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Blue Ribbon Tax Structure Commission Education Property Tax Discussion September 13, 2010 Goal of Today’s Discussion 1. Revisit fundamental decision points for statewide education property tax. 2. Explore big picture models for income based and property based education funding systems. Summary of Previous Presentation • Act 60 was a political compromise. Some policymakers wanted an income tax to fund education and others wanted a property tax to fund education. • Vermont has a hybrid tax system for housesites, where people see EITHER ▫ A hybrid system where many property owners are eligible to pay based on income ▫ A property tax system that provides tax relief for homeowners with an income up to $90,000 • The education tax double bind: taxpayers paying based on income may have better deal in all income system AND taxpayers paying based on property may have better deal in all property system. Statewide Tax for Education: What Do You See? • A system that should be converted entirely to an income tax. • A system that should be converted entirely to a property tax. • A system that is rightly a hybrid system. ▫ If this is correct, ought the Commission tweak the system as the Legislature does annually? Tax Models for Homestead Statewide Education Property Tax: Disclaimers • Today’s deliberations are preliminary to any final proposals or recommendations. • Today’s discussion illustrates general concepts and associated tax rates. ▫ Models presented today would require major refinement. Tax Models for Homestead Statewide Education Property Tax: Assumptions • Options are designed to be roughly revenue neutral for FY2011 • Revenue-neutrality is accomplished by adjusting base tax rate on income or property ▫ Base tax rate on income or property is adjusted annually to cover school spending. ▫ Tax rate on income or property varies by town with per-pupil school spending • Base rate establishes minimum state per pupil spending, average rate is function of base rate and all local school spending choices • Existing tax burden would be shifted among taxpayers - impact would vary widely depending on each taxpayer’s particular circumstances • Actual FY2011 tax rates: ▫ Base Rate: 1.8% on household income – $0.86 on homestead value ▫ Average Rate: 2.62% on household income – $1.25 on homestead value Income Tax to Fund Education: General Considerations • Broadens tax base; however, income is a less stable tax base than property, which makes tax rate setting more difficult • Tax burden shifts among resident homeowners depending on relationship between income and homestead value ▫ Generally, high-income resident homeowners pay more • Income is arguably a better measure of ability to pay than property • Renters may pay a new tax without offsetting tax reduction (AGI Tax Only) • Eliminates some complexity, including property tax adjustment; reporting of Household Income depending on new base; etc… (AGI Tax Only) • Adds complexity; requires state-level administration; requires employer- based withholding; etc… • Other issues: transition & cash flow Model 1: Education Income Tax Based on AGI Homestead tax base $16,059.9 • Issues: see previous considerations slide. Base Rate 1.48% • Move to AGI broadens the tax base by nearly Average Rate 2.15% 68%. Gross homestead $345.2 taxes Adjustment $0.0 Net homestead taxes $345.2 Model 2: Education Income Tax Based on AGI Capped at First $500k of AGI (Income Sensitivity for High Income Earners) • See considerations slide Homestead tax base $16,059.91 • Variation on Model 1 Base Rate 1.59% • Capping AGI subject to Average Rate 2.31% tax at $500K reduces revenue by $24.2M Gross homestead $370.8 taxes • Average spending- Adjustment -$24.2 adjusted tax rates increase for everyone to cover loss Net homestead taxes $346.6 Model 3: Education Income Tax Based on Household Income (HI) • See considerations slide Homestead tax base $13,030.9 • Variation on Model 1 Base Rate 1.83% • HI is defined more broadly than AGI - arguably, HI is a better measure of ability to pay Average Rate 2.66% • Assessing tax on homesteads excludes renters Gross homestead • More complexity: all resident $346.7 taxes homeowners (including those with HI over $90K) required to report HI Adjustment $0.00 • Tax base under this option is smaller than models 1 and 2, so average spending-adjusted tax rates Net homestead taxes $346.7 increases Property Tax for Education: General Considerations • Reduces complexity: eliminates property tax adjustment; reporting of HI; privacy issues related to HI; housesite rules; etc… • Existing tax burden among resident homeowners shifts depending on relationship between income and homestead value ▫ Generally, resident homeowners with HI over $90K pay less under all property tax options • Raises ability to pay issues for low-income resident homeowners • Relies on stable revenue source; avoids overreliance of income taxes • Allows tax administration primarily at local level, but the equalization study still needed Model 4: Property Tax with No Adjustments • Issues: see previous Homestead tax base $417.2 considerations slide. • Prebate (Income Sensitivity) Base Rate $0.57 eliminated. Average Rate $0.83 • Rebate (Circuit Breaker) eliminated. Gross homestead $346.1 • Everyone pays same rate taxes regardless of income or circumstance. Adjustment $0.00 • Generally, shifts education tax from residents homeowners with Net homestead taxes $346.1 HI over $90K to those under $90K Model 5: Property Tax with No Adjustments but a Homestead Exemption of $83,000 • Current adjustments (prebate and rebate) Homestead tax base $417.2 are used to create exemption • Resident homeowners exempt $83K from FMV of homestead value Base Rate $0.86 • Gross education property taxes reduced by about $1,038 per homestead Average Rate $1.25 • Exemption proportionally greater for lower-value homesteads Gross homestead • Creates a new benefit for roughly 58,000 $522.1 resident homeowners with HI over $90K taxes • Roughly $60M in tax shifted to resident Adjustment $-176.0 homeowners with HI under $90K • Exemption applies to education taxes only Net homestead taxes $346.1 • See previous considerations slide Model 6: Property Tax with a Homestead Exemption of $45,000 and Current Rebate System • Eliminates Prebate (Income Homestead tax base $417.2 Sensitivity) program. • After accounting for the cost of rebate, exemption from Model 5 is Base Rate $0.86 reduced to $45K. • Gross education property taxes Average Rate $1.25 reduced by about $563 per homestead. Gross homestead • Roughly $33M in tax shifted to $522.1 resident homeowners with HI taxes between $47K - $90K Adjustment $-175.1 • Resident homeowners with HI under $47K held harmless, but continue to report HI. Net homestead taxes $347.0 Model 7: Property Tax with Current Rebate System Only • Eliminates prebate (Income Homestead tax base $417.2 Sensitivity) program. • Loss of income sensitivity (prebate) and exemption increases tax for Base Rate $0.72 rebate-eligible resident homeowners ▫ Consequently, cost of rebate increases dramatically from $23.5M Average Rate $1.05 to $88.8M • Resident homeowners with HI under Gross homestead $47K held harmless, but continue to $437.2 report HI taxes • Generally, shifts education taxes onto Adjustment $-88.8 resident homeowners with HI between $47K and $90K Net homestead taxes $348.4 Model 8: Property Tax with Current Rebate with Expanded HI Limit from $47,000 to $53,000 • Raises HI eligibility threshold from Homestead tax base $417.2 $47K to $53K • Increases cost of the rebate by another $11.7M compared to Model 7 Base Rate $0.74 • Maintains value of rebate over time ($47K threshold has not been Average Rate $1.08 increased since 1995) Gross homestead $449.3 taxes Adjustment $-100.5 Net homestead taxes $348.8 Something to Consider • The fairness of the current system and all property tax models tends to be related to the ratio between house value and income. • This ratio is different for everyone. • This ratio can change for taxpayers over time. (For example, prime earning years versus retirement.) • Ratio is entirely unregulated. Fundamental Question Regarding Education Tax Funding. • Should the Commission recommend a new system for how Vermont resident households support public education? • Winners and losers are everywhere, but we can generalize. • Solely an income tax (potentially a large tax hike on Vermonters with an AGI >$90,000) • Solely a property tax (large tax hike on Vermonters with an AGI <$90,000) • Hybrid system is the status quo. Statewide Tax for Education: What Do You See? • A system that should be converted entirely to an income tax. • A system that should be converted entirely to a property tax. • A system that is rightly a hybrid system. ▫ If this is correct, ought the Commission tweak the system as the Legislature does annually? Next Steps 1. Deliberate regarding whether the system ought to be an income tax, property tax, or hybrid tax. 2. Direct staff regarding development of the models presented today.
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