On March 9, 2016

Bill puts new formula, education fund surplus into play on taxes

By Tiffany Danitz Pache, VTDigger.org

Lawmakers on the powerful House tax-writing committee have set homestead property tax rates for next year, using a new formula—the “yield” calculation — instead of increases in the penny rate. The bill also includes a controversial provision that applies all of the surplus money in the education fund, about $19.7 million, to lowering the statewide property tax rate. The bill now goes to the House Committee on Education.

The yield rate is reflected in the education tax legislation the House Ways and Means Committee approved 9-1-1 last week. The yield formula for the statewide homestead property tax is part of Act 46, which was enacted last year. The new calculation will be in use for the first time in the coming fiscal year.

Lawmakers say the yield calculation for the statewide homestead property tax is more transparent because it shows how much local districts are spending per student and it is tied to a fixed rate of $1 per $100 of property value.

The statewide yield rate, or “property dollar equivalent yield,” is the product of the total revenues in the education fund, minus spending on programs not directly related to K-12 public education, divided by the total number of students in Vermont schools.

The locally adjusted tax rate is based on the difference between how much each district chooses to spend per pupil and the statewide yield rate. If, for example, the statewide yield were $10,000, and a local school district spent $20,000 per student, the local district’s tax rate would be $2 per $100 of assessed property value. Likewise, if the district spent $11,000 per pupil, the tax rate would be $1.10.

The formula looks like this: $11,000 (district per pupil spending) x 1.00 / $10,000 (yield, or statewide per pupil rate) = $1.10

Residential taxpayers who are eligible for an income-sensitivity tax break will pay 2 percent of household income under the formula. If the district spends 10 percent more than a separate, slightly higher “income dollar equivalent yield rate” for income-sensitized taxpayers, their tax rate increases 10 percent, to 2.2 percent.

The education tax bill passed by House Ways and Means sets the property yield at $9,701 and the income yield at $10,870.

In December, the Tax Department anticipated higher yield rates: $9,870 and $11,065, respectively. The Legislature is setting lower yield rates because education spending increased 1.5 percent instead of 2.5 percent, as originally projected. In addition, the grand list—the total value of real estate in Vermont—is up 1.8 percent.

The penny rate will still be used to calculate the nonresidential property tax for commercial property and second homes. Under the current education tax proposal, the rate would be reduced from $1.59 to $1.53 per $100 of assessed property value. The yields will change from year to year as property values, household incomes and education spending change. As Rep. Adam Greshin, I-Warren, a member of House Ways and Means, put it: “We can never promise we will lower your tax bill, but we can promise to lower the rate.”

Education groups oppose plan to use surplus

The Vermont School Boards Association, the Vermont Superintendents Association, the Agency of Education and some lawmakers oppose the lawmakers’ plan to use the entire $19.7 million education fund surplus to lower taxes.

The money was left over when the Agency of Education overestimated the amount needed to cover special education costs last year. The excess would be used to lower the statewide property tax rate in the same year that many school districts used up rainy day funds. Districts tapped into reserves to lower spending and avoid tax penalties under the allowable growth threshold set by the state last year.

Nicole Mace, executive director of the Vermont School Boards Association, said schools are using close to $17 million in reserves to avoid the penalties.

“Local districts relied on a substantial amount of fund balance to stay below their allowable growth threshold,” Mace said. “If the state uses the entire $19.7 million, then over $35 million in one-time funds will be used to cover operating expenses that will need to be made up next year.”

Rep. Adam Greshin, I-Warren, says the money belongs to taxpayers. “That money should be returned to the taxpayer, and that is what we are doing,” he said.

Jeff Francis, executive director of the Vermont Superintendents Association, urged lawmakers to consider spreading out the money over time to moderate the impact. “Next year, we are heading into a possibility of not having those dollars available either at the local level or at the state level,” Francis told lawmakers.

Greshin anticipates that “taxes will remain moderate” because of the state’s growing grand list, district consolidation under Act 46, and state cost containment measures.

Rep. Bill Canfield, R-Fair Haven, voted no. He objected to the use of all the surplus this year because “we don’t know where we will be next year.”

Unfunded mandates

The legislation also lays out a process for addressing the costs to schools of lawmakers’ directives. A month after each legislative session ends, the Joint Fiscal Office and the secretary of administration will consult the education secretary to figure out how much it will cost supervisory unions and school districts to implement new laws that passed without dollars attached to them. The Emergency Board will decide on the final amount at its midsummer meeting. Then the governor’s budget report will transfer it from the general fund. The estimate is for the fiscal year that will begin July 1 of the following year.

Education Secretary Rebecca Holcombe and education advocates felt that the year gap would force districts to front the money without assurances that they would get paid back. They were also wary of politics since a new governor might not have the same priorities as the previous one.

Rep. Patti Komline, R-Dorset, who proposed the measure, said, “I’m hoping this will force the Legislature to be more deliberate when they are passing bills that have real costs to the taxpayers.”

Other notable changes proposed in the education tax bill include:

A change to the excess spending threshold. Starting in fiscal year 2020, the threshold will drop from 121 percent to 119 percent of the 2014 per pupil cost, minus exclusions such as special education and school construction costs, and adjusted for inflation. Districts that cross the threshold will be double taxed on each additional dollar spent.

Terms for merging school districts that have debts or assets. The legislation sets up a way that merging school districts can transfer some capital assets back to their towns.

A mandate that the education secretary require school districts to report surpluses and reserve funds.

Creation of a study committee to look at a common level of appraisal (CLA) for merged districts so taxpayers from different towns in the new district all have the same tax rate.

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