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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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