Senate Finance resumes debate on replacing homestead property rate with an education income tax

The Senate Finance Committee on Feb. 27 continued a staff-led review of proposals that would replace the homestead property tax rate with an education income tax, a discussion framed around revenue stability, equity and how the change would affect school and municipal funding.

Patrick Turchin, a presenter, opened the session by noting the purpose of the briefing: “nothing I’m about to say is either, you know, cheerleading for or denigrating this idea.” He told members the presentation compared the two tax types against “the six pillars of a high-quality tax system” to help inform the committee’s conversation rather than to recommend a specific rate or design.

The presentation emphasized predictability and sustainability as a central distinction. Turchin and other staff said property-tax revenue is more stable because towns maintain a grand list and reappraisals and the Common Level of Appraisal (CLA) produce a known tax base by the time rates are set. By contrast, staff noted personal income tax receipts are more volatile: withholding generates roughly 70% of income-tax receipts while quarterly estimated payments and capital gains make up the remainder, which can swing with business sales or investment income.

Julia Richter, a staff member, answered questions about reappraisals and credits, saying the CLA “is intended to account for the overall tax bill” and that a reappraisal can cause visible shifts in assessed values even when the overall rate is adjusted downward to yield the same revenue. Richter also noted that roughly 70% of households receive a property-tax credit, a component of the homestead system that uses a look-back on prior-year income.

Staff warned the committee that relying more heavily on income-based revenue would change the state’s revenue mix. The presentation cited an earlier tax study showing the state’s revenue composition as roughly 32% consumption (sales), about 30% property and about 23% income; replacing the homestead rate with an education income tax would make income a larger single source for education funding and increase exposure to economic cycles.

Using a historical comparison, presenters said a 2008-style recession would have produced a significant shortfall for an income-funded education account. Staff provided a range for the illustrative shortfall and said that, under that modeled downturn, about $70 million of the shortfall would have come from income-tax receipts alone; staff estimated that absence of reserves could have required a roughly $0.20 increase in the homestead-type rate to make up the difference. Presenters stressed the estimates were illustrative and dependent on the chosen tax design and available reserve policy.

Committee members asked about fairness and horizontal equity. Presenters reviewed how property taxes and the property-tax credit interact with household income: property taxes tend to be a larger share of income for lower- and middle-income households while effective property-tax incidence generally declines as income rises. Staff summarized crosswalk analyses that combine property-tax incidence with personal income–tax effective rates and said the combined burden is relatively flat across many income ranges but can dip above very high incomes.

Members also pressed staff on data limitations. Turchin and Richter said estimating household income alongside property records requires reconciling federal Adjusted Gross Income (AGI) data with the grand list; AGI is available up to property-tax credit eligibility thresholds, but the state lacks full household-income disclosure for higher-income households, which complicates distributional modeling.

The briefing also noted other revenue considerations: the general fund previously relied on a transfer funded largely by income tax and more sales-tax reliance has changed that mix; federal stimulus and the Wayfair decision were cited as events that have produced large swings in collections. Staff told senators that if the state were to increase reliance on income tax for education, policymakers would likely need stronger reserves or other safeguards to smooth volatile years.

The committee paused the presentation before completing the full slide deck and planned to continue the discussion at a later meeting. Staff said the slides reflect work from a prior tax study and some figures had not been updated in this session.