Vermont Personal Income Tax and Education Financing System Changes of 2018

Two major factors contributed to the Legislature's decision to make changes to both the personal income tax and to the education financing system this year: changes to the federal income tax laws and the use of one-time money last year to reduce property taxes. The House decided to undertake a major tax overhaul to address both the income tax and the education funding situations. Neither the Senate nor the House felt that it was sustainable to continue using one-time money, which is not consistent from one year to the next, to finance our education system. The resulting legislation passed by both bodies relies on dependable sources of revenue while holding the residential property tax rate increase to 2.6 cents.

The Income Tax
The federal income tax changes passed by the Trump administration and the Republican-dominated Congress are projected to increase the Vermont personal income tax revenue by $30 million. The state tax increase will be due primarily to the elimination of the $4,050 personal exemption, the elimination of several itemized deductions, and the increase in the standard deduction. It has been the intention of both the Governor and the Legislature to ensure that Vermonters would not be impacted by the $30M increase.

The following changes were made to the state income tax system:
  • creates a new Vermont standard deduction equal to $6,000 for single filers, $12,000 for married couples and $9,000 for heads of household;
  • creates a new Vermont personal exemption equal to $4,150 per exemption;
  • reduces the income tax rates by
Ø lowering rates for low and middle income taxpayers by 0.2%, and
Ø collapsing the top two brackets (8.8% and 8.95%) into one for taxable income greater than $233,000 and setting the rate at 8.75% ;
  • increases the Vermont earned income tax credit (EITC) from 32% of the federal EITC to 36%;
  • creates a 5% tax credit on the value of charitable contributions up to $20,000; and
  • exempts taxable social security income from state income taxes for single filers with less than $45,000 in adjusted gross income (AGI) and married filers with less than $60,000 in AGI, and phases out the exemption between $60,000 and $70,000 of AGI.

Education Financing
It is the obligation of the state to raise enough money to pay for all the school budgets passed by local school districts in March.  The use of one-time funds last year at the Governor's insistance to keep property tax rates in check led to a potential 7 cent increase in residential property tax rates this year.  Earlier this year the Governor challenged school districts to hold budget increases to no more than 2.5%.  Actual budget increases voted by taxpayers in March came in lower than his request at 1.6%. This reduced the expected property tax increase to 5 cents, which the Governor still finds unacceptable. His remedy has been to use $58M of one-time money again to keep tax rates from rising. The Legislature saw the challenge as keeping the property tax rates from increasing, but doing so in a sustainable manner that wouldn't depend on inconsistent one-time funds from one year to the next.  The changes to education financing seek to hold property tax rates steady while fully supporting the local school budgets voted in March. The loss of a huge percentage of students over several decades and its effects on the cost of education are not ignored, and the changes made to the structure of the educational system in previous years are beginning to achieve results.

These are the major changes to education financing:
·        repeals the General Fund transfer to the Education Fund on a revenue-neutral basis by
Ø dedicating 100% of the sales and use tax and 25% of the rooms and meals tax to the Education Fund;
Ø transferring adult education and literacy, Community High School of Vermont, the renter rebate program, and reappraisal and listing payments to the General Fund;
·        modifies the property tax adjustment by
Ø reducing the maximum housesite value limit for a full adjustment from $500,000 to $400,000;
Ø reducing the maximum housesite value limit for a partial adjustment from $250,000 to $200,000;
·        sets the property yield $10,032 per $1.00 of homestead property tax;
·        sets the income yield to $12,135 which determines the tax rate on household income for households eligible for income sensitivity;
·        sets the equalized tax rates:
Ø Average homestead property tax rate = $1.526 (a 2.6 cent increase from 2018, but 0.1 cent lower than 2017);
Ø Average tax rate on household income = 2.53% (0.02% lower than 2018, and 0.17% lower than 2017);
Ø Nonresidential tax rate = $1.590 (5.5 cents higher than 2018 and 2017);
·        sets up a task force to study the student-to-staff ratio issue and make recommendations by the end of the year on how to improve it;
·        separates the homeowner rebate into two parts, municipal and educational, that will be itemized separately on the tax bill for clarity.

This tax bill reflects the decision by the legislature to use the one-time money available this year to fully fund the Education Reserve Fund, reduce the shortage in the Teachers' Retirement Fund, and pay for other necessary short-term obligations as appropriated in the state budget. A tri-partisan House vote of 89 – 43 adopted this proposal as a reasonable approach to protect Vermont taxpayers from adverse changes at the federal level and to provide a sustainable funding formula for our valuable public education system.