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ACT NO. 71

(H. 577)

Education, Taxation, Education Finance, Economic Development

This act makes technical corrections to Act 60 of 1997 and implements education and economic development laws ancillary to the Act 60 education financing system. The following is a summary of its major provisions. [This summary is supplemented by a detailed section by section analysis of Act No. 71 which may be obtained from the Legislative Council.]

Education Property Tax Provisions

The Act makes technical corrections to the provisions for a statewide property tax system for financing education enacted in Act 60 of 1997. It clarifies that the definition of "homestead" includes sheds and cooperative homesteads; clarifies that certain property will be taxed as "nonresidential" property (non-telephone utility cables, lines, poles and fixtures; gas distribution lines; ski lifts, fixtures and snow-making equipment affixed to the land); clarifies that standing timber is taxed to the owner of the underlying land, even if the timber has been conveyed separately; amends the penalty for false declaration of a homestead (8 percent penalty if no fraud involved); allows mobile home and cooperative housing owners to include lot rent or the allocable portion of property tax on the underlying land in their income sensitivity claim; requires studies on (1) allowing a homestead claim in the case of a homestead owned by a business and (2) alternatives in the definition of "homestead" and income eligibility; extends to December 1, 1998, the time for filing for the 1998 income sensitivity payment; raises the minimum income tax from $150 to $250 for S corporations, partnerships and limited liability companies, beginning in 1998; provides that at the time of sale of a mobile home, only the taxes on the mobile home, not the site, need be paid; repeals the rule that a mortgagee bank is obligated to pay homestead taxes on the mortgaged property and instead, gives the State a lien interest in the property which is subject to the mortgage; allows municipalities to change dates of tax assessment if necessary to comply with Act 60; leaves the gas tax at 19 cents per gallon; provides that the State, not the towns, will send out homestead property tax bills, and that homeowners will pay the State 25 percent of the tax on September 1, 25 percent on November 15 and the adjusted balance on April 15, beginning in 1999; grants the commissioner of taxes the authority to contract with local officials for collection of delinquent homestead property tax.

Transitional Year 1999 property Tax Rate Provisions

The Act clarifies the transition year 40 percent cap on the increase in the education property tax rates in property wealthy towns for the transition year 1999. It provides that the education fund will not pay a town for a surplus in a town's education budget in thatyear. As revised, to raise an amount that is no greater than 110 percent of its 1998 municipal budget, plus its 1998 education budget increased only for inflation and for any extenuating circumstances, as determined by the commissioner of education, a municipality's FY 1999 transitional state education property tax rate will be reduced so that the municipality's combined FY 1999 municipal, statewide and local share tax rate is no more than 40 percent over its combined 1998 rate. If a district nevertheless budgets a surplus in fiscal year 1999, the 40 percent cap will be applied to reduce the district's education property tax rate to raise that portion of the district's budget which is not surplus.

The Act also adds an additional cap on the transitional year 1999 state education property tax rate for certain school districts. The additional cap provides that if a district qualifies for the 40 percent cap described above, and if it also maintains or reduces its budget by not more than 10 percent, its state education property tax rate is further capped so that it will be no greater than $0.35 more than its 1998 equalized school tax rate.

Further, the Act adds a third "cap" on the transitional 1999 education property tax rate for certain other school districts. This third cap provides that in a school district in which the 1997 equalized grand list has been reduced by 40 percent or more from its 1996 equalized grand list due to the exemption of personal property, business machinery and equipment, the combined municipal and education property tax rate of that district may be no more than $0.50 higher than its combined municipal and education property tax rate for the prior year.

Finally, the Act places a limit on the benefits of the caps to individual taxpayers, or a "Cap on Caps". It provides that for each of the three "caps" set out above, an individual taxpayer may not benefit from any of them to receive a combined reduction in property taxes for all property owned by the taxpayer in the district of an amount greater than $5,000.00. [ Note: Sec. 170a of Act No. 147 of the Acts of 1998 (H.755, the FY 1999 General Appropriations Act) significantly modifies this section. As modified, the "Cap on Caps" applies only to limit the benefits to a taxpayer from the $0.35 cap and the $0.50 cap on the combined municipal and education tax rates. It does not apply to limit the benefits to a taxpayer resulting from the original 40 percent cap.] The Act also provides that the responsibility to enforce this section is vested with the Division of Property Valuation and Review and sets out procedures for collection and enforcement.

Economic Development Tax Incentives

The Act also includes the following provisions to encourage economic development within the new system of education financing under Act 60. Most will be administered by the Vermont Economic Progress Council (VEPC), newly reformed under the Act.

Property tax incentives. The Act amends Act 60's provisions relating to tax stabilization agreements and property tax exemptions to authorize the VEPC, rather than the General Assembly, to approve certain tax stabilization agreements and exemptions for the purpose of reducing a municipality's education grand list and its state education tax liability. Exemptions and agreements which reduce the municipality's education grand list are: those in effect on July 1, 1997; post-July 1, 1997 exemptions or agreements for economic development which are approved by the VEPC; affordable housing agreements which may be approved either by the VEPC or by the commissioners of taxes and housing and community affairs; post-July 1, 1997 voted exemptions for nonprofit volunteer fire, rescue and ambulance service organizations; and exemptions of property owned by a municipality situated in another municipality which has been voted exempt by the municipality in which it is situated and which is used for forest lands, municipal water supply or other noncommercial municipal purposes. Exemptions and agreements which do not reduce the municipality's education grand list are: post-July 1, 1997 exemptions or agreements for economic development which fail to obtain VEPC approval; post-July 1, 1997 stabilization agreements for agricultural land, forest land, open space land and alternate energy generating plants; post-1997 transfers of development rights for land conservation which are less than a permanent transfer; pre-1998 transfers continue to reduce the education grand list until they expire, but to a maximum of five years; and post-July 1, 1997 voted exemptions for property owned by a nonprofit and used for public, pious or charitable purposes (except that voted exemptions for fire, rescue and ambulance do reduce the grand list, as described above). For these exemptions or agreements which do not reduce the municipality's education grand list, the municipality must still raise the unreduced amount of education property taxes, and must make up the shortfall in revenue through an additional municipal property tax.

In addition, the Act authorizes VEPC to approve or deny applications from a municipality seeking to retain a portion of the annual increase in state education property tax revenue assessed on new economic development which the municipality must use to purchase or finance infrastructure such as wastewater treatment, water supply, transportation, and utility connections; and allows incremental revenues generated by newly created, or by the expansion of existing, Tax Increment Financing (TIF) districts, to be used for the purposes of the TIF district if approved by the VEPC.

The Act also creates an exemption from the state education property tax of up to two years for unoccupied facilities, excluding land, during construction until 75 percent complete or in use and owned by a business that has obtained the approval of the VEPC, and creates an exemption from the statewide education tax for the value of cleanup costs associated with redevelopment of a contaminated property, the so-called "Brownfields" exemption.

Income tax incentives. The Act also authorizes new general fund income tax incentives, which may be granted by the VEPC to a qualifying business entity. Theseinclude a payroll or new jobs tax credit of five to 10 percent of increased payroll costs; a research and development tax credit of 10 percent of qualified R&D expenditures in Vermont; a workforce development tax credit of 10 percent of qualified training, education, and workforce development expenditures, or a tax credit of 20 percent of qualified training, education, and workforce development expenditures for the benefit of welfare-to-work participants; an export tax incentive in the amount of the difference between calculating corporate income tax under the current apportionment formula and under this incentive's new formula that doubles the factor attributable to sales -encouraging exporting businesses to declare income in Vermont for tax purposes instead of in other states because the new formula's weighting system will lower their income tax liability; and a small business investment tax credit of 5 to 10 percent for qualified investments of more than $150,000.00 in plants or facilities and machinery and equipment. VEPC must evaluate, and approve or deny, applications for the above income tax incentives for consistency with eight guidelines and a cost-benefit model to measure the fiscal benefits and costs to the state. VEPC is further subject to a maximum amount of value of tax incentives that it may approve in any fiscal year as set by an annual authorization limit set by the General Assembly.

Sales Tax Incentives. The Act amends the exemption for the sale of energy to manufacturers to include the sale of energy for the production or provision of products or services by a business approved by the VEPC. It also amends the sales tax exemption for the sale of building materials used in the construction, renovation or expansion of facilities for the manufacture of tangible personal property to include receipts from sales above $250,000.00 that are either used for the production or provision of products or services by a business approved by the VEPC or incorporated into a downtown redevelopment project and which are not otherwise allocated to the municipality for municipal infrastructure. The Act adds 32 V.S.A. § 9819 to provide that sales tax receipts on sales of building materials in excess of $250,000.00 used in the construction, expansion or renovation of facilities of a business approved by the VEPC and incorporated in a downtown development district will be allocated by the commissioner of taxes to the municipality in which the business is located to be used for the financing of municipal infrastructure to support the business that generated the taxes in that municipality.

[Note: this section was subsequently amended by Act 120 of 1998, H.278, the Downtown Community Development Act, to provide a different allocation of receipts on the tax on sales of construction materials for qualified projects scaled to the size of the municipality in which the project is located.]

Local Option Taxes. The Act expands the local option tax provisions in Act 60 to towns in which the grand list decreased by 10 percent or more as a result of the exemption of personal property, business machinery and equipment, and inventory; and to towns which will experience a large increase in the education property tax rate in fiscal year 1999 or 2000 (20 percent or more); alters the time in which a local option tax may be imposed from January 1, 1999 through December 31, 2002; changes the allocation ofreceipts to the municipality in which they were collected to 80 percent in calendar year 1999, 70 percent in calendar years 2000 and 2001, and 60 percent in calendar year 2002; and provides that responsibility for the collection and administration of local option taxes is vested with the department of taxes.

Education Policy Provisions

The Act clarifies that a school district which has not voted a budget by June 1 shall pay into or receive from the education fund based on its most recently adopted budget; adds that an assessment from a union or joint contract district and any deficit are added to the adopted budget and used to determine the tax rate; establishes that a district which maintains a school may send a student to a private school only if the student has needs that can't be met in the district school; establishes that a district with very high extraordinary special education expenses may receive 80 percent reimbursement of costs; establishes a small schools support grant as an annual grant; establishes that for two years before adoption of final standards of quality, the State Board of Education shall adopt transitional standards; establishes that state funds for extraordinary transportation expense reimbursement are to be $250,000.00 and are not part of the appropriation for regular transportation expense reimbursement; extends the sunset on technical education state aid to July 1, 1999; extends the sunset on special education state aid to July 1, 2001; establishes a blue ribbon commission on special education cost control; directs all school districts to adopt an accrual method of accounting; establishes a fiscal review panel to help school districts control special education costs; provides that the general state support grant shall be paid to the Vermont Academy of Science and Technology for its students; establishes limits for amount of state aid for special education; commits the General Assembly to establishment of secondary school choice in school year 2001 - 2002; and authorizes designation of and an appropriation for technical education pilot projects.