Finance committee debates move to income-based property tax, weighs deferral option

On Feb. 3 the Finance Committee discussed proposals to move Vermont toward an income-based property tax or surcharge and explored tax-deferral alternatives, with members warning some lower-income homeowners in higher-value houses could face higher bills while education funding mechanics remain unresolved.

Committee members said the proposals under review included a fully income-based approach and a governor’s proposal that would lower taxes for lower-income and lower-value homes while raising taxes on higher-value properties. "We just heard a couple of presentations... we heard the proposal that we go to purely income based," said Speaker 1, Committee member, summarizing the presentations the committee had received.

The committee’s discussion focused on trade-offs: shifting the tax base from property value toward income could target wealth more directly but could also function as an asset test for homeowners who have low incomes but live in highly appreciated homes. "Effectively, what you're doing here is you're applying an asset that's in that property," Speaker 1 said, arguing that taxes tied to house value can capture appreciation rather than current income. Several members noted that housing values have risen unevenly and that non-homestead properties, and credits now paid out of the education fund, complicate simple conversions.

Members also debated alternatives to a credit model, such as tax deferral programs that allow eligible homeowners to defer property tax liability until sale or probate. "I'm really intrigued by the deferral possibility," Speaker 1 said, adding questions about whether deferral would accelerate sales or moves by seniors. Committee members asked for evidence from states that use deferral programs, including Minnesota, and asked staff to model potential market effects and fiscal impacts on the education fund. "If you defer it... the more popular it is, the less money we have," Speaker 4 said, noting that widespread use of deferral could reduce near-term school funding and might require the education fund to borrow or the state to identify replacement revenue.

Committee members asked for a broader set of witnesses and modeling before advancing legislation. Several asked staff to invite testimony from organizations with different perspectives, including the Public Assets Institute (which some described as progressive) and groups such as the Tax Foundation and state counterparts in Minnesota to compare outcomes. Speaker 4 said the committee should ask realtors about market impacts and asked staffer Julia to run scenarios showing how education property tax rates would change under different deferral participation levels.

Members repeatedly emphasized that many details remained unresolved: the level of income caps, the interaction with existing property tax credits and homestead rates, and how any deferral would be financed. One member pointed to a commonly-discussed threshold in previous debates: houses crossing a roughly $400,000 mark have produced large shifts in taxable value in prior reappraisals. "You went from 300 to 500. Now you're paying full both on that hundred thousand over and you still gotta pay the whole income tax," Speaker 3 said when describing effects in jurisdictions that tightened value bands.

Next steps: the committee asked staff to gather modeling and outside testimony on deferral programs and income-based tax systems, including the Minnesota model, the Tax Foundation perspective and local real-estate market impacts, and to report back before any bill drafting.