Senate committee weighs shifting local-option tax split; analysts warn of potential pilot fund shortfall

The Senate Committee on Government Operations heard fiscal analysis Tuesday on a proposal to change how Vermont's local-option tax revenue is split between municipalities and the state's pilot special fund.

Chris Rube of the Joint Fiscal Office told the committee that "state law grants towns in Vermont the authority to levy an additional 1%, tax on sales, meals and alcohol and in order rooms," and that under current statute the revenue is apportioned 70% to the levying municipality and 30% to the pilot special fund. He said the bill before the committee would move that split to 75/25; legislators in the House had considered an 80/20 allocation.

The nut of the committee briefing was financial: the Joint Fiscal Office estimated roughly $59.2 million in total local-option tax receipts in fiscal 2026 based on towns that had approved those taxes and FY24 data. After the tax department's per-return administration fee (about $5.96 per return) and the split, the office calculated the pilot fund would hold roughly $16.8 million under the current 70/30 split, about $14.0 million under a 75/25 split, and roughly $11.2 million under an 80/20 split. Rube warned that an 80/20 split "creates a structural deficit moving forward" because it would not cover the program obligations the legislature typically funds from the pilot special fund.

Why this matters: the pilot special fund (payment in lieu of taxes) is the primary state source used to make pilot payments to municipalities that host state-owned properties, including corrections facilities and the University of Vermont. Committee members were told FY24 ended with a pilot fund balance of about $10.3 million after several years of rising consumption-tax collections, and that FY25 pilot payments were fully funded for the first time in recent history. The FY26 budget passed earlier in the day appropriates about $14.5 million from the pilot fund for recurring pilot payments and related onetime items.

Analysts flagged two onetime appropriations in the FY26 budget that affect the near-term pilot balance: $1,000,000 for a municipal granular stabilization program (expected to fund roughly the program's first two years) and $1,150,000 shifted from the Transportation Fund into a pilot line for town-highway nonfederal disasters. Rube cautioned that if those onetime appropriations become recurring obligations, or if additional towns adopt local-option taxes in coming years, cash flows and the fund balance could change and the legislature would need to revisit the allocation.

Department of Taxes Chief Operating Officer Andrew Stein described the tax department's administrative role and the fee that comes off the top of local-option collections. "So the way that it works... it's per local option tax... Return is from the retailer, not from the town submitting it," Stein said, explaining the $5.96-per-return deduction and the compliance work the department performs to generate and collect taxes that ultimately benefit municipalities.

Committee members asked technical and policy questions: whether the Joint Fiscal Office estimates include towns that have not yet implemented all possible tax categories (sales, meals, rooms), whether additional towns that adopt local-option taxes would materially change the fund outlook, and whether a phased effective date would help the department implement the change without system problems. Andrew Stein asked the committee to consider an effective date of Oct. 1, 2025, for the allocation change to allow time for coding and testing in the department's systems.

Discussion and next steps: several senators said they supported moving cautiously. One member who has advocated for an 80/20 split said the fiscal briefing was "the most well explained argument against why we should do it." Committee staff and the tax department offered to supply more granular town-by-town data and to clarify administration costs.

Ending: The committee did not take a formal vote on the allocation during the hearing. The bill language (draft 2.1) was referred for additional technical edits and timing clarifications; committee members signaled interest in advancing a 75/25 compromise but asked staff to model the impacts under alternative assumptions (additional towns adopting taxes, changes in consumption tax revenue) before final action.