Analysis: Why are two things that seemingly have nothing to do with each other bundled together in this bill? A little background…. Despite (or as a result of) Act 46 and other public education reforms passed over the past few years Vermonters are facing a 5.5 cent/$100 increase in property taxes under the current funding system. The primary motivation for changing the formula at this time is to obscure notice of this massive overall tax increase, and the failure of past legislation to contain education costs/taxes as promised. The $30 million fix to the federal tax changes is attached to this as a “hostage.” Attempts to divide the two issues and vote on them separately were blocked.
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Part 1. The original objectives of the education finance piece were to control costs and eliminate complexity. In the end this bill does neither of those things. It includes a new $59 million income tax increase, called a “surcharge,” eliminates the current General Fund transfer to the Education Fund, and dedicates 100% of the sales and use tax to the Education Fund. This allows for a cut in homestead property tax rates lower most property tax rates by 15 cents/$100 of assessed value.
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Part 2. The “federal tax fix” compensates for the $30 million tax increase by lowering each of Vermont’s marginal tax rates for personal income taxes by at least 0.2%, expanding the earned-income tax credit, and eliminating the tax on Social Security benefits for low and middle income Vermonters.
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Those voting YES are in favor of reducing the reliance on the property tax for the purpose of funding pre-k-12 education spending, and shifting that burden to the income tax, which they believe better reflects ability to pay.
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Those voting NO note that H.911 does not address education spending, it merely shifts the costs without reducing or curbing the total tax burden. The income tax surcharge will give Vermont the third highest marginal income tax rate in the nation. The income tax is historically a volatile revenues source, ill suited for education funding. The shift to income taxes is unfair to renters who end up paying higher income taxes, but get no property tax relief (landlords get no property tax deduction to pass along as non-homestead properties are not subject to the property tax cut). This new funding scheme is unfair to 30,000 non-residents who chose to work in Vermont and will now be paying this new education tax with not compensating property tax decrease, making it more difficult for Vermont employers recruit and retain cross-border workers. H.911 leaves all the complexity of the current system in place (CLA, per pupil spending, income sensitivity etc.), and adds even more complexity by introducing new income tax surcharge. And, finally, they worry that lowering the property tax will create a feeling that there is excess capacity in the property tax, and property taxes will quickly rise to re-fill the gap.
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