Local option taxes yielding big surplus: Middlebury to decide uses for $1 million

MIDDLEBURY — Middlebury officials will ask local residents this year for help in solving a pleasant dilemma:
What to do with almost $1 million in surplus funds generated thus far by Middlebury’s local option taxes.
It was on Town Meeting Day in 2008 that Middlebury residents authorized a 30-year, $16 million bond to fund the Cross Street Bridge project, the centerpiece of which is the span linking Main Street to Court Street over the Otter Creek.
Residents on the same day voted to ask the state Legislature to amend Middlebury’s town charter so that it could implement local option taxes of 1 percent on sales, rooms, meals and alcohol to cover $7 million of the project costs. Middlebury College bankrolled the remaining $9 million.
Town officials estimated the local option tax would yield around $650,000 annually for the town’s share of debt service. Officials agreed that those tax proceeds would be dedicated to Cross Street Bridge-related expenses.
But revenues are out-pacing debt service for the project. As of June 30, 2016, the town had accumulated $935,843 in surplus funds from the taxes.
Figures provided by Middlebury Town Manager Kathleen Ramsay show a steady uptick in local option tax revenues since the levy went into effect in the fourth quarter of 2008.
“Clearly, it has exceeded our expectations,” Ramsay said.
The special taxes yielded $652,083 in revenue in 2009, the first full year in which they were in effect. Receipts escalated to $702,910 in 2010; rose to $731,400 in 2011; grew to $768,155 in 2012; soared to $816,726 in 2013; rose to $882,710 in 2014; climbed to $927,640; and yielded a record $988,326 last year.
The third quarter — the months of July through September — has consistently been the most lucrative period for the local option tax in each of the last eight years, according to town records.
On average, the local option tax has raised around $838,652 per year for bridge debt and maintenance. That’s almost $200,000 more than the $650,000 per year  town officials had projected.
Ramsay is not surprised by the improved performance of the tax.
“I think if you look back to where we were economically, 2008 was also the start of the downturn of the economy,” Ramsay noted. “In 2009, (the estimate) was spot-on, with $652,000. We have seen a gradual increase over time.”
At the same time, debt service for the project is gradually declining and the bridge has not needed any substantial fixes since being installed.
“We have had to seal some cracks on the bridge and do some cleanup,” Ramsay said. “We are looking to do a comprehensive inspection — since we have passed the five-year point with the bridge — to better identify a maintenance plan and what our ongoing commitments should be. The board is also concerned that before considering other uses for these funds, (it should consider) what is an adequate and proper reserve for any unforeseen needs, which is tough to predict.”
The town is working with VHB Engineers to better quantify those potential needs, according to Ramsay.
Towns that implement local option taxes receive 70 percent of the revenues generated; the remaining 30 percent is kept by the state to disburse as part of its payment-in-lieu-of-taxes program. By statute, surplus local option tax funds are limited to municipal (as opposed to school) use.
Ramsay said Middlebury is not allowed to apply surplus local option tax revenues to pay down its bridge bond more quickly.
The selectboard a few years ago dipped into the Cross Street Bridge reserve fund for $200,000 to underground utilities behind the new municipal building. Officials argued such work should have been done during construction of the bridge.
Other Vermont communities have already faced the issue of what to do with local option tax surpluses. The town of Killington, for example, applied some of its surplus to pay down debt on municipal facilities. Killington voted this past March to discontinue its local option tax on sales, which had been in effect since 2008.
Thirteen Vermont communities currently have a local option sales tax. An additional 17 municipalities have a local option tax on rooms, meals and alcohol purchases, according to the Vermont Department of Taxes.
Middlebury selectboard Chairman Brian Carpenter said he favors a community dialogue through which residents could state their preference on how excess local option tax funds could be used. He believes suggestions could range from applying the excess funds to deferred capital projects in town, to using it to stabilize municipal taxes.
“The reality is, we don’t need that total amount of money,” Carpenter said. “The community needs to have a say in that.”
Performance of the local option tax has been a valuable indicator of the town’s good economic health, according to Carpenter. The tax has also provided a way to spread the Cross Street Bridge debt across the wider population that benefits from its use, including residents from out of town.
Tentative plans call for Middlebury residents to weigh in on the local option tax surplus by this fall, when the town is preparing its fiscal year 2019 budget.
Reporter John Flowers is at [email protected].

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