State facing $176 million Education Fund deficit, Vermonters could pay higher taxes

Vermont's Education Fund is facing a $176 million deficit for the 2021 fiscal year beginning July 1, and Vermonters could end up paying more property taxes to make up the difference. 

While property taxes, the largest source of money for the fund, have remained stable, other sources of revenue have been impacted by business closures and reduced purchasing due to the economic slowdown caused by the new coronavirus.

The hardest hit funding source is the sales and use tax which is expected to contribute $407.2 million into the Education Fund for fiscal year 2020 ending June 30, but is projected to bring in $384.3 million for 2021, according to numbers released by the Joint Fiscal Office on May 18. 

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Economic instability has affected two other income sources, but not to the same extent. One-third of the state's purchase and use tax feeds into the Education Fund as well as one quarter of the meals and rooms tax. Together, these sources account for less than $8 million of the shortfall.

With job loss and other factors affecting income, more people are likely to qualify for property tax credits (income sensitivity), bringing in less money through the homestead education property tax. 

The non-homestead education tax, which is tax on business and commercial properties, as well as second homes, is the single biggest source of income for the Educational Fund and has been largely unaffected.

Where the money comes from

Income sources for the Education Fund include:

• Homestead education property tax (less property tax credit — income sensitivity).
• Non-homestead education tax.
• Sales and use tax.

    Sources contributing smaller amounts to the fund:

• Purchase and use tax (one-third of total).
• Meals and rooms tax (one-quarter of total).
• Lottery transfer
  • Profits from the state lottery support education usually in the neighborhood of $20 million dollars, or less than 2% of the Education Fund. 
• Medicaid transfer
  • A portion of the money the state gets back from federal government for students who receive Medicaid eligible services in addition to educational services.
• Other sources (wind and solar, fund interest)
  • Vermont facilities which produce a significant amount of energy through wind and solar pay an alternative to property tax; a portion of the money goes to the Education Fund. The fund interest can be positive or negative as a draw against the General Fund for cashflow purposes.

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The way the Education Fund is structured, when non-property tax sources go down, property tax rates go up to make up the difference, according to Douglas Farnham, deputy commissioner of the Vermont Department of Taxes.

"Ways and Means has already made it very clear they are going to do everything they can to prevent a very large rate hike," Farnham said. " I know the governor is also interested in not seeing a large increase in property taxes. I think everyone is looking at ways to try to prevent that."

When the sales and use tax became an Educational Fund source a couple years ago it was considered low-risk, Farnham said. No one anticipated a shutdown of many Vermont businesses would face due to a global pandemic.

Contact April Barton at abarton@freepressmedia.com or 802-660-1854. Follow her on Twitter @aprildbarton.

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