by Paul Cillo, Public Assets Institute The Legislature did the right thing this year by holding property tax payers harmless after the COVID pandemic took a big bite out of the state’s Education Fund. The state is better situated to deal with a revenue shortfall than individual taxpayers or school districts, who already face monumental trials during this crisis.
The shortfall this year mostly has to do with a loss of sales taxes and rooms and meals taxes. All sales tax revenue and a quarter of rooms and meals taxes go directly into the Education Fund, along with property taxes and state lottery receipts. Together these sources cover the cost of public education in Vermont.
When the governor shut down all but essential businesses in March to stem the spread of the virus, stores, restaurants, and lodging establishments were closed. That not only created a big problem for these businesses and their employees, but it also reduced taxes needed in the Education Fund.
State revenues from sales and rooms and meals taxes dropped sharply in the spring and are projected to remain down in this fiscal year, which ends next June 30. In August, the Legislature learned that Education Fund will probably take in $84 million less than had been forecast last January. The shortfall is mostly due to lower revenue from these two taxes.
Legislative leaders knew in the spring that the pandemic was creating a revenue problem for the Education Fund. Their choice was whether or not to fill the gap with an increase in the property tax. The increase needed was about eight cents on property tax rates.
In the end, their solution was to allow the Education Fund run a deficit this fiscal year rather than raise property taxes. While the state will use federal Coronavirus Relief Funds (CRF) to offset some of this deficit, the hope is that Congress will act to loosen fund restrictions or make additional federal funds available to states. Neither has happened yet. But in the meantime, the Legislature developed contingency plans to fill the remaining gap: use reserves, borrow, transfer money from other state funds, increase other revenue, or cut spending. Essentially, this approach bought some time for the state to better assess the situation when they return to work in January.
Normally, if the Education Fund runs a deficit one year, the shortfall has to be made up the following year. But the Legislature recognized that Vermonters will still be struggling next year too and took steps to avoid a big property tax increase. It waived a requirement of state law that has the tax commissioner recommend, by December 1 each year, statewide education property tax rates for the coming fiscal year sufficient to cover any projected deficit in the current year and to maintain a stabilization reserve of five percent. The Legislature instructed the commissioner to ignore the 2021 deficit and to assume that the fiscal 2022 reserves would remain at the 2021 level.
This has been a challenging year to say the least. But what we have seen this year are the kinds of solutions that are possible when policy makers put people first. While no legislation can commit a future Legislature, legislators went as far as they could to protect school districts, students, and property tax payers from carrying the additional burden of COVID economic losses this year and next. They deserve credit for this work.