Ways & Means panel evaluates switch from income-based property tax credit to homestead exemption

BURLINGTON — The House Ways & Means Committee spent its Feb. 26 meeting focused on proposed changes to Vermont’s property tax relief system, hearing testimony that a move from the existing income‑sensitive property tax credit to a homestead exemption could increase tax burdens for lower‑income and fixed‑income homeowners.

Karen Lafayette, who identified herself as a representative of the Vermont Low Income Advocacy Council, told the committee the administration’s proposal — which would replace the income‑based credit with a homestead exemption capped at $200,000 of house value — “increases the taxes of the lowest income Vermonters the most” unless their homes are valued under the exemption cap. Lafayette argued the state should maintain and update income sensitivity rather than shift to a value‑based exemption.

Lafayette said the policy under consideration reverses the intent of Act 60, the 1990s statute that moved school funding from a strictly local property tax to a statewide formula and created income sensitivity so many Vermonters pay education taxes based on household income. She told the committee that, in her experience, property wealth does not always reflect ability to pay, particularly after recent rapid appreciation in house values.

Using her own Burlington home as an example, Lafayette said a 2019 reappraisal raised her house’s assessed value from about $268,000 to about $523,000 and increased her total tax bill from roughly $7,900 to roughly $12,700. She said the post‑reappraisal bill included “about $8,350 on education and $4,350 for municipal taxes.” Lafayette said even under current law, with the $8,000 cap on credits and income sensitivity limited to the first $400,000 of house value, she would still pay at least about $4,700 in taxes on a $40,000 retirement income. She warned that under the administration’s proposal — with a maximum homestead exemption of $200,000 — her taxes would “rise roughly to $7,800,” which she said would be about 19% of a $40,000 retirement income.

Julia Richter of the Joint Fiscal Office presented preliminary modeling that illustrated why lawmakers and analysts call the topic mathematically complex. Richter described the exercise as “a math exercise” and said modeling is iterative: changing the property tax credit alters education fund yields, which alters property tax rates, which in turn changes the cost of any credit and therefore requires recalculation.

Richter said the existing property tax credit is a significant “tax expenditure” in the education fund. For fiscal year 2025, she said, the property tax credit earned in that fiscal year is estimated to cost about $153,000,000; because of the statutory lag the cost shows up in the education fund outlook in the following fiscal year.

Richter reviewed the key parameters of the current system that factor into modeling: the so‑called circuit breaker at household income up to $47,000 (under which credits apply), a band up to $90,000 where credits use the first $400,000 of house site value, and above $90,000 where the credit is computed on the first $225,000 of house site value. She said the “natural breakeven point” in the yield model for fiscal year 2025 is about $115,000 of house value, meaning the model identifies the point where paying by property value becomes cheaper than the income‑based credit, all else equal.

Committee members asked about administration claims the homestead exemption proposal would be revenue neutral. Richter explained revenue neutrality can be achieved by designing the exemption so its total cost to the education fund matches the current credit, but she cautioned that many plausible parameter changes require repeated iterations in the yield model before policymakers can see final liabilities and rate effects.

Witnesses and committee members also discussed practical effects on seniors. Lafayette and multiple lawmakers expressed concern that relying on home equity — via sale or reverse mortgage — to pay higher taxes could push people into debt or force moves to scarce downsizing options. Lafayette said reverse mortgages still require payment of insurance and property taxes and noted that downsizing alternatives are “extremely hard to find” in some markets.

The committee paused the property tax discussion for a scheduled break and planned to continue modeling and testimony when it reconvened.