Many second homeowners pay a lower tax rate than residents, will the Legislature change that?

By Ethan Weinstein/VTDigger

In more than a third of Vermont towns, primary residents are taxed at higher rates than those who own second homes or commercial land, according to a VTDigger analysis of property tax rates.

But that could change this legislative session if Vermont lawmakers take up reforms that have been researched throughout the past year. 

“This is a hot topic this year as the Legislature looks for ways to fine-tune the property tax rates and relieve tax pressure on certain taxpayers,” said Jake Feldman, a senior fiscal analyst at the Vermont Dept. of Taxes. 

Right now, property taxes pay for education spending at two separate rates: one for primary residents, and one for second homeowners, commercial landowners and other “nonhomestead” property holders.

In November, legislators, motivated by the state’s housing crisis, told VTDigger they wanted to consider taxing second homeowners differently than commercial and rental property owners, suggesting vacationers should shoulder a greater tax burden if they want to own homes that are occupied for only part of the year.

Rep. Emilie Kornheiser, D/P-Brattleboro, who is now the newly seated chair of the tax-writing House Committee on Ways and Means, noted at the time that vacation homeowners in some communities pay lower tax rates than residents.

As of now, if a town spends more per pupil on education than a certain state-determined number, primary homeowners shoulder the burden, causing them to pay a higher relative rate than second homeowners. If a town’s school spending rate does not exceed the statewide standard, second homeowners pay a higher rate.

Currently, though, there’s no clear way to identify second homeowners in Vermont’s tax structure.

A presentation last March on taxes and second homeowners by Graham Campbell, a senior fiscal analyst in the legislative Joint Fiscal Office, explained that second homes are difficult to identify in the current property tax system because they lack a unique tax designation and are typically categorized with other nonhomestead properties, such as businesses.

Campbell also found that “Vermont does not provide any specific tax benefits to second homeowners that don’t apply to primary homeowners.” 

Taxing second homes differently from other non-homestead properties would be one way to disadvantage nonresident homeowners, the presentation noted, but that system might rely on second homeowners to voluntarily declare their property’s use.

“This past summer, we did take the time to look into whether any other jurisdictions were taxing second homes so we could see what definition they were using,” Feldman said, “but we couldn’t find any examples in this country.”

Julie Marks, founder and director of the Vermont Short Term Rental Alliance, said she believed increasing taxes on second homes would cause some property owners to list their second-homes as their primary residences. The change could also drive more property owners to rent their homes through Airbnb or cause those already doing so to raise their prices, she suggested. Marks also said prospective vacation home buyers would be more likely to purchase properties elsewhere in New England.

“Whether these outcomes would be ‘good’ or ‘bad’ is subjective and differ for each individual,” Marks explained. “Second homeowners who are part of our association are generally aware that they already contribute more in property taxes than Vermonters with primary homestead declarations do.”

On average, non-homesteaders are expected to pay a higher tax rate than primary homeowners in the 2023 and 2024 fiscal years, according to the state Department of Taxes. Everyone is expected to pay more than years past because of rising education costs and increased property values, Tax Commissioner Craig Bolio told VTDigger in December.

Under the current system, those who qualify — 64% of homesteaders in 2023, according to the tax department — can pay education taxes based on their income rather than their property. The maximum household income to qualify was $136,900.

A more drastic reform would be to shift Vermont’s public school funding to an entirely income-based tax rather than funding education through the homestead property tax. A panel of lawmakers met throughout the fall to consider what an entirely income-based system might look like. 

Who pays the most right now?

Although in most communities, second homeowners pay a higher tax rate relative to that of their resident counterparts, that’s not always the case. For the current fiscal year, homeowners in 88 towns pay higher rates.

The starkest example is in the Windham County town of Marlboro, where homesteaders paid 32% more than non-homesteaders. Second homeowners are paying significantly less in other nearby towns like Townshend, Newfane and Jamaica, as well as Fairlee and Vershire in Orange County. 

Other outliers include all seven towns in the Windsor Central Unified Union School District (Killington, Bridgewater, Woodstock, Barnard, Pomfret, Plymouth and Reading) towns in the Harwood Unified Union School District, and much of Addison County.

How have education taxes changed over time?

Most communities this year have a tax rate more favorable to primary residents than they did in 2016. 

Pittsfield, in Rutland County, had the greatest change. Today, second homeowners pay a 45% higher rate than primary residents. But in 2016, they paid 21% less than residents. 

Many Essex County towns, like Bloomfield and Brunswick, have had some of the largest swings in favor of second homeowners, as have the Windham County communities currently placing the largest relative burden on resident homeowners, like Marlboro.

Other towns that have swung in favor of second homeowners include Mount Tabor and Ira, in Rutland County.