Education Property Taxes

How did we get here? and what do we do next?

Across all school budgets in the state, education spending increased substantially this year.

There were numerous factors, including:

increases in costs related to health care (about 4.5 cents on the tax rate),
school-based mental health (about 5 cents on the tax rate), and
infrastructure (about 5 cents, due to aging infrastructure and in some locations, PCB mitigation).

In addition, the state bought down the tax rate last year– a gap that needed to be made up this year (about 5 cents). Those increases alone drove an estimated increase of about 20 cents on the average tax rate.

In addition to all of the cost pressures mentioned above, the projected tax rate increases for Norwich and Thetford are also the result of changes in Vermont’s education funding formula passed in Act 127 of 2022. The new formula makes it easier for communities to raise revenues for their school if they serve a lot of students who are more expensive to educate (i.e. economically disadvantaged students, English language learners, students in small/rural schools and high school students).

Norwich and Thetford have few students in these categories, and neither district is considered small or rural. As a result, the net effect of these tax changes is that the tax rates in both towns are expected to increase even if school spending had remained flat or been cut. If the changes to the formula remain in place, tax rates in both towns could double in the next five years.

Recognizing that the property tax increase is unbearable for many Vermonters, the Legislature included a cost containment provision in the Yield Bill that, depending on your point of view, either encourages school districts to spend less or penalizes them for spending too much. In the next budget year, the penalty is projected to fall hardest on districts that are mid size and that operate schools.Thetford will be the hardest hit district in the state, followed by Norwich. The assumption appears to be that the prospect of a 100% increase in tax rates is not enough of a deterrent to high spending.

A member of the Norwich school board has called this a “tax bomb.” The reality is there is no way our local boards can cut their way out of this, so please be very gentle on your local school boards. Norwich now has fewer homesteads than it did in 2018. Hopefully the “tax bomb” is not a contributing factor. In both Norwich and Thetford, the non homestead rate (which applies to second homes and AirBnBs) is much lower than the homestead rate. We have shared this concern with the House Ways and Means Committee.

Moreover, the formula change in Act 127 is likely to more rapidly increase spending. If it costs less than a dollar to raise more than a dollar of education spending, districts that gain "tax capacity" under the new formula are more likely to increase spending. In addition, in districts that benefit significantly from the new weights, it may now be less burdensome at the district level to pay for social services out of education dollars, even foregoing a medicaid match, However, this makes the system as a whole more expensive, and that excess cost is shared system-wide.

Only one other state uses this kind of funding formula. They spend about half as much as us and are trying to increase spending.

In other words, unless we make significant changes, the estimated increases are an understatement.

The recently passed yield bill sets the property and income yield numbers, key figures that school boards and towns use to set education property tax rates. While tax rate increases will vary by district, the average statewide increase, once projected to be over 20% has now dropped to 13.5%. We were able to bring the increase down by adding new revenue sources (cloud software tax, short term rental property tax) and applying one time funds to buy down the tax rate. For all of the reasons mentioned above, we know that the tax rate increases in Norwich and Thetford will be greater than the state average. The increased spending means Sharon and Strafford will also pay more.

How much greater will tax rates be? Unfortunately, it’s a bit too early to know. School administrators need time to run the calculations with the new yield numbers. In Norwich the situation is even more complex as the town is undergoing a reappraisal. Because of this, the town won’t know new property valuations and the updated Common Level of Appraisal (CLA) until late July or early August, a key figure necessary to determine the final tax rate.

Next year, EVERY district will enter the next budget season facing a bump of at least 7 cents because we chose to buy down the tax rate this year. Every time that is done, it creates a spike the following year, as it did this year. This is one of the main reasons the legislature was hesitant to buy down the rate further this year; it just makes the problem worse next year.

While the Governor’s message that tax rates were too high was very simplistic, his plan to lower them this year was anything but. The governor wanted school districts to borrow against next year in order to bring down the rate this year. Given the projected increases in coming years, that seemed perilous, so the legislature overrode this request. We need genuine cost containment. Hiding the problem with deficit spending just digs the hole even deeper.

In addition, the Republican majority leader advocated for “capping” growth with an “allowable growth threshold.” This strategy was tried and removed previously in Act 46 precisely because its effect was to give the green light to a lot of districts to grow more than they needed, raising spending rather than limiting it. The 10% cap we took out of the formula this session because it fostered higher spending is another example of why this so-called “containment” increases spending.

Similarly, clawing back reserves (as some demanded) could also have had perverse consequences. Sharon would have lost the funds it has been slowly socking away to prepare for facilties upgrades. And, as so many have reached out to tell me, Thetford and Norwich have more households that earn above the income sensitivity threshold on average, but there are many people in every town that cannot or will not support these increases.

Beyond the efforts described above, the governor has been largely absent from efforts to generate solutions. The legislature was unable to arrive at more comprehensive solutions this session, but did take some steps to ensure we were in a different situation next year.

What does the yield bill do?

For an excellent summary of the financial impacts of the yield bill, see this link to a fiscal analysis prepared by the Joint Fiscal office at the Vermont legislature: Yield Bill PDF

One bright spot: the bill increases the property tax credit for people in the income sensitivity program.

This should blunt the harm to taxpayers with the most modest incomes. Several of us have also been looking for ways to means-test this program to ensure it is protecting the right taxpayers.

The education commission established in the bill is designed to make recommendations related to the structure of the education system, as well as the finding formula. To paraphrase a former Chair of the House Appropriations committee from a few years ago, the right solution for us now might be the one that makes everyone give a little to make us all better off. Vermont just does not have the tax base to support the expanding demands on the education fund, and our communities need to bring our system in line with reality in a way that protects our communities and opportunities for our children.

What does the legislature need to do?

The current cost pressures are not all cost pressures local districts can address on their own. They need help from the legislature. Without legislative action, we make our communities unaffordable for too many people. And as our communities become unaffordable, fewer people with small children can afford to live there, shrinking our student population even more. This is a negative downward spiral the legislature must interrupt.

The primary levers to do so include:

Changing the funding formula. Our current formula is both hyperinflationary and not providing the intended benefits, even to some of the communities it was supposed to benefit. This must be the top priority of the House Ways and Means committee and the Senate Finance Committee next year. We can both use weights to ensure kids who cost more to educate are supported AND ensure both a floor and reasonable limits on how much education costs.
Tackling out of control health care costs. The cost of an individual plan on the health care exhange has doubled since Gov. Scott came into office. With premiums increasing by double digits every year, there is no reasonable limit to inflation in school costs. Moreover, as our population ages, and more Vermonters shift to Medicare, the impact of cost shifting to private insurance is becoming more concentrated, driving ever higher prices.
Addressing the cost shift of state social services to the education fund. The Governor has been balancing the state mental health budget with vacancy savings and keeping increases far below inflation– effectively a cut. Since schools are the payers of last resort, those costs are falling back to the Ed Fund. In other words, by under budgeting at the state level, the Governor can claim to be reducing costs, while forcing school districts to pick up the tab, as they are required to do in statute. We need a real plan for how to protect our safety nets without breaking the backs of tax prayers.
Supporting strategic consolidation, particularly at the high school level, paired with reasonable limits on where districts pay tuition. We have high schools of fewer than 100 students that struggle to provide the breadth and depth of opportunities students need. The White River Valley district, which merged 2 high schools and 2 middle schools into 1 high school and 1 middle school is an example of how this kind of collaboration can both give kids better opportunities AND lower cost. At the same time, there is no point financially in closing small high schools only to support tuition to even smaller schools, to out of state prep schools, or to schools that can’t or won’t serve all children or above by VT antidiscrimination statutes. Limiting where students can go would ensure the VT schools that serve the majority of our children, including schools like Thetford Academy are more robust and cost less per pupil.
In the short run, targeting of infrastructure dollars where they will make the biggest difference: places that are consolidating and places coping with PCB mitigation. Addressing “must do” priorities first will free capacity for “want to” priorities later.
Addressing the explosion in cost in special education services for students with extraordinary disabilities, especially related to tuition to specialized settings. The last few years of budget data suggest we are serving fewer children but at much higher prices, including in for-profit settings.

What can communities do to mitigate this pressure?

Work on lowering the cost per pupil to try to minimize the impact of the excess spending penalty.
Encourage taxpayers to apply for the income sensitivity program. Many taxpayers do not realize they are eligible.
Support smart development of affordable housing that makes it possible both for young families to move here and for seniors who want to downsize to find a place within the community that they can call home. We have fewer children here than we did 20 years ago. To the extent we make it possible for more children to attend our schools, the lower the per pupil cost.
Take advantage of new opportunities in H.630 to partner regionally to share services, e.g. high quality, affordable placements for students who need specialized settings.

State Representative

VOTE NOVEMBER 5, 2024