• Recession effects
    March 30,2014
     

    Vermonters are still suffering the after-effects of the Great Recession, and one of those effects is the upward pressure on property taxes. When these causes and effects are fully understood, policymakers may feel less pressure to alter a system that, for the most part, is working well.

    Back when the recession hit, Vermont and other states fell into crisis mode because of plummeting revenues caused by the decline in incomes and economic activity. Thus, events compelled lawmakers to slash state spending so that the shortfall of revenues would not create huge budget deficits.

    One of the targets for cuts was the transfer of General Fund revenue to the Education Fund. In those early days of the recession, the Legislature slashed the transfer by $23 million.

    Every year money goes from the General Fund — which is supported by broad-based taxes, such as the income and sales taxes — to the Education Fund in order to ease pressure on property taxes. State money has gone to education for decades. Before the passage of Act 60 in 1997, it was called state aid to education, and it was always a political football. Governors striving to balance their budgets would cut state aid, and critics would charge that they were balancing their budgets on the backs of property tax payers. They were right: As aid derived from broad-based taxes fell, property taxes were forced up.

    When the Legislature passed Act 60, it realized it needed to continue to support education from broad-based taxes or else property taxes would skyrocket for everyone. So part of Act 60 pledged the state to a specific level of support to the Education Fund from the General Fund. When the recession forced legislators to shrink that support, they were reneging on a promise.

    Initially, that $23 million cut in the state transfer did not create a huge burden on property tax payers because President Obama’s stimulus program provided the state with $19 million in federal money, partly offsetting the $23 million reduction. Eventually, stimulus spending ended, and the Education Fund faced a yawning deficit created by the lack of money from the General Fund.

    The Legislature responded by lowering its promised level of support for the Education Fund. The new smaller transfer would thereafter be the promised amount, so the state would no longer be breaking its promise. Yet the Education Fund was still not receiving money sufficient to avoid upward pressure on property taxes. Since then the Legislature has sought gradually to increase the amount of the transfer. In the proposed budget for the coming year it would add $1.5 million, which goes a little way to offsetting that initial $23 million loss. Also the amount of the transfer is indexed to inflation.

    Taxpayers concerned about rising taxes rejected nearly three dozen school budgets this year. Concern has been mounting that school budgets are continuing to rise even as enrollments are falling. Indeed, falling enrollments, which diminish the per-pupil reimbursement from the state are one reason why taxes are going up.

    Last week House members revealed that they would not have to raise the statewide property tax rate as much as they had feared. One reason is that school budgets are not rising as rapidly as expected. State officials had expected school budgets to increase by 3.8 percent; instead it appears they are rising 3 percent. The budget restraint exercised by school boards and the rejection of some budgets by voters shows that pressure from the people at the local level continues to help keep school costs in check.

    The level of support for education from the General Fund remains at a diminished level. A decision by the Legislature to return to the earlier level of support would provide a huge check on rising property taxes, though it would require a decision to use money from the income and other broad-based taxes. Indeed, the tension between income taxes and property taxes as a source for education funding has always existed.

    Raising the income tax to pay for education would shift part of education spending to a progressive tax that draws more from wealthy taxpayers. Doing so would be more fair. As it is, wealthy taxpayers pay for education out of their property taxes, which tend not to demand as a high a percentage of their income as income taxes do.

    But politically, raising income taxes to pay for education is not on anyone’s radar. Nevertheless, as lawmakers consider the various pressures on the property tax, they ought to remember the effects of the recession and the choices it forced upon them. Eventually, they may be in a position to rectify those choices.

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