School Tax Sleight of Hand

by John McClaughry 

John McClaughry

Vermont’s educational finance law is amazingly complex. That complexity means there are many points within the law where small changes can produce quite different results.

Consider the current sleight of hand being performed by Gov. Peter Shumlin to avoid the dreadful necessity of increasing the residential and nonresidential school property tax rates in his reelection year.

Under Act 68, the legislature set in statute a per pupil “basic educational support amount” (BESA) number: $6,800 in 2005. This number increases each year by a formula related to educational cost increases in New England. It got up to $8,544 two years ago.

This year, by the formula, it is supposed to increase to $8,891. Gov. Shumlin wants it to increase only to $8,723. Why does this matter? Because the residential school property tax rate is directly proportional to the amount per pupil a district spends in excess of the BESA. Hold down the BESA, and residential school property tax rates will jump up to bring more local tax dollars into the Education Fund. That would help make it possible to avoid raising the two property tax rates.

Then there’s the Governor’s ingenious scheme to reduce the General Fund Transfer into the Education Fund. This transfer was designed in 1997 to convert the former state aid payments into funding for the new Act 60 Education Fund.

Every legislative session the General Fund budget is under lots of financial and political pressure. All of state government except transportation feeds from the General Fund.

The architects of Act 60 were well aware that a future legislature could start cheating on the GF transfer. So they wrote into that law an automatic formula to determine the amount of that required annual transfer.

For quite a few years the legislature honored the transfer formula. Rising property values allowed the legislature to fill the Education Fund while slightly decreasing both residential and nonresidential property tax rates.

But this year the deal broke down. Despite exhortations from the Governor and Education Commissioner, public school budgets keep climbing upward. Property tax assessments fell after the 2008 housing crash. There is terrific demand for GF dollars.

In 2010 and 2011 the legislature used $38.8 million in federal stimulus money to comply with the GF Transfer formula. Now there is no more stimulus money. The formula requires replacing the stimulus money with Vermont tax dollars.

So rather than raise those dollars by raising the two education property tax rates, Gov. Shumlin came up with a subtle plan to reduce the GF transfer. It’s called “rebasing”. It permanently redefines the formula base downward by $27.5 million.

That means there will be a $27.5 million shortfall in the Education Fund. That in turn means more school costs will be shifted onto residential property tax payers who are not likely to figure out what is being done to them.

Back in March one alert legislator, Rep. Oliver Olsen of Jamaica, spotted this scheme in the fine print of the 2012 appropriations bill. He realized that this was a sneaky tax increase on residential property owners to enable the legislature to balance an overgrown general fund budget.

Olsen’s amendment to strike this language failed 38-99. The Senate made some minor technical changes, but no senator tried to take out this hidden tax increase. The bill passed 27-1.

Jack Hoffman of the liberal Public Assets Institute, headed by the co-author of Act 60, is a sharp critic of this scheme. “When the legislature cuts the [General Fund] transfer,” Anne Galloway of Vermont Digger quoted Hoffman as saying, “it drives up property taxes for everyone.”

How would an administration committed to speaking plainly to the people of Vermont have handled this? The governor could simply say “despite my exhortations and stern letters from Commissioner Vilaseca, the voters keep on voting to increase school budgets. Therefore we will continue the General Fund transfer as required by Act 60, and increase the two state property tax base rates by two cents.”

“That will bring in enough to balance the books for another year. That increase won’t be popular, but it will give all of us more incentive to get a better grip on local school spending.”

A really visionary governor would go further: “Next year we are going to attack the ever rising costs of our government school system by ramping up parental choice and provider competition. That will produce better educational outcomes for our children, and actually reduce what we are now spending on K-12 education.”

John McClaughry is vice president of the Ethan Allen Institute (www.ethanallen.org).