Another Session Begins

On January 1st of this year a change in DMV fees took effect. This is a roughly 20% increase on fees that have not seen an increase since 2016. I have received emails asking how that much of an increase can possibly be justified. The increase has also been in the news and political speeches as an example of a Democratic supermajority forcing unpopular issues into legislation. 

Last session I voted for the bill (H.479) that increased those fees when it was in my committee (Ways & Means) and when it came up for a vote on the House floor. It came out of Ways & Means with a party-line vote of 8, 4, 0  (in favor, opposed, absent). The votes on the House and Senate were voice votes of approval.

Raising cost to Vermonters is not popular. It's something that has to be done with a good deal of thought and careful consideration of the cost and benefits. Vermonters deserve an explanation or why I voted for this additional cost burden. Here it is:

On January 26th of last year the Ways & Means committee heard testimony from the Joint Fiscal Office (JFO) regarding the financing of transportation in Vermont (document link). This was just a broad overview of where the money comes from and where it goes. At that point we were not considering any changes, just collecting information.

On February 24th we received another presentation (document link) from the JFO. This one looked at future funding of transportation projects and services. That's when problems became apparent.

There were two big reasons for increasing fees: 1) Inflationary pressure on the cost to the Department of Motor Vehicles (DMV), and 2) the desire to draw down matching Federal funds in support of transportation projects.

The Transportation Fund

First, it is important to understand that DMV fees are deposited in the Transportation Fund, not the General Fund which receives Income Tax dollars. The 2023 Transportation Fund was about $300 million. That money is only used for transportation related expenditures. That's not completely true, as portions go to the State Police (about $20 million), to the Department of Building and General Services (BGS) for information centers (about $4.2 million) and another half a million to the Downtown fund for municipalities. 

Federal Support of Transportation Projects

Second, it is important to understand that most of the money Vermont spends on transportation comes from the Federal Government. Those Federal funds  do not come for free. The State must provide a "match." That means that the Feds say, "We'll give you $4 dollars for every $1 dollar you provide, up to a  certain maximum available." In fiscal year 2023 those Federal matched funds amounted to about $450 million.

The Problem Presented to the Legislators

The problem presented to Legislators in February was that there would not be enough match money in the Transportation Fund to draw down the maximum amount of Federal Funds available. We did not have enough of those $1s to draw down the maximum number of $4s available. In addition the administration predicted a $7 million increase in funds needed to support the basic needs of the agency. This is the result of declining gas tax revenues, increased personnel costs (salaries, health cares and other benefits) and the inflationary pressures we have all felt. All this meant that an additional $31 million was needed for the Transportation Fund for both FY2024 and FY2025. 

The Governor's Proposal

The Governor proposed filling that $31 million funding gap for each of the next two years with General Fund money. That would enable Vermont to draw down the maximum Federal funds. But, aside from the fact that it would mean taking money from other non-transportation related programs using the General Fund dollars, it would also not solve the long-term problem of that $7 million gap in what the Agency of Transportation (AOT) needs to maintain basic services. That amount will continue to grow unless we identify new sources of revenue (electric vehicle taxes?) or reduce services.

DMV Fees - Part of the Solution

On March 21st The House Committee on Ways & Means took a close look at DMV fees as a potential source of revenue to help close that gap. The fees add about $87.8 million to the Transportation Fund and have not been adjusted since 2016 when the Governor promised no increase in taxes and fees. The then standard practice of reviewing and adjusting fees for a third of state government every three years was halted. No fee bills were submitted to the Legislature by the Administration.

Inflation since 2016

There are several measures of inflation since July 2016 to December of 2022. Here are the one's provided to the committee:

Consumer Price Index(CPI) All Urban Consumers - 24.53%

Personal Consumption Expenditures (PCE) -  Chain-Type Price Index -19.76%

Producer Price Index (PPI) All Commodities - 37.39%

Government Consumption Expenditures State and Local Deflator - 31.11%

FHWA National Highway Construction Cost Index - 51.79%

We chose to use the smaller of those percentages, but it is interesting to note the 51.79% increase that was hitting the cost of Highway Construction.  This spreadsheet shows the change in DMV fees that would result from using that inflation rate for those fees that have not changed since 2016. The yellow columns show: the current fee, the fee change resulting from inflation, and the amount of additional revenue for each. Those are basically the fee changes we approved for the bill that was eventually approved by the House. There may have been small changes when the Senate took up the bill or when the Committee of Conference worked out differences between the House and Senate.

The change in fees was projected to bring in an additional $20 million a year. That still left a gap of nearly $10 million in order to draw down those Federal Funds. So, in addition, the bill increased the Purchase & Use Tax due for vehicle weighing over 10,100 pounds by that same inflationary percentage. The reasoning was that those vehicles have a greater impact on the transportation infrastructure. That would bring in another $1.16 million. The rest of the gap would be filled by General Funds. 

After considering the fact that the AOT was in the middle of a computer modernization project, House Ways & Means decided to delay implementation of the fees until January of 2024. That brought the first year's new revenues down to about $8 million instead of $22 million. Another gap to be filled by the General Fund.

The JFO also produced a Fiscal Note (document link) on the bill that explains the impact of the fees and other portions of the bill.

Conclusion

Yes, DMV fees have gone up by about 20% this year. But these are increases that hit most Vermonters only once a year. The "Pleasure Car registration - 1 year" fee  increase means an additional $15 a year, but brings in a little over $5 million in revenues, which could be used to draw down $20 million in Federal funds. That's a bit simplistic, but does illustrate the issues involved. In addition, the continued revenue will support ongoing AOT services and provide funds for future Federal matches. 

Those are the reasons I voted to approve the fee increase. I welcome questions or clarifications. I can always be contacted at CTaylor@leg.state.vt.us.

Keep in minds that Education Property tax rates are not at all the same as Municipal tax rates. They are two very different calculations. This is only discussing Homestead Education Property Tax rates.

Early in December of each year the Joint Fiscal Office (JFO) projects what education property taxes will be for each town in Vermont for the coming fiscal year. School district budgets will not be voted on until March of the following year but they can be estimated. Other sources of revenue that fund Vermont schools are also estimated. The JFO does not really know how much Sales Tax revenue will be received during the next year and put into the Education Fund. Still, it's a starting point and gives the Administration and the Legislature a good idea of what educational funding will cost and how it will be paid for. It does not look good. The JFO projected that the average homestead property tax bill in Vermont will go up 18.5%. That is far too much!

My committee (House Ways & Means) will be taking a hard look at this issue. I hope to have a better understanding of what is a pretty complicated problem by the end of next week when I can write-up a complete explanation. 

This morning (Monday, January 8th) I spoke with a town assessor and my understanding of when and how the Grand List is updated is not correct. I will roll that into next week's explanation. I hope. I also spoke with a superintendent of schools and much of what follows is flat wrong. I leave it here so readers will know how confused these things can get. So this is no longer My Current Understanding.

What was - My Current Understanding - 

I stress the word "Current" in that subtitle. While reading this, keep in mind the difference between the tax rate and the tax bill. It is the average tax bill throughout the state that is projected to go up by 18.5%.

This year, by statute, homestead property tax rates are capped at 5%. I'll explain that next week. The only way your tax bill can go up by more than that capped amount is if the assessed value of your homesite has also increased. I looked at my past tax bills and my "Housesite Value" has not changed since 2018. I checked the 2022 Vermont Grand List and my housesite value is that same value. I will be taxed on that value and therefor my Homestead Education Property Tax bill will not increase by more than 5% for the 2024-2025 tax year. 

I should mention that there is one unlikely possibility where the 5% cap doesn't apply for any specific school district and the tax rate can exceed that 5%. That too I will explain next week.

If I were to sell my house in the current market I would certainly get more than what it was assessed for back in 2018. In fact, the price might be nearly twice my purchase price. But I'm not taxed on that increased possible market value. I'm taxed on the current assessed value.

When the State calculates a school district tax rate, it takes into account what the State estimates is the fair market value of my house. The calculation of Colchester's homestead property tax rate sees my housesite as worth much more than what it is assessed for. That's done through what is called the Common Level of Appraisal (CLA). Without that 5% cap my tax rate and therefor my tax bill will likely go up by much more than 5%. The JFO also reported that voter approved education spending is projected to grow by 12%. That's another reason Education Property Taxes are expected to go up substantially.

The JFO also reported that this last year the value of the State's Education Grand List increased by 14.3%. So it makes sense that a 5% increase in homestead property tax rate on property that has increased in value by 14.3% will result in a tax bill of around 18%.

The questions for me to ask next week revolve around who will be having to pay those high tax bills that result in an average increase of 18.5%. Who has had their assessed value increased over the last year by more than 13.5%? Have there been that many town-wide reassessment? Is it new homes? If it's a new home, the person who built it or bought it would not see an increase because there was no previous year to compare it to. When are the purchase prices of homes reflected in the assessed value and therefor the Grand List? If I sold my home tomorrow for twice the current assessed value, what would the new owner's assessed value be and when would it be reflected in the Grand  List? 

The beauty of being a legislator is that I can get all these questions answered by informed and reliable people within a few days. I will do so and, hopefully, explain it all next week. I may well be told that I have this all wrong.