Tax committee replaces school income tax with `surcharge'

The House Ways and Means Committee voted Wednesday to add a surcharge to income taxes that will help support low-income taxpayers.

The new education funding plan is folded into a comprehensive tax reform bill, H.911, which includes significant changes to the income tax.

Even though committee members overwhelmingly supported the surcharge proposal, in an 9-2-0 vote, they all said they were disappointed with the plan because because it is complex, and it doesn't achieve one of their main goals: ensuring that statewide school spending is tied to local voting decisions.

The committee has spent weeks working on bold changes to the school funding formula. Most of the statewide funding for schools currently comes from the property tax and a transfer of money from the general fund for government programs to the statewide education fund, which pays for schools.

The original Ways and Means plan halved the property tax rate, eliminated an income sensitivity program and abolished the general fund transfer. The property tax money was replaced by a new school income tax, all of the sales tax, and a percentage of the rooms and meals tax.

Last Friday, the panel decided to take a go-slow approach to passage, and put off implementation of the reform package until 2020.

Since then, Ways and Means has learned that the plan would hurt low-income residents who live in towns with high school spending rates.

Janet Ancel, D-Calais, chair of House Ways and Means, said that as lawmakers sought to make the tax reform package fairer, complexity crept in.

"We were making it more equitable and it became less simple," Ancel said.

The school funding package is part of a comprehensive tax reform bill that also makes changes to the personal income tax to mitigate the impact of a new federal law that has adverse effect on many middle and upper income Vermonters.

The new education finance reform plan changes how property tax rates are calculated and retains income sensitivity. It would go into effect July 1, 2018, for fiscal year 2019.

The previous proposal was lauded by the speaker of the House as a way to slash property taxes in half.

The new plan only reduces the average property tax rate by 10 percent.

The old proposal set a floor of $47,000 for the school income tax and applied a higher percentage tax on levels of income above that threshold.

The new plan sets surcharge rates for all taxable incomes under the 2017 schedule. The rates are: 0.1 percent on income taxed at 3.35 percent; 0.5 percent on income taxed at 6.6 percent; 0.5 percent on income taxed at 7.6 percent and 1 percent on income taxed at 8.6 percent.

The surcharge would bring in about $60 million in new money.

Rep. Cynthia Browning, D-Arlington, said she liked the new plan because "it uses our existing income tax categories to raise additional revenues."

The surcharge would be assessed and administered in the same way as the personal income tax and it will be retroactive to Jan. 1, 2018. Vermont income tax filers would first pay the tax in April 2019.

The income sensitivity program for residents that earn up to $147,000 a year and pay for schools based on a percent of income instead of the full value of their property remains in the proposal. Previous changes to the education formula threw out income sensitivity which brought more money — up to $170 million — into the education fund. That money was used to significantly lower property taxes.

Rep. George Till, D-Jericho, said the income sensitivity component is problematic. "Now we have this very ironic situation with 70 percent of Vermonters paying based on income and an income tax too. I don't like that part of this."

Under the new and old plans, the general fund transfer is eliminated and replaced with 100 percent of the sales tax and 25 percent of state revenues from meals and room taxes.

Both plans use a base per pupil spending amount and a yield for any spending above it, but in the new version the base is phased in over three years beginning at 92 percent for fiscal 2019, then 96 percent and then 100 percent. The panel was trying to soften the impact of the cost containment on taxpayers in high spending school districts.

The plan sets base spending at $11,916 per pupil for fiscal 2019. Every school district in the state spends more and will be subject to a yield of $8,500. The base income tax rate will be 1.66 percent but the average rate for those paying on income will be 2.32 percent. The base property tax rate is $1.00 and the average tax rate will be $1.40. The non-residential rate stays unchanged at $1.59, according to the Joint Fiscal Office.

The new plan would raise $397 million from property taxpayers (including those who are income sensitized), $164 million is raised from both payers on the yield, $59 million will come from the surcharge on the income tax, $677 million comes from non-residential property taxes and the rest comes from other tax revenues including sales and meals and rooms, according to the Joint Fiscal Office.

Ancel said this proposal shifts more of the cost of schools to income and offers better cost containment than the current system, but she was disappointed they couldn't find a good substitute for the income sensitivity program. "I think it makes it more transparent, I can't claim it is simpler, but it is more transparent and easier to explain."

Some lawmakers had a hard time letting go of the previous proposal that had more cost containment and linked voters to the school budget more since everyone paid something on their property.

Rep. Kurt Wright, R-Burlington, voted for the proposal with hesitation, "in the previous proposal, I liked we were able to get rid of income sensitivity and reconnect many voters to their spending decisions."

Rep. Fred Baser, R-Bristol, voted against the bill because it was put together too hastily and didn't do enough to change the formula. "I was excited about dealing with education tax reform. I don't think this is a good bill the way it exists today," Baser said.

The Scott administration would rather keep the current law when it comes to paying for schools, but add some cost containments.

Kaj Samsom, the tax commissioner, told Ways and Means their new plan is more complicated and shifts costs. "I think Vermonters will have a harder time understanding it," Samsom said.

He recommending that the panel "maintain current law, with meaningful cost containment."

"This plan has a hope for cost containment, but honestly, could turn into cost inducement," Samsom said.

Update: The committee vote on H.911 has been updated; it had been kept open for absent members.


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