For the first time in 20 years the Legislature is considering changing the public education funding formula. Our current system (Act 60/68) has grown more complex, and as a result, is not understood by most Vermonters. Household income, income sensitivity, circuit breakers, excess spending, income yields, look-back provisions, per-pupil spending and more are all part of today’s education funding calculation. The sense is Vermonters have lost faith in the funding formula. Combine this with a possible five to seven percent increase in property taxes this year, an election year, and the stars are aligned for change.
The House Ways and Means Committee, of which I am a member, is taking up the challenge of revising our funding formula. As of this writing, we are still ironing out the details, but basic principles are in place. The following is the structure of the proposed new funding formula:
1. An education income tax will be created. The rates will be progressive just like the state and federal schedules. This will replace the current income sensitivity calculation. We plan on raising about $160 million, or one-10th of our Education Fund budget through this income tax.
2. Currently, one-third of the sales, purchase and use taxes go to education. We plan on dedicating 100 percent of these consumption taxes to education. In addition, consideration is being given to using one-quarter of the rooms and meals tax for education.
3. As a result of the money received from the income taxes, the homestead property tax will be reduced (the property tax on your residence and contiguous land). Our goal is a 30 percent to 40 percent reduction in the education portion of residents’ property tax.
4. The non-homestead property tax, which applies to all property other than residences, will continue unaltered.
5. Finally, many miscellaneous dollars, like lottery proceeds and some Medicaid dollars, will round out the money flow to the education fund.
Some legislators would like to add cost containment to the new formula. One idea, which has traction, is to set a per-pupil spending threshold that, if exceeded by a school district, will have those costs borne significantly by that district’s homestead property owners. There is also discussion about putting limitations on what portion of the formula will be raised by income taxes. Gov. Scott has provided my committee and the Education Committee a list of other cost containment strategies. Building cost containment into the new formula makes sense. Postponing action will only make it harder and more complex in the future.
Our committee is fully engaged in trying to create an education funding formula that is fair with greater transparency. There are several issues surrounding the proposed new formula that hold some concern.
•  In lowering Homestead property taxes are we creating a greater capacity for municipal and educational spending?
•  There is also a concern that by making the effective income tax rate closer to 10.8 percent on our highest income earners (it is currently 8.95 percent), we run the risk that those paying the most will take actions that may have a negative effect on state income.
•  How will variations in our income tax revenue impact the rest of the formula?
•  We recognize that federal income tax reform is creating uncertainty.
•  School districts are coping with Act 46, the law that manages school governance consolidation.
It is likely the House will take action on this bill by Town Meeting. We don’t have any indication of how the Senate is viewing these changes. This is likely to be one of the last bills to be voted on during this session.