Lawmakers probe local-option taxes as pilot special fund grows after 2022 revenue spike
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Summary
Joint Fiscal Office staff briefed the Senate Transportation committee on local-option tax mechanics and the pilot special fund, noting a post‑pandemic surge in consumption tax receipts, recent split changes (now 75/25 town/pilot), aviation-fuel treatment exceptions, and FY26 pilot payment and appropriation details.
Joint Fiscal Office staff gave the Senate Transportation committee a primer on local-option taxes and the pilot special fund, explaining how municipalities may levy a 1% local-option tax (on sales, meals and rooms or combinations) and how the Department of Taxes administers collections and apportions revenue.
Presenters told the committee the local-option tax revenue picture changed substantially after 2021: consumption-tax receipts rose in fiscal 2021–22 (sales and use up 17.4% between fiscal 2020 and 2021, then 7.4% between 2021 and 2022 in the consensus forecast cited) and more municipalities adopted local-option levies. The presenter said the revenue split was amended recently (from a 70/30 to a 75/25 town/pilot split) and that a small return fee is deducted from returns to help administer the program.
Officials explained a limited exception for aviation fuel: in municipalities with airport fuel sales the federal rules require a portion of the state share to be used for aviation‑related purposes rather than the pilot special fund. They also noted that Burlington and Rutland City operate under charter-based gross-receipts taxes and retain 100% of those revenues.
On pilot special fund mechanics, presenters said the fund generally compensates municipalities for state-owned property using the Agency of Administration’s insurance replacement values that are multiplied by each town’s common level of appraisal (CLA). The presentation cited FY26 actual pilot payments of roughly $11.39 million and noted the pilot fund balance rose from about $4 million in 2021 to nearly $15 million in fiscal 2025. The presenters described several FY26 one-time appropriations (including a municipal grand-list stabilization program and a $1.15 million road-improvement item) and the BAA proposal for additional inventory and reappraisal funding.
Committee members and JFO staff discussed policy trade-offs: administrative complexity for apportioning online sales to towns, equity concerns about who ultimately bears consumption taxes, and competitiveness implications if local-option levies push overall tax rates above neighboring states. Chris from the Joint Fiscal Office said staff project the pilot fund could still hold a multi-million-dollar surplus under current proposals but cautioned against adding recurring costs because of conservative budgeting practices and future revenue uncertainty.
The committee asked follow-up questions about charter changes, DMV and Department of Taxes technical limits, and whether towns must use aviation‑fuel-related revenues for airport purposes; members agreed to invite Department of Taxes staff and DMV officials for a deeper technical briefing.
