Eclipse week

No Devine Intervention

Not counting on the Eclipse Cash to save us, the Ways & Means committee last week turned full attention to the "Yield Bill." That's the bill that sets the numbers used to calculate property taxes throughout the State. Usually it's a one page bill. Last year's was a page and a quarter. This year's started Tuesday with twenty-four.

The Yield Bill sets three numbers:

• Property dollar equivalent yield - Used to calculate your education homestead property tax

• Income dollar equivalent yield - Used to calculate any income sensitive education tax credit

• Nonhomestead property tax rate - Used to calculate non-homestead education property tax rates

The combination of those three numbers ultimately determines how much money will flow into the Education Fund used to fund all public education in Vermont (about $2.3 billion). It's tempting to say, "So set those numbers so my tax rate doesn't go up so much." But . . . there has to be enough tax revenue to fund all the voter approved school district budgets in the State. So really, there are only a few ways that the Legislature can change those numbers in the near term.

1. Reduce the amount needed - We can decide to not fund universal school meals or other programs. School districts can cut their budgets. But some of that is up to the local voters and there are always at least two sides to discussions about cutting programs. 

2. Increase the amount coming into the Ed Fund from non-property tax sources - We can repeal the sales tax exemption for software delivered over the internet (the "cloud tax"). We can raise the Sales & Use tax. We can tax sugar beverages in order to pay for universal school meals. How about a Short Term Rentals tax surcharge? But reducing one tax by increasing another does not seem quite right, unless it's done carefully.

For the long term people talk about "structural reform" and  "cost containment.

With all this in mind, the Yield Bill is divided into at least three sections: what we want to do immediately (FY2025),  next year (FY2026) and after that (FY2027 and beyond). Wrapped around all this are people urging us to move quickly and get this year's rates reduced and others urging us to go slow and not make things worse.

Making Sausage

The oft-repeated adage around the Capitol is the one about how a person should never see how sausages or laws are made. It's messy and not pleasant to watch. But that's what we're doing (making law) and it's all open to the world to see via YouTube. Our committee meetings are streamed live and recorded. Last week a lot of people were watching. 

When Tuesday's version of the bill was made public the Chair of our committee tried repeatedly to make it clear that it was all just the starting point. In fact we had been taking testimony on issues that would become part of the bill since the beginning of the session, but this was the first time proposals were put into print as a bill that can begin working its way through the system. Along with the bill there has been extensive outreach to various special interest organizations: the Vermont School Board Association, the teacher's union, the association of school business managers, the association of independent schools, and several others. There has been joint meetings of the Education Committee and Ways & Means. Other legislators have been invited to testify about their perspectives. It all gets fed into the sausage grinder. And what comes out?

The Yield Bill as it is now

The members of the Ways & Means committee spent very little time on the floor last week. Instead, we sat in committee listening to testimony and discussing possibilities. Periodically, we were pulled to the House floor for a roll-call vote on a bill or amendment, then back to committee.  We picked through the proposed bill, added, subtracted, and revised.

All week we worked through different versions of the bill. The hope was to vote it out of committee Friday, but we didn't get that far. Instead we will be meeting by Zoom on Monday and should be able to vote the bill out on Tuesday. It's still changing.  Here's the version we worked on Friday. There will be another by Monday. You can find the versions under attorney Kerby Keeton's name on this page. The draft bill is numbered "DR 24-0692."

The Yield Numbers

On the draft bill the values for the variables mentioned above are only "$X.XX." They have not yet been determined. The latest version of the Education Fund Outlook contains the latest best guesses, but they will change by Tuesday.

FY2025 - For the tax bills relating to July of this year to July of 2025. most of the factors the determine rates cannot be changed: most school budgets have been approved, projected revenues from the various existing non-property tax sources have been finalized. What are we left with?

• An Increase in the Property Tax Credit - 60% to 70% of those paying homestead property taxes receive some credit that reduces their tax liability. For this coming tax year, we can increase that credit and further reduce the tax liability of those payers. However, that reduction has to be compensated for, so the plan is to increase the non-residential tax rate to make up the difference. Usually, we increase the property tax bill for homeowners at the same rate as businesses and second homes, but for this year we may not follow that president. There is concern that the increase on rental business will just get passed through to renters.

• The Cloud Tax - The current version of the Yield Bill repeals the Purchase and Sales tax exemption for software downloaded through the internet. This will bring in an addition $20 million to the Education Fund.

• A Short-Term Rental impact surcharge - Short term rentals (STRs) are currently taxed like hotel rooms at 9%. The Yield Bill proposes am additional 1.5%. 

FY2026 and FY2027

Allowable Spending

When COVID hit and school budgets were in turmoil we paused the use of what was called the "Excess Spending Threshold." That was a sort of cap on each school district's budget increase. If the district went over that amount, it's tax rate for that portion was a little higher. The current yield bill brings back the excess spending cap with an important modification: school districts with low per pupil spending will be able to increase their budgets more than those with higher per pupil spending. These are not "caps" in that the district will not be allowed to spend more. It's just that it will cost them more in a higher tax rate for those additional dollars. The current name for this is "Allowable Spending." The budget language used on the ballots will also be changed to better inform the voters as to how this works.

A new Common Level of Appraisal (CLA)

The CLA has been a headache all along. We would love to get rid of it and there is a process to do so, but it will take four or five years and impact the way towns do appraisals. For now, a change in how the CLA is used to calculate education property taxes has been proposed in the yield bill. The mathematics of it will result in less fluctuation of the Dollar Yield and therefor in town tax rates. However, this proposal adds complexity to an already difficult to understand process.

Property Tax Credit 

The Property Tax Credit that nearly 70% of Vermonters use to reduce their property taxes is based on income. But there are many Vermonters who have plenty of wealth outside their income and can well afford to pay the full education property tax. The Yield Bill changes the form used to apply for the credit to include a checkbox to indicate if the filer has assets worth more than $2 million. If they do, then they do not receive a property tax credit. 

Though it seems easy to just not check that checkbox, most people of such wealth do not prepare their own taxes. An accountant is more likely to check the box.

Beyond 2027

Once we get past this coming tax year, what do we do to keep this from happening again? The details of what happens in the future are passed off to two entities: an Education Fund Advisory Committee and an Education Opportunity Payment Task Force.

Education Fund Advisory Committee - This committee monitors the Education Fund and makes recommendations about it. Its powers and duties include:

• Reviewing and recommending updates to the pupil weights

• Determining how categorical aid might be handled outside the Education Fund

• Reviewing income limits for the property tax credit

• Determining if Education Fund reserves are adequate

• Reviewing how school district reserves are used

Education Opportunity Payment Task Force - There is a clear need to restructure the way property taxes are calculated in Vermont. The basic change is that there will be an "Education Opportunity Payment"; an amount per weighted pupil that will be paid to each school district. This is determined by the State to be the minimum amount needed to properly educated each weighted student in the State. If a school district's voters want to pay more, then they have to pay a higher tax rate.

This task force will deal with the details of making this change. The task force's powers and duties include:

• What can the Education Opportunity Payment (EOP) be used for

• How tax rates are set for the EOP

• The source of revenue for the EOP

• How categorical aid grants will be funded

• The best way to transition to this new system

Bottom Line

This coming week it all comes to a head in the House and will be passed on to the Senate, where there will, no doubt, be changes. There are still many ideas on the table.

Several of the bills I've written about in previous weeks raised various taxes: the Property Transfer Tax, Corporate Taxes, Income Taxes for the wealthy etc. Those bills went over to the Senate. I hear rumors that the Property Transfer Tax changes and the Wealth Tax on income have been killed, but one ever knows until the gavel comes down at the end of the biennium.

Next week we will wrap up the Yield Bill and get it to the House floor for a vote. We may well vote that bill out of committee on Tuesday. After that, and a sigh of relief, we will turn to other matters. I don't know what they are as yet.