Lawmakers weigh property-tax deferral as a way to soften shift to a homestead exemption

Tax department staff and lawmakers discussed whether a property-tax deferral program could reduce increases for homeowners who would pay more under a proposed shift from Vermont’s income-based property tax credit to a homestead exemption.

Jake Baldwin, a Department of Taxes official, told members of the House Ways and Means and Senate Finance committees on Feb. 11 that "deferral programs are offered in 31 other states and also Washington, D.C.," and reviewed how other states limit eligibility, apply interest, and place liens on properties.

The discussion arose in the context of a department proposal to replace the current income-based education property tax credit with a tiered homestead exemption tied to household income. Baldwin said the proposed exemption is intended to improve transparency, make education property taxes more progressive by property wealth, and make relief sensitive to changes in the coming tax year rather than lag a year as the current credit does.

Lawmakers focused on how deferral programs typically work: most limit eligibility to principal residences and often to older homeowners (commonly age 62–65 and older) or people with disabilities; many include income and liquid-asset tests, multi-year residency requirements, interest charges, and liens that become due on sale or transfer. Baldwin cited Maine, Minnesota and Oregon as examples: Maine’s program has an income cap under $80,000 and a liquid-assets test (about $150,000 or $100,000 for single applicants), Minnesota allows deferrals up to a percentage of estimated market value minus outstanding loans, and Oregon uses county-specific property-value limits tied to length of residence.

Committee members pressed Baldwin on likely take-up and cost. He said Maine’s program had under 10,000 household participants in the early years and that some early-state programs cost roughly $1.5 million (a figure referenced in his slides for a program context); he said Minnesota’s program appeared to be costing about $2 million in the recent period he reviewed but clarified that his cost figures did not include administrative expenses or interest income the state might later recoup.

Lawmakers raised technical interactions with other tools and legal instruments. Baldwin said reverse mortgages are generally incompatible with deferrals because reverse-mortgage lenders do not want a state lien they would have to satisfy when taking title. He also noted that certain trust and life-estate arrangements can be treated as homesteads under existing Vermont statute in specific circumstances and that the department had not proposed changes to ownership rules at this time.

Chris Steele, president of the Vermont Bankers Association, urged caution from lenders’ perspective, saying a deferral lien could erode "the value of that first mortgage position," and warned the presence of an accruing, unknown state lien in front of a mortgage could reduce homeowner equity and complicate refinancing or sale.

Baldwin offered possible program design options to target relief to households that the department’s modeling shows would face the largest increases under the exemption. As examples, he suggested elected deferrals capped at amounts such as $2,000 for the lowest-income groups, smaller caps for higher-income tiers, and limiting deferrals to the education portion of the tax bill rather than municipal taxes.

Committee members and witnesses repeatedly returned to implementation questions: who would hold the lien (state, county or municipality varies by other states), how to verify liquid assets, how to set interest rates and caps so homeowners do not defer more than property value, and how long-term deferred balances interact with estate and transfer taxes.

Lawmakers directed staff to continue refining modeling and policy language. Baldwin said the administration is open to further evaluating a deferral option to complement the homestead exemption but that no final program parameters were proposed at the hearing. The committees plan additional review and follow-up testimony.