Along with two of my colleagues from the Ways & Means Committee, Rep. Jim Condon, a Democrat from Colchester, and Rep. Adam Greshin, an independent from Warren, I introduced a comprehensive education finance reform bill this week – H680.

You can read the bill in detail, here.

At a high level, the bill proposes to make the following changes to Vermont’s K-12 education finance system:

1. Replace the current variable residential education property tax rate with a much lower fixed residential property tax rate that would be uniform across the state;
2. Allow residential rental units to be taxed at the lower residential property tax rate, rather than the non-residential tax rate;
3. Implement an education income tax structure that would vary according to local school spending;
4. Eliminate the income sensitivity, property tax rebate, and renter rebate programs (no longer necessary due to the lower residential property tax rate);
5. Provide financial incentives for school districts that operate high performing schools or schools that demonstrate improvements in student achievement;

Before I go into detail about this proposal, I would like to take a step back and provide some background for how we arrived at the proposal in H680.

Two fundamental problems with Act 60/68 are the lack of transparency and accountability that stem from the inherent complexity of the system.  Very few legislators truly understand how the system works, let alone average citizens voting on school budgets.

Under the current system, there are no less than six different types of voters who are impacted in different ways by the school spending decisions we ask them to make on Town Meeting Day:

1. Voters who own their own home, but are ineligible for income sensitivity assistance – they pay the full residential property tax rate;
2. Voters who own their own home, and are eligible for income sensitivity assistance (i.e. those with household income up to $90,000) – in a roundabout, convoluted way, they pay a tax that is based on their household income;
3. Voters who own their own home, and are eligible for  partial income sensitivity assistance, but are limited by a cap on income sensitivity payment (capped at $8,000), own more than 2 acres of land, earn more than a certain amount of income through interest and dividends, and/or have a home that is valued over $500,000 – these folks pay a hybrid property/income tax;
4. Voters who own their own home, but have less than $47,000 in household income – they are guaranteed to pay no more than 5% of their household income in education taxes, regardless of local school spending decisions;
5. Voters who rent their home – they don’t pay property taxes, and although their landlord pays property taxes, those taxes are at the fixed non-residential rate, which does not vary based on local school spending;
6. Voters who live rent-free in another person’s home (e.g. parent, child, boyfriend/girlfriend, couch surfer, etc.) – they don’t pay property taxes.

This gives you a sense of the challenge that school boards face when posed with the obvious question on Town Meeting Day:  “How will this budget affect my bottom line tax bill?”

The problem is that there is never a clear answer to that very straightforward question.

The first objective of H680 is to make the impact of school spending decisions much more transparent, so the voters have a clear understanding of how a proposed school budget will translate into their individual tax obligation.

Currently, about 70% of Vermont homeowners participate in the income sensitivity program; in a roundabout way, they are effectively paying an income tax based on their local school spending.  However, this is far from evident to the average taxpayer – it involves a tax credit applied to a  property tax bill based on the prior year’s income and property tax liability.

So, if 70% of homeowners are already paying based on income, why not short-circuit this convoluted system and have everyone pay an education income tax with a system that is much more transparent?

This is what H680 proposes to do.

Under H680, there would be an income tax structure (with three marginal rates) that would vary based on local spending decisions.  Every income-earning Vermont resident would be subject to the tax, regardless of whether or not they own property: local spending decisions would drive income tax rates up or down for local residents, proportionately to per-pupil spending in that community.

When posed with the question of “how will this budget affect my bottom line tax bill”, a school board would have one answer that would apply to all voters:  “these are the income tax rates that you will all pay…”  No more prebates, rebates, exceptions, and other machinations to complicate the picture.

The second objective of H680 is to provide greater accountability for local spending decisions.  One of the problems with the current system is that we have folks voting for school budgets who don’t have to pay for those decisions.  That just isn’t fair.  With H680, virtually everyone eligible to vote on school budgets would pay into the system.  Everyone would have skin in the game.

A third objective of H680 is to bring greater accountability for how education tax dollars are being spent.  The proposal would provide financial incentives (resulting in lower tax rates) for school districts that have high performing schools and/or schools that can demonstrate improvements in student achievement.  With this kind of incentive, we would be asking voters to focus on how effectively their school dollars were being spent, rather than simply looking at how much was being spent.  For example, if the school board budgeted money to lay down Astroturf on the football field, voters might question the wisdom of such an expenditure if they were missing out on a tax break because the school was under-performing academically.

By providing financial incentives to encourage greater focus on student outcomes, we can facilitate local decision making that results in more efficient and effective use of education tax dollars.

Education funding is a rather dense subject; the complexity of the current system makes it challenging to compare and contrast alternatives – even those (such as this one) that would simplify the system.  I hope that my outline of the proposed legislation makes sense, but I would invite you to ask questions.  I would also ask you to share your comments and criticisms.  No proposal is perfect, but unless people are willing to put ideas on the table and invite feedback, we will never have the opportunity to move forward.

I look forward to developing this concept further and sharing more information with you, including hypothetical scenarios and financial statements (which are being worked up).

In the meantime, here answers to some of the questions you might have about H680:

Wasn’t there a proposal a few years ago to pay for education with an income tax?

Yes, there was, but that bill called for a uniform, fixed education income tax, with a property tax that would still vary based on local school spending.  The challenge with that approach is that we would still have voters making budget decisions that would only impact property owners.  H680 proposes the reverse – an income tax for education that would vary according to local spending, coupled with a lower fixed residential property tax rate for education.

Why put forward a proposal; why not commission a study first?

Since the passage of Act 60, the have literally been dozens of studies on education and education funding in Vermont.  Studies are a useful way to examine complex issues that are not well understood, but there comes a point when they just become a political tool to delay action and avoid taking a stand.  In the case of education finance, we have studied the issue to death:  we know what the problems are, and have examined many alternatives over the years.  We don’t need any more studies.  The time has come for real proposals.

What would the tax rates be under this proposal?

Actually tax rates would be set in separate legislative action.  Because this proposal includes a fixed residential property tax rate and three marginal education income tax rates, there are many different combinations that could be used.  The goal would be to develop a combination that would allow for a transition from the current system in a way that does not disproportionately impact different taxpayers.  This modeling is underway, and hypothetical scenarios will be available at a later date.

Would education income taxes collected from local residents be retained by the local school district?

No.  Although the rates applied to residents in each town would vary according to local school spending, this would be a state tax that would be collected by the state and remitted to the state education fund.  Communities with different average income levels would have equal ability to raise money for their schools. For example, a poor community with per pupil spending of $12,000 would have the same tax rates as a wealthy community with per pupil spending of $12,000.

How would this affect the non-residential property tax?

Under this proposal, there would be no change to the non-residential property tax (which applies to business property, open land, second homes, hunting camps, etc.).  Those properties would continue to be taxed at the same rate they are today.  It is important to note that this rate is fixed, and is insulated from local spending decisions.

Why not just eliminate the residential property tax rate altogether?  Can’t we just move entirely over to an income tax?

One of the advantages of the property tax is the relative stability of the tax base.  While property values have declined in Vermont, the impact on revenues has been relatively minor, compared to the erosion of income tax revenues.  Income is inherently more volatile, so shifting all of our education revenues to an income tax would lead to wild shifts in tax rates and/or drastic variations in school spending.  By retaining the non-residential property tax and using a low fixed residential property tax, we would preserve the relative stability of our revenue mix.

Wouldn’t this be a new tax for renters and others who don’t pay the education property tax?

Because the non-residential property tax is applied to rental units and paid by landlords, it is a cost of business that influences rents, so renters contribute to the property tax in an indirect way.  H680 proposes to tax residential rental units at the new, lower, fixed residential rate, with the expectation that the savings would reduce the market cost of rentals, pressuring rents downward.  We may need to look at some interim mechanisms to ensure that tax reductions were passed along to renters.

Technically, anyone living rent-free in a household should be reported as part of the household income for purposes of determining income sensitivity payments under the current funding system.  We know from tax preparers that this often does not happen, and as a consequence, many people are not paying their fair share under the current system.  Since everyone would pay the income tax under H680, and the need for calculating property tax income sensitivity payments would go away, this would no longer be an issue.

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The first week of the 2012 legislative session was eventful!

A group of students from the Maple Street School opened up the legislative session on Tuesday with a fantastic performance of “We the People”, a song composed by South Londonderry resident Sandy Wilbur.  Although I don’t have a video of their statehouse performance, a studio version that was produced by Sandy is online, here.

I have lots to report from this past week, including:

• A New Education Finance Report
• Tax Abatement Bill Passed the House
• Governor’s State of the State Address
• Governor Shumlin’s Tax Pledge
• Tropical Storm Irene Report

Education Finance Report Released

Earlier this week, a draft report on Vermont’s education finance system was presented by Dr. Lawrence Picus. The report was commissioned by the Legislature last year, and was intended to look at how well Vermont’s education finance system was working against the goals that were established within Act 60/68, as well as some comparisons with other states.

You can download a copy of the report here.

Unfortunately, the scope of the report was tailored to look at how the current system is working against narrow objectives within Act 60/68.  So, although some of the headlines have proclaimed that the current funding system is working well, the qualifier is that the system is working within the parameters that the Legislature established within Act 60/68.  Dr. Picus was careful to qualify this statement throughout his presentation.   In other words, we should not interpret this to mean that the funding system is working well, compared to alternatives that might exist.

While I would have liked to have seen a report that looked at alternatives that might deliver better quality, lower cost education in Vermont, the Legislature did not ask for that.

That being said, the Picus report did provide concrete data that clearly shows that we could be doing a much better job educating our students with the significant tax dollars we collect.

I will be examining this report in detail over the coming weeks and months, but for now, I’ll leave you with a few key findings I gleaned from the report:

• From 1999/2000 to 2000/2011, Vermont ranked #1 in the country for the growth in K-12 per-pupil spending – 149% cumulative growth (pg. 98);
• For the the same time period, Vermont ranked #49 in the country for the change in student enrollment – while many states experienced growth, Vermont experienced a 18% reduction in student enrollment (pg. 101);
• New Hampshire spends 20% less per pupil than Vermont (pg. 98), yet its students consistently score better than Vermont students on math and reading exams (pg. 29);
• Despite the extraordinary growth in per-pupil expenditures, Vermont’s results have been relatively flat, or exhibit only modest increases, over
  the past five years across all subjects (pg. 29);
• Vermont students are losing ground compared to other New England states – both New Hampshire and Rhode Island have seen greater improvement in student test scores in the past five years (pg. 30).

What I found particularly interesting in the report were five case studies of Vermont schools that had experienced dramatic improvements in student performance in recent years.  The case studies demonstrate that we have the opportunity to significantly improve student performance with structural changes to our education delivery system – and that these reforms are not dependent on increased funding.

In summary, while I would have liked to have seen more from this report, it clearly shows that the current system is not delivering value for the money we spend.  More importantly, it provides a guidepost with ways in which we could potentially deliver better educational outcomes for Vermont students for less money.

Abatement Bill Passes House

Later in the week, the House took up H461, a bill that establishes a mechanism to reimburse towns for tax abatements granted to property owners who suffered significant damage from Tropical Storm Irene or the spring flooding that impacted northern Vermont last spring.  In the absence of the type of legislative change that H461 would bring about, many storm-ravaged communities would be required to pick up the cost of education property taxes abated in their communities.

This was an issue that I wrote about several months ago.  In response to the concerns raised by myself, along with other representatives and the Vermont League of Cities and Towns,  the Ways & Means Committee met in October and drafted H461.  In summary, the bill (once passed into law), will allow storm-damaged towns to apply for reimbursement of any education taxes that are abated for qualifying properties.

I had the honor of reporting on the bill on behalf of the Ways & Means Committee before the full House on Thursday.  The bill passed the House unanimously and is now off to the Senate for action.

Governor’s State of the State Speech

On Thursday, Governor Shumlin delivered his State of the State address to the House and Senate.

Much of the speech focused on Vermont’s phenomenal response to Tropical Storm Irene.  While I don’t always agree with Governor Shumlin on the issues or his methods, I give him credit for the incredible job he did leading our state through the aftermath of Tropical Storm Irene.

The Governor praised the efforts of so many Vermonters who contributed (and continue to contribute) to the storm response, relief, and recovery efforts.  Our National Guard, state employees, local contractors, volunteers, and local officials have all played key roles in the recovery.

Governor Shumlin’s Tax Pledge

In part of his State of the State speech, Governor Shumlin stated that he remained “determined not to increase broad-based taxes” this year.  That may be all well and good, but we cannot expect Governor Shumlin to keep a promise that he has already broken.

Shumlin’s pledge to “remain determined not to increase broad-base taxes” builds on a promise he made to Vermonters last year – a promise that he promptly broke when he raised millions of dollars in new healthcare taxes and instituted the first increase to statewide property tax rate since Act 68 was passed.

And if that was not enough, Vermont property taxpayers will pay $27.5M in new property taxes this year, thanks to a raid on the Education Fund that Governor Shumlin engineered last year.

Report on Tropical Storm Irene

This was was Neale Lunderville’s last week as Vermont’s Irene Recovery Officer.  Over the past four months, Neale has helped solve many of the complex fiscal, operational, and organizational challenges involved with the Irene recovery effort across the state.

Sue Minter, a former state representative from Waterbury (a community hard-hit by Irene), and most recently the Deputy Secretary of Transportation in the Shumlin Administration was appointed by the Governor last week to take over for Neale Lunderville as the state’s Irene Recovery Officer.

Neale spent his first day on the job in our district, and brought Sue down to Jamaica last weekend as part of the transition to review progress that we have made over the past several months.

This week, Neale and his team released a comprehensive report on Vermont’s preparation and response to Tropical Storm Irene, which includes a number of important findings and recommendations.  Jamaica was highlighted in the report as one of:

“…two shining examples of Vermont towns that received heavy damage, but in the days and weeks following the storm were well prepared to deal with its aftermath in large part because of their preplanning and organization.”

(pg 58 and 59 of the report).

You can download a copy of the report here.

Neale has done a fantastic job as Vermont’s Irene Recovery Officer, and has helped the state navigate through the aftermath of one of the worst natural disasters we have experienced.  We owe Neale a debt of gratitude for his service to the state.

I have had the pleasure of working with Sue Minter in a variety of roles over the years, and can say, without hesitation, that there is no person better qualified to take over for Neale.  I look forward to working with her this year.

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The start of the legislative session is still a few weeks away, but I wanted to touch base with you on some recent property tax related news.

You may have heard the Governor’s  announcement earlier this month, where he recommended leaving the statewide property tax rate unchanged.

I found this to be a rather curious pronouncement, since the Governor’s FY12 budget, passed earlier this year, included a provision that all but guaranteed a property tax rate increase worth $27M next year.  Not surprisingly, the Governor omitted that piece of information from his press conference.

Instead, the Governor suggested that Vermont can stave off a property tax rate increase by level funding school budgets and tweaking the education funding formula with some accounting magic.

Amazing!

But, as the old adage goes, if it is too good to be true, it probably is – and this is no exception.

Unfortunately, due to sheer complexity of Vermont’s education finance system, it is possible to disarm the truth by obfuscating fact with a rudimentary alignment of smoke and mirrors.  The complexity of Act 60/60 always makes it difficult for the public and the media to separate fact from fiction.

In the absence of a meaningful focus on education finance reform, the simple truth is that we are looking at an increase in the statewide property tax rate next year, which will largely be the consequence of actions taken by the Legislature and the Governor earlier this year.  Broadly, there are four factors that are putting upward pressure on the statewide property tax rate next year:

1. The loss of $19M in one-time federal funding that schools received in the current budget year, but won’t next year;
2. Two successive years of level funded school budgets, which have created spending pressures that will break out next year (the Education Department estimates spending growth of 1.7%);
3. Continued erosion of the grand list (total taxable property value); and
4. Most significantly, a change to the ed funding formula enacted earlier this year, which reduces the state’s contribution to the Education Fund by $27M next year (worth between 2 and 3 cents on the property tax rate) and leaves a permanent reduction to the state’s ed fund contribution.

With respect to the last item, I raised the alarm earlier this year about a provision that was tucked into the FY12 appropriation bill (H441), which permanently reduced state funding of the Education Fund, and set the stage for next year’s tax rate increase.  I offered an amendment to strike the offending language from the bill, which was defeated by Governor Shumlin’s allies in the Legislature (click here to view vote details).  As the Vermont League of Cities and Towns noted in their preview report of the 2012 legislative session, “that vote cost property taxpayers three extra cents on their state education tax rates.”

The language was left in the budget, which passed the house and the senate, and was ultimately signed into law by the Governor.  Needless to say, I voted NO on the budget, largely due to my concern about how a permanent raid on the Education Fund was being enacted (click here to view vote details).

In summary, the statewide property tax rate is on course to increase next year, and although the root cause of this increase is chiefly attributable to actions of the Governor and the Legislature, Governor Shumlin is setting up the school boards to take the blame.

Vermont Digger has a good article that goes into considerable depth on this whole issue.

As always, don’t hesitate to contact me if you have any questions.  I hope you and your family have a happy and safe holiday season!

Best,

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