesses pay the top rate.

For example, according to the JFO study, of the 23 out-of-state companies with Vermont taxable income of more than $1 billion, two paid only $250, which is the alternative minimum allowed by the state. In the $100 million to $1 billion taxable income group, 22 of the 140 companies only paid $250, and 25 of the 111 companies with taxable income of $50 to $100 million paid $250.

Meanwhile, Vermont companies of the same size pay based on their taxable income, and it’s not until you get into taxable income below $10,000 that you see Vermont companies taking advantage of the alternative minimum.

In fact, of the 860 companies with taxable income of $10,000 to upwards of $50 million, only two filed for the alternative minimum payment of $250. Both of those companies were in the $10,000-$25,000 income group.