Vermont has a housing crisis, a higher rate of vacant houses than almost anywhere in the country, and a K-12 system in financial trouble. For some, one solution might mitigate all three problems: A heftier tax on second homes.
But simply taxing second homes at a higher rate is not so simple, in part because Vermont currently has no system for categorizing vacation homes. But an attempt — tucked into the House’s sweeping education reform bill — to create new property classifications faces opposition from Republican lawmakers and Gov. Phil Scott.
For education tax purposes, there are currently only two types of property in Vermont: primary residences and everything else. The homestead rate is applied to primary homes, and the non-homestead rate is applied to all other properties — including commercial facilities, farms, rental buildings, seasonal camps and second homes.
The non-homestead classification “is such a wild, catch-all category,” said Democratic Rep. Emilie Kornheiser, who chairs the tax-writing House Committee on Ways and Means.
The lawmaker’s attempt to inject more nuance into the tax code is folded into H.454. As passed out of the House, the bill would create four types of properties: “homestead” for primary homes; “non-homestead apartment” for long-term rental properties; “non-homestead residential” for second homes and “non-homestead non-residential” for everything else.
The bill doesn’t set different tax rates for any of these four categories. Kornheiser says it should be up to a future Legislature to decide who should pay more — or less. And while she doesn’t think taxing second homes more is the “panacea” that some might believe it to be, she does think a more granular tax code could make Vermont’s system more fair.
The homestead rate in each town is pegged to its local school district’s per-pupil spending. But because non-residents can’t vote on local budgets, there’s only one non-homestead rate across Vermont. That means that in some municipalities where per-pupil spending is higher than average, residents pay a higher rate than those paying non-homestead taxes, including second homeowners.
That was the case in nearly 30% of Vermont’s towns this year — including in Burlington, the state’s largest city — according to a Vermont Public analysis of tax rates published by the state.
“When that happens,” according to Kornheiser, “Vermonters around the state write to their representatives, write to their senator, they write to me, and are very upset and appalled about that, right? And don’t understand how it could be true.”
Despite the state’s reliance on tourism, the idea of a new second home tax appears to be popular. A poll commissioned by the Vermont-NEA last year found that 79% of respondents supported higher levies on vacation homes to lower residential property taxes.
But analysts for both the Legislature as well as the Vermont Department of Taxes have noted that there are exceedingly few examples of second home taxes elsewhere in the U.S. that Vermont might borrow from.
“Anytime there is a tax policy that another state is not doing, that makes life super hard,” Jake Feldman, a senior fiscal analyst for the tax department, told lawmakers last week. The department is only aware of one state that taxes second homes: Hawaii, and in only two counties.
The House education reform bill defines a second home as a residential property that’s not being used as a primary residence, that’s not being rented to a long-term tenant, and that is considered “habitable on a year-round basis.” But the tax department told Senate lawmakers they’ll need a more refined definition.
“What makes a property habitable on a year-round basis? Is it insulation? Is it heating? Plumbing? Is it a road that’s plowed?” Feldman said. “It’s very subjective.”
And the department has argued that creating several new classifications will be very difficult to do, particularly at a time that the state is embarking on parallel efforts to regionalize its education governance and property assessment systems.
Democrats have said they’re sympathetic to the administrative difficulties that might come with rewriting the tax code. But they’ve also suggested they take the department’s protestations with a grain of salt.
“I think we need to listen to the people that do the work,” said Sen. Ann Cummings, the Democratic chair of the Senate’s tax-writing finance committee. “But I’m also cognizant of the fact that they work for the governor.”
Scott remains wary of a second home tax, although he hasn’t said the idea is a non-starter. But he’s argued such a proposal shouldn’t be tied in with education reform, and he’s suggested that second homeowners may already be paying their fair share. Tax bills on some properties, he said at a press conference last week, reach upwards of $40,000 or $50,000 as it is.
“It’s not whether they can afford it or not, it’s whether they’re going to continue to do it or not,” Scott said. “It’s a balance as well. I don’t want to take advantage of anybody.”
Critics of the push to tax non-homestead properties differently often also note that residential property owners, in the aggregate, pay less. This year, Vermont residents will contribute an estimated $594 million to the state’s Education Fund via the taxes they pay on their primary homes. The non-homestead tax, meanwhile, will kick in an estimated $895 million.
Like the governor, Republican Senate Minority Leader Scott Beck argues now is not the year to create new property types.
“With that being said, maybe for me, the time is never. Because I just don’t see the need to do further classification,” he said. Higher taxes on second homes, Beck added, won’t free up the housing supply.
“Our problem is that we’re not building enough housing, not that people have second homes,” he said.
And Beck argued the state could ensure residential property owners pay less than non-homestead property-payers by simply charging both types of payers uniform rates.
The education reform bill is now up for consideration in the Senate. And while Cummings said she plans to advance the conversation around second-home taxation, the extent to which she can will depend on Scott.
“The reality is, if the governor vetoes something, we do not have the votes to override,” she said.
Peter Hirschfeld contributed to this report.
