ACT NO. 68
Education Finance; Taxation
This act is the new education funding law which replaces Act 60 of 1997; it creates a simpler education funding system based on a split grand list. The new system begins in fiscal year 2005 and will affect property tax bills beginning in the summer of 2004.
The new act:
Repeals the sharing pool.
Splits the education grand list into two parts: homesteads and all other property.
Taxes homesteads at an adjustable rate, adjusted within each district to correspond to the districts education spending.
Taxes nonresidential property at a uniform statewide rate.
Maintains income sensitivity with a very few changes.
Replaces $50 million in education property tax with $50 million in broad-based non-property taxes.
The Split Grand List
The Split Grand List (SGL) system splits the grand list into two types of property, homestead and nonresidential property.
A homestead is the homeowners primary residence and the entire parcel surrounding the residence. Nonresidential property is all other taxable property.
Homestead owners must file an annual declaration of homestead in order to identify homestead properties on the grand list.
Homesteads are taxed at a rate that is adjusted in proportion to a districts education spending each year. The rate starts at $1.10, and if the districts education spending per pupil exceeds a base amount of $6,8002 per pupil, the $1.10 rate is increased in the same proportion for that district.
a. A district votes to spend $8,160 per equalized pupil.
b. $8,160 divided by $6,800 = 120%.
c. The homestead base tax rate of $1.10 is multiplied by 120%, giving a homestead property tax rate of $1.32 for this district.
The proportional adjustment of the rate creates a clear relation between education spending and education property burden. The proportion of district spending to the base amount is called the district spending adjustment. The district spending adjustment may not be less than 100%.
Penalty for High Spending
In addition to the adjustment to the $1.10 rate for spending above $6,800, a towns homestead tax rate will be further increased if its spending is more than 125% of the state average education spending.
This penalty is imposed on high-spending towns to encourage cost control as follows: each dollar a town votes to spend (other than approved school construction costs) in excess of 125% of the statewide average is double-counted.
Example: Assume that a district is spending $10,160 per pupil and the statewide average was $8000 per pupil. 125% of the statewide average would be $10,000.
Without the penalty, the districts homestead tax rate would be $10,160 divided by $6,800, or 149% of $1.10, resulting in a tax rate of $1.64.
With the penalty, the district would double-count the $160 in excess of the $10,000, meaning: the district would be treated as if it were spending $10,160 + $160 per pupil, or $10,320. Its rate would thus be 152% of $1.10, or $1.67.
Nonresidential property is taxed at a fixed statewide rate of $1.59. The fixed rate gives stability to property owners who may not live in the district and so, do not vote on school budgets. The fixed tax rate also creates a predictable revenue source from commercial property.
In order to identify which property is a homestead and which is nonresidential property, SGL requires that every owner of a homestead must file an annual homestead declaration form provided by the Tax Department. These declarations are mandatory, and faulty declaration or failure to declare may subject the owner to a penalty of 3-8 % of the education property tax.
Sharing Pool Repealed
Act 68 repeals the local share property tax of Act 60 and its sharing pool. By the time SGL goes into effect in FY 2005, it is projected that the base rate of $1.10 will not raise more than $6,800 per pupil in most, if not all, towns in the state, so those towns will not be required to send homestead property tax revenues to a sharing pool for redistribution.
Income sensitivity is generally the same under the new act as under prior law. While the homestead under the new law is defined as the home and the entire parcel for purposes of the homestead property tax, income sensitivity is still calculated only for the house and up to two acres, as under prior law. The house and two acres is now known as the housesite.
For homeowners who qualify for income sensitivity, the homeowner calculates 2% of household income and compares that number to the education property tax paid on the housesite. If the tax is higher than 2% of household income, the homeowner receives the difference back from the state.
(If the district is spending more than the $6,800 base amount per pupil, the 2% is increased in the same proportion as the $1.10 increase. So, in the example above, in which the district is spending 110% of the base amount per pupil, the 2% of household income would also be multiplied by 110%, with the result that income sensitivity claims from that district would be based on 2.2% of household income.)
If the homeowners household income is $75,000 or more, the homeowner compares the 2% of household income to only the education property tax on the first $160,000 of housesite value. In addition, the homeowner pays the unadjusted education property tax on any remaining homestead value above the $160,000.
An alternative method of calculating the income sensitivity payment is also available: the homeowner may choose to compare the actual education tax on the housesite to what the tax would be if the housesite value were $15,000 less and receive the difference from the state. This option is available under the new law only if the homeowners household income is $47,000 or less.
If the homeowners household income is $47,000 or less, then an additional payment is available from the state if the total education and municipal property tax on the housesite exceeds a certain percentage (3.5% to 5%) of household income. This is the rebate program, or super circuit breaker.
Under the new law, a homeowner receives an additional payment of $10 per acre for up to five acres of homestead property in excess of the two-acre housesite.
Also under the new law, the household income exclusion for income of a student-dependent or parent-dependent living in the house is increased from $4,000 to $6,500; and income of a person living in the house under a formal Homeshare program is excluded from household income.
Effective Date: Most provisions take effect in FY 05, beginning July 1, 2004.
1 The homestead and nonresidential property tax rates are to be reviewed annually and a recommendation made by the commissioner of taxes to the legislature as to whether the two rates should be decreased or increased, if projected revenues so warrant.
2 The $6,800 base education payment is adjusted annually for inflation. Education spending does not include funds from endowments, grants, fundraising, Federal funds, or targeted state grants such as special education funds.
3 See note 1.
The Vermont General Assembly
115 State Street