Rethinking the property tax
Commissioner analyzes how tax burden is shared
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By LOUIS PORTER Vermont Press Bureau - Published: November 8, 2009
STOWE – Rich Westman says in all likelihood he will become the first tax commissioner to recommend an increase in the statewide property tax rate since there has been a statewide property tax. That has started Westman thinking about bigger questions like how equitable the property tax and education funding systems are and how exemptions and tweaks to the property tax, from income sensitivity to local option taxes to current use, have lead to the change.
It's not really Westman's fault the property tax rate is expected to increase next year.
Each year, the tax commissioner recommends a rate based on factors he has have little control over – such as spending by schools and the growth (or decline) in the value of land, houses and other property. While spending has gone up, the increase in Vermont property values have outpaced it, meaning the rate typically has gone down even while the total amount of money collected has increased. Add to that the fact Westman, a former state representative, only has been in his new job a few months.
That doesn't mean he won't get the blame.
"I expect it will be a case of 'shoot the messenger,'" Westman said.
The value of the state's education grand list is expected to decrease in 2010, 2011 (by as much as 3 percentage points) and in 2012. The way the value of that property is calculated – with a three-year rolling average – means the impact will be not as sudden, but will stretch out longer than if it were based on the value of property taken each year.
The anticipated rate increase is one reason Westman has put together a presentation on what has happened to the statewide property tax system since Act 60 – the often-maligned education funding system put in place by the Legislature in 1997 – with "Westman of Cambridge" among the "yes" votes. He has begun going on the road with his show to the association of listers, to the state Department of Education and, last week, to the Rotary Club of Stowe.
But why?
The short version of Westman's talk is that the state has granted exemptions to paying property taxes to various constituencies, groups and areas. Downtowns, where nearly everyone believes future development should be concentrated, have gotten tax increment financing districts that divert property taxes to local improvements to help make areas attractive for growth.
Current use has lowered property taxes for those who keep their farm and forest land open. Income sensitivity has allowed most residents to pay property taxes based on earnings, not on value of their land, keeping homes in the hands of people who might not otherwise be able to afford them.
Statutorily exempt properties owned by nonprofits — from colleges and universities to public pools — have been exempted from some property tax rolls. Local option taxes – mostly on the western side of the state that does not face competition from New Hampshire – have helped communities reduce their reliance on the property tax by imposing local sales or rooms and meals taxes. A cluster of smaller benefits, such as exemptions for veterans, renewable power projects and machinery and equipment, also have been put in place or are being contemplated, as well.
The result is that many Vermonters benefit in some way from one exemption or another, and they were put in place for good reasons, Westman said.
But the upshot is that those left without one or another of those benefits – whether they are residents who earn too much to get income sensitivity or businesses who aren't in a TIF district – bear the burden.
So owners of non-residential property, including commercial buildings, second homes and acreages larger than homesteads but not in current use, are taxed on 46 percent of the total education grand list. Residents who do not qualify for income sensitivity have 19 percent of the total property value and are taxed on it and the portion of the state's total grand list that income – adjusted residents pay taxes on (after the effect of income sensitivity is taken into account) is about 16 percent.
That means 10 percent of the state's education grand list is lost for taxation purposed to income sensitivity, 5 percent is reportedly lost to statutorily exempt institutions (although the true number is probably much more), about 3 percent to current use, and a percentage point or so to exemptions such as TIFs, machinery and equipment and others.
Other factors
Several other things are happening at the same time, Westman said. The portion of the Education Fund that comes from property taxes (a transfer from the General Fund, lottery receipts and other sources fund schools as well) has increased from 55 percent in 1999 to 70 percent now.
The General Fund – with its own likely deficit of tens of millions of dollars expected next year is unlikely to ride to the rescue. And the exemptions are growing. Income sensitivity, that is the cost of saving lower- and middle-income Vermonters from paying their property taxes based on the value of their homes, has grown from less than $110 million to more than $140 million since fiscal year 2006.
The handful of TIF districts in Vermont only account for a tiny fraction of the loss in property taxes, but Westman said he expects the numbers to dramatically increase as cities realize the potential. It would be crazy for officials running a downtown not to apply for such an exemption, given the benefit it can have for development, Westman said.
But "we are supporting all of that development on the back of the property tax," Westman said. "Can we afford to have every major town exempted?"
Meanwhile, the cost of current use – for a goal of keeping land open that most seem to agree on – has grown by about 10 percent in the last year alone.
And the total extent of some of the exemptions, particularly the statutorily exempt property, isn't even known. That's because towns have historically chosen what properties to exempt from taxes and largely continue to be in charge of those decisions, even though it's the state's other taxpayers that make up much of the difference today. The towns report the value of those exemptions, but there is little way to police the real value, Westman said.
For instance, Berlin typically reports about $20 million of taxable property, including Central Vermont Medical Center and offices of Blue Cross/Blue Shield of Vermont, and a taxable grand list of about $400 million, Westman said. But this year, the select board decided to thoroughly evaluate the amount of exempt property on the books. The result? A value of $103 million for the exempt properties, a five-fold increase, Westman said. Meanwhile, Middlebury, with all of Middlebury College, as well as other institutions in the town off the books, reports only $13.6 million in exempt properties, Westman said.
"Anyone want to make a bid at $13.6 million on Middlebury College?" Westman said.
What's next?
But if the purposes of all of those exemptions are good, what's the problem?
Well, there are some things happening that worry Westman. For one thing, the number of farm, commercial and industrial parcels are declining, even though the total value they have still is increasing. Partly that may be because one big-box store accounts for many small stores and one large farm accounts for many small ones (although the large farm may still consist of several parcels).
Residential parcels, meanwhile, are increasing.
In addition, it makes Westman wonder how equitable the school funding system truly is. That was, after all, the goal of the Brigham lawsuit and Act 60 which resulted from it. But Whiting, where Amanda Brigham was from, is a small town. It doesn't have a downtown that could likely benefit from a TIF district like the one in Winooski, or a local option tax.
"We have eroding equity," Westman said. "We have added Band-Aid after Band-Aid."
And "those people who don't get the Band-Aids get more and more of the burden," Westman concluded.
louis.porter@timesargus.com