It’s the property tax that’s unfair.
Economist Art Woolf wrote recently that Vermont spends too much on education because taxes are too low for many residents. Woolf was referring specifically to resident homeowners who qualify to pay school taxes as a percentage of their income rather than on the value of their property. According to Woolf, because their income-based taxes are less than their property taxes would be, these homeowners feel like education in Vermont is on sale, so they’re buying more of it.
One problem with Woolf’s hypothesis is that it assumes that the value of a primary residence is a fair and rational indicator of how much each Vermonter should be contributing to the education of our children. It may have been 200 years ago, when the value of a person’s property and possessions was the best measure of his ability to pay. But that isn’t true today, and the system should be brought up to date with today’s economy.
The education of children is one of society’s most important responsibilities, and we all benefit when children can grow to be informed, productive, contributing members of the community. Because we all benefit, we each need to contribute our fair share to the cost of education—that is, according to our ability to pay. In our present-day economy, a better and fairer indicator of a person’s ability to pay is income, not the assessed value of one particular piece of property.
Nearly 50 years ago, Vermont recognized that property values did not reflect people’s ability to pay. At the time, newcomers were moving to Vermont and driving up property values, but older residents living on fixed incomes didn’t have the money to pay their higher tax bills. To avoid pushing people out of their homes, Vermont instituted a rebate program for older homeowners whose property taxes exceeded a certain percentage of their income. This ability-to-pay concept was later incorporated into the state’s current education funding system. Today, about two-thirds of Vermont homeowners pay school taxes based on their household income rather than the value of their home.
Woolf argues that these people are getting a break, and that because they’re getting a break, they feel they can afford to spend more on education. But studies done by the Vermont Tax Department over the years show something different: that many high income Vermonters who pay property taxes are the ones getting a break. People with annual incomes of $500,000 or more typically pay a smaller percentage of their income to support schools than do Vermonters with incomes of $60,000 or $70,000. Given the importance of education, shouldn’t those who benefit most from society contribute the most to the cost of educating our children?
There is a problem of fairness with Vermont’s two-tiered system, but the solution is not a return to the school property tax for all Vermont resident homeowners. A fair system would have all Vermont residents pay school taxes based on their income and all non-residential property owners continue to pay the property tax.
Public Assets Institute