Lawmakers draft school funding plan based on income tax

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Editor’s note: The income tax explanation in the second paragraph has been clarified and a quote from Janet Ancel has been added regarding the income withholding portion of the tax plan.

A House panel is drafting an education finance bill that would lower the property tax and implement a new income tax to support the state's schools.

A school income tax would be based on adjusted gross income for all residents. The withholding would be applied to employee payroll for wage earners and would be an estimated tax for sole proprietors and people who earn other income. Residents would pay no school tax on the first $47,000 of income. For example, a family with a household adjusted gross income of $200,000 would pay tax on $153,000. Households with incomes of $47,000 or less would not pay any school income tax.

The plan, which has broad support in the House Ways and Means Committee, is expected to be finalized next week.

Rep. Janet Ancel, the chair of Ways and Means, said in an email exchange that the withholding should not be confused with a payroll tax. “Wage withholding is a trust tax and is for people who receive wages to effectively prepay their income taxes,” Ancel said. “It’s considered a trust tax because employers withhold the money and remit it to the state on behalf of the employee. It’s entirely different from a payroll tax.”

Ancel describes the draft as “a serious proposal” that is designed to simplify the funding process and strengthen the connection between voters and the cost of supporting local schools. The plan has a good chance of making it to the floor of the House, Ancel said. “We haven’t done that in 15 years,” the Calais Democrat said.

The new plan closely tracks a 2006 school finance proposal offered by then-Rep. Bud Otterman, R-Topsham, who had been vice-chair of Ways and Means and died in 2012. It also incorporates elements of a school finance plan offered by Rep. Scott Beck, R-St. Johnsbury, a member of the Education Committee.

The plan draws revenue from income and sales taxes instead of relying so heavily on the property tax. At the same time, it would ensure that every dollar spent beyond a certain threshold is felt by local voters.

"We have been trying to move more to an income-based system and this feels like the best chance to do that," Ancel said. "I like the fact that it is a mix."

Funding Vermont's schools is expected to cost 7 percent more in the coming year. Most of that hike is the result of a $50 million deficit in the K-12 Education Fund. Because the state has a statewide funding system, local school districts have to make up the difference. School districts are also expected to increase spending by about 3 percent on average, which would increase the gap between spending and current tax rates by another $30 million.

The emerging proposal from House Ways and Means is revenue neutral and is based on projected Education Fund rates set for fiscal year 2019. It does not include cost containment measures. The plan eliminates income sensitivity, a program that allows people with a household income of up to $147,000 to pay based on income instead of property value. It would instead require residents to pay a portion of their education bill with an income tax.

The plan lowers property tax rates and moves sales tax revenues from the General Fund to the Education Fund. In addition, lawmakers hope to eliminate the annual transfer of money (this year the amount is $322 million) from the General Fund to the Education Fund. The non-residential property tax would remain the same.

Under the plan, the state would provide every school district with a set amount per pupil. Lawmakers used $12,982 as a sample threshold. School districts that spend more than that hypothetical level per pupil would pay a higher property tax rate.

Average per-pupil spending is about $15,380. In this example, any district spending more than $12,982 would pay additional property tax on $4,450 per pupil.

About 70 percent of Vermonters currently pay based on income through the income sensitivity rebate program. The new formula would lower homestead property taxes and eliminate the income sensitivity program. Homeowners with incomes less than $47,000 would not pay a school tax based on income, according to Rep. Sam Young, D-Glover.

Under the new plan, voters would be more connected to school spending because everyone would pay based on property values, and the rate would change based on local spending. When school budgets go up, local property tax rates will go up, too. The income tax rate would not change.

Once the committee comes to an agreement, the proposal will go to the House Education Committee. Rep. Kurt Wright, R-Burlington, said he wants to protect taxpayers who aren't actually wealthy, but who are making too much to be eligible for income sensitivity rebates.

Rates must be set fairly so middle-income residents don't feel as if they are "getting screwed," Wright said. "We want to take care of lower income too, but we have to be careful at the other end."

Wright said he hoped the Education Committee would add a cost containment mechanism.

`Purifying' the education fund

Reps. Cynthia Browning, D-Arlington, and George Till, D-Jericho, talked about "purifying the education fund" by moving out any programs that aren't directly related to schooling, such as current use, renter rebates and income sensitivity.

"Getting out things that are obviously not Education Fund things is very appealing to me," Till said. "We have a mix (of taxes) now. This is just a much easier understood mix, rather than the whole income sensitivity maze. I think this meets the criteria of making (how we pay for schools) more understandable."

About $30 million in Education Fund spending is used for Adult Education and Literacy, Flexible Pathways (a portion goes to higher ed), Community High School Vermont, the Renter Rebate, the Relisting Payment for towns to maintain grand lists and teacher pensions, according to Mark Perrault, an analyst with the Joint Fiscal Office.

"The state has used the statewide education property tax system to meet non-education policy goals and I feel the state should take responsibility for covering those costs in the General Fund," Browning said.

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