Lawmakers, analysts debate replacing Vermont school property tax with income-based levy

Members of a Vermont legislative committee spent more than two hours on a policy proposal to replace the current homestead portion of local school property taxes with an income-based education tax, hearing detailed analysis about distributional effects, revenue volatility and implementation hurdles.

Patrick Tidderton, of the Joint Fiscal Office, told the panel that the bill under discussion would calculate the proposed education tax on adjusted gross income (AGI) and that the draft language treats some business income as part of AGI. "The brackets introduced are based on just AGI," Tidderton said, and he walked members through tradeoffs he labeled under the pillars of a high-quality tax system: sustainability, reliability and fairness.

The proposal drew sharply different reactions. Supporters and some education advocates said income-based funding could better align school financing with ability to pay; business groups and tax analysts warned the change could increase year-to-year revenue swings and complicate administration. "No other state has or is considering an income tax to replace school property taxes on homeowners," Jake Feldman of the Tax Department told the committee, urging caution and more study. "If someone comes to the committee with the tax policy idea and it's not anything that anybody is doing, some red flags should go up."

Why it matters

The committee was presented with two core trade-offs: (1) progressivity and perceived fairness — who pays — and (2) revenue stability. Tidderton and other presenters highlighted that personal income taxes can produce sizable surpluses in good years and steep shortfalls during recessions, while property tax bases are comparatively stable year-to-year. Tidderton described the 2008 recession scenario as an example: under a hypothetical swap of homestead property tax to income tax, the education fund could have faced a shortfall in the range Tidderton cited as roughly $160 million to $170 million, and he said that would have translated into an estimated 20-cent increase in the statewide non-homestead rate in that scenario.

Key discussion points

- Structure and scope: The draft under discussion calculates the new levy on AGI and would include pass-through business income that shows up on a filer's AGI; it does not replace corporate income tax, Tidderton said. The bill as described also contains an adjuster intended to scale local rates when districts' spending differs from allowable amounts.

- Distributional effects: Witnesses and analysts showed that a relatively small share of taxpayers pay a large share of income tax revenue. Tidderton and others noted that roughly 25,000 filers at the highest end contribute a large portion of personal income tax revenue; one slide shown to the committee indicated about 3% of taxpayers account for roughly 42% of state personal income tax receipts (presentation numbers as provided to the committee).

- Who would win and lose: Several witnesses warned the change would raise taxes for some modest-income households whose property values are low compared with their incomes and could reduce visible property-tax bills for owners of high-value homes who now pay comparatively less on income. Stephanie (executive director, Public Access Institute) told the committee she and her organization favor gradually moving the homestead burden off property values and said an income-based approach could reduce some inequities, particularly for second-home owners and very high-value properties. Jake Feldman and a chamber representative said the state risks greater volatility and potential business competitiveness questions if reliance on income-tax revenues increases.

- Administrative and timing issues: Tax department staff explained fundamentals of withholding and withholding tables: state and federal withholding operate on calendar-year schedules, so any midyear change in how schools are funded would not be visible to taxpayers at the time towns adopt budgets or to employees expecting midyear changes in payroll withholding. Feldman warned that, under current withholding practice, "there's no reflection" of a new school tax in paychecks until reconciliation at tax filing, potentially making school costs feel less transparent to taxpayers.

- Examples from other states: Committee members discussed recent experience in California and Massachusetts with high-end income surcharges. Tidderton and witnesses summarized academic and policy-center analyses showing dynamic responses that reduced static revenue expectations; Massachusetts's 2023 surcharge on incomes over $1 million ultimately raised revenue near or above initial estimates in its first year, while academic work on California found revenue collected below static projections largely because of changes in how income was reported, not mass out-migration.

Committee directions and next steps

Committee members and staff agreed on several follow-ups: a legislative lawyer or counsel will brief the panel on administration and legal issues (Tidderton noted counsel was scheduled to appear soon), the fiscal staff will refine distributional and revenue scenarios and committee staff will provide clearer comparisons of the governor's and House proposals for members to review. No formal votes or motions were taken at the hearing.

Details and context

Tidderton gave several numerical points to illustrate scale: the presentation showed the state collects several hundred million dollars in homestead property tax revenue (a figure cited in committee materials as "about $600,000,000" for homestead in a recent year) and forecast personal income tax receipts around $1.3 billion for the year referenced in the briefing. He also highlighted that withholding accounts for about 70% of personal income taxes, and that estimated payments and one-time capital gains make personal-income-based revenue "chunky" and therefore more volatile than property-based revenue.

Public testimony and advocacy groups

Stephanie of the Public Access Institute asked the committee to consider incremental changes first that would update income-sensitivity thresholds and circuit-breaker levels (she noted the existing thresholds had not been updated in decades) while continuing to study a longer-term shift to income-based funding. A chamber representative argued the business community favors refining the property-tax model and addressing education cost drivers rather than replacing homestead funding with an income tax.

What the committee did not decide

There was no final action or vote. The committee did not adopt rates, a final bill text or a funding timetable. Several members emphasized that questions about school cost drivers (health care costs, special education, staffing) remain central to any permanent change in funding structure.

Ending

Committee members directed staff to return with additional modeling, legal analysis and clearer comparisons of competing bills; the panel scheduled follow-up briefings and signaled further hearings before making policy choices.