October 09, 2006

School Funding: A Tale of Three Taxes

In 1997, Vermont joined the growing number of states that moved away from a purely local property tax toward a statewide tax that shares revenue between poor and wealthy taxing districts. This is a good move for those seeking to make the property tax a more equitable funding source. But property taxes are as unpopular in Vermont as in many other states, and the state-wide property tax is starting to become an election issue.

A number of anti-tax lawmakers are proposing to repeal the statewide tax--which provides two-thirds of the funding for public education--but have yet to propose a replacement funding source. The Vermont League of Cities, taking a slightly more responsible tack, announced this week that it also favors repeal of the statewide property tax, but endorses replacing at least some of the lost revenue with an increase in the personal income tax. The League also debated the merits of expanding the sales tax to cover services, and using the revenue generated to help pay for schools. Meanwhile, the property tax debate has spilled over into the gubernatorial election, with incumbent Governor Jim Douglas proposing a cap on local budget growth. A helpful overview of the Vermont property tax debate is here.

Replacing the statewide property tax with local income tax revenues could make the Vermont tax system more progressive. However, many questions remain about the proposed income tax. Would the tax have a single- or multiple-rate? A multiple-rate tax means that higher-income individuals pay a higher percent of their income than do lower-income individuals, making the tax progressive. However, multiple rates might be too complicated for a local income tax. Similar points of contention surround the proposed sales tax base expansion. Taxing services as well as goods would provide a larger tax base, making the tax slightly less regressive while allowing a lower rate. Some city leaders are opposing the move over worries that expanding the sales tax would hurt local businesses.

In the heated atmosphere of the election season, it is likely that the debate over taxes will continue. Between local income taxes and expanding the sales tax, Vermont has its choice of options to replace property tax revenue. When discussing the advantages and drawbacks to various tax options, voters in Vermont must remember the reason the state-wide property tax was established in the first place: Vermont must provide funding to public schools that is adequate and fair.


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