Facing an unprecedented increase in education spending, lawmakers are preparing to rewrite a portion of Vermont’s school funding formula within a matter of mere weeks. The move would likely send school boards, most of which have already adopted proposed budgets for next year, back to the drawing board, and lawmakers may allow districts to delay school budget votes until after Town Meeting Day.
What the legislature is contemplating is highly unusual. And indeed, when lawmakers came back to Montpelier in January, Emilie Kornheiser, the chair of the tax-writing House Ways and Means Committee, believed it was too late in the school budget cycle to make immediate changes to the school finance formula.
But the latest estimates show education property tax rates going up even higher than the 18.5% increase that the tax department initially forecasted in late November. And Kornheiser said she’s changed her mind.
“It's become very clear to so many people that, given the information that we're getting about what's happening with school budgets right now — and what happened with tax rates — it's just not tenable to not make changes for (this year),” the Brattleboro Democrat said in an interview Monday.
Schools face a slew of intense budgetary pressures this year, including deferred maintenance costs, spiking health insurance premiums, and the retreat of federal pandemic-era aid. But education officials and lawmakers have grown increasingly concerned that a temporary tax break, built into a recent retooling of the education finance formula, has also incentivized many districts to spend at higher levels than they would have otherwise.
In 2022, lawmakers passed Act 127 to encourage poorer and more diverse districts to spend more on higher-need students. In theory, that new law should have encouraged more affluent districts to tighten their belts, because they’ll be taxed at a higher rate. But because lawmakers wanted to provide an easier transition for districts losing tax capacity under the law, they included a provision that year-over-year homestead property tax rate increases were capped at 5% (before the CLA is applied) in the law’s first five years.
Now, lawmakers and Gov. Phil Scott think that this cap is encouraging districts to make extra one-time expenditures. And the cap, combined with inflationary pressures, has also created a cascading effect.
Every time a new district hits the cap, the slack is picked up in the tax rates of other districts, who then themselves are pushed closer to the cap. And based on current modeling, every district is now projected to be capped. But the spending plans that they are passing still need to be funded. That means that there’s only the non-homestead property tax — which is applied to rental properties, second homes and commercial buildings — to absorb the impact. And it also means that even if individual districts cut millions from their budget, their homestead tax rate might not go down much — or at all.
“It essentially sends the whole education fund into a bit of a haywire scenario where we can't predict outcomes or impacts,” Kornheiser said. “And so something's gonna have to change there.”
Lawmakers say they still want more affluent districts to have time to adjust. But instead of an across-the-board 5% cap, House lawmakers are now contemplating a more surgical approach.
Kornheiser’s committee on Tuesday took a first look at an alternative that would give districts a temporary discount on their tax rate that is tied more directly to their loss of taxing capacity under Act 127. The committee is expected to take up a more fully fleshed out bill later this week, as well as parallel legislation that would enable districts to delay their school budget votes from their traditional dates on Town Meeting Day.
There are several steps to go before this becomes law. The full House would have to vote to advance Kornheiser’s proposal, and then the Senate would have its say. But key Senators on Tuesday indicated that they’re generally on board with the direction the House is headed in.
“I think the cap has to go away,” said Sen. Ann Cummings, Kornheiser’s counterpart in the Senate.
And while the Washington County Democrat emphasized that the Senate was likely to make adjustments to whatever the lower chamber sends its way, she was unequivocal that the status-quo could not stand.
“The details are still getting worked out. But I think we're pretty much all on the same page as to what the solution is,” Cummings said.
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