Blue Ribbon Tax Structure Commission. Education Property Tax Discussion October 26, 2010

Transcription

1 Blue Ribbon Tax Structure Commission Education Property Tax Discussion October 26, 2010

2 Goal of Today s Discussion 1. Explore three hybrid models for the statewide education property tax requested previously by the Commission. 2. Explore challenges presented by the tax shift in these models, focusing particularly on model Provide staff with direction for future deliberations.

3 Model 9: Trading Income Tax Revenue for Property Tax Revenue Homestead tax base $417.2 Base Rate $0.86 Income Sensitivity eliminated. Rebate (Circuit Breaker) eligibility reduced to $29,140 (2X poverty level.) Average Rate $1.25 Gross homestead taxes Adjustment $522.2 $62.8 (CB) $114.0 (PIT) Net homestead taxes $345.4 Property tax rates kept the same as current year to generate additional revenue. Additional revenue ($114 million) used to reduce personal income tax rates. Options and issues for personal income tax rates will be discussed in later slide.

4 Model 10: Eliminate Income Sensitivity and Reduce Circuit Breaker Eligibility Homestead tax base $417.2 Same parameters as Model 9, but the decreased adjustment is used to reduce property tax rates. Base Rate $0.65 Average Rate $0.95 Gross homestead taxes $394.6 Adjustment $-48.1 Net homestead taxes $346.5 Property tax increased by roughly $49.5M on resident homeowners with HI between $29,140 and $90,000 and lowered by $49.5M on resident homeowners with HI > $90, % of current eligible households lose by an average of $ % win by an average of $ % are held harmless from change via circuit breaker. Generally, all households with a household income >$90,000 win.

5 Model 11: Rollback Income Sensitivity Eligibility to $75,000 Homestead tax base $417.2 Income Sensitivity eligibility is reduced to $75,000. Base Rate $0.84 Average Rate $1.22 Gross homestead taxes $509.9 Adjustment $ Net homestead taxes $350.4 Property taxes increased by roughly $17M for resident homeowners with HI between $75,000 - $90,000 Property taxes decreased by roughly $17M for resident homeowners with HI above $90,000 Average tax increase on affected taxpayers is $523.

6 Considering the Three Models Conceptually Model 9 opens the loop to adjust Vermont s tax portfolio. It represents a choice that Vermonters ought to pay a greater portion of their taxes through the property taxes and lower portion of their taxes through the personal income tax. Models 10 is a closed loop. The model readjusts the incidence of the property tax. Majority of households previously sensitized (74,205) pay more. All households with Household Income >$90,000 pay less. Model 11 is a closed loop. The model readjusts the incidence of the property tax. On average, residents with a Household Income above $90,000 pay less and residents with a Household Income between $75,000 and $90,000 pay more.

7 Model 9: How Does this Affect Property Owners The model affects 87,920 previously sensitized households with a Household Income between $29,140 and $90,000. On average, property taxes will increase $ for these households. ($114 million in total.) Property tax regime remains unchanged for households with HI above $90,000.

8 Model 9: How Does this Impact Income Tax Filers? $114 million raised by eliminating income sensitivity and reducing circuit breaker eligibility is redeployed to lower income taxes. Commission directed staff to target revenue to the affected property owners. Two income tax models created for consideration.

9 Model 9: How Does this Impact Income Tax Filers? (2) Model 9A 2008 brackets used $114 million used to collapse first two brackets into one flat bracket of 3.1%. For example, first $131,450 of Taxable Income would be taxed at 3.1% for MFJ Former brackets were: 3.55% on first $54,400 of Taxable Income 6.8% on Taxable Income between $54,400 and $131,450 Model 9B 2008 brackets used $114 million used to reduce rates on first two brackets. For example, 2.5% on first $54,400 of Taxable Income for MFJ 5% on Taxable Income between $54,400 and $131,450 for MFJ Former brackets were: 3.55% on first $54,400 of Taxable Income 6.8% on Taxable Income between $54,400 and $131,450

10 Model 9A: Winners & Losers 3.1% Bracket on First $131,450 of Taxable Income See Attached Spreadsheet 87,920 households will pay on average $ more in property taxes. Break even point is $85,850 of income. Substantial losses (>$1,000) occur for tax filers between $29,410 and $50,000. (Mostly current circuit breaker population.) Taxpayers with an income over $90,000 are clear winners. All taxpayers with income beyond first two brackets ($131,450 MFJ) would receive $3,095 tax cut.

11 Model 9B: Winners & Losers 2.5% Bracket for First $54,400 of Taxable Income and 5% Bracket for $54,400 - $131,450 of Taxable Income See Attached Spreadsheet 87,920 households will pay on average $ more in property taxes. No break even point as all desensitized households lose. Compared to Model 9A, losses are slightly mitigated in former circuit breaker population. Taxpayers with an income over $90,000 are clear winners. All taxpayers with income beyond first two brackets (131,450 MFJ) would receive $1,958 tax cut.

12 Models 9A & 9B: Considerations (1) Aiming at Two Targets Increasing property taxes for highly specific group and offering a general benefit for all tax filers. New beneficiaries would include out of state residents, renters, and property owners with a household income >$90,000. Less than 10% of tax filers have an income >$90,000. Most conservative estimate is that Income tax benefit to this group is worth > $40 million. No way to target the tax cuts due to progressive tax system. Creating a specific credit would be similar to reinventing existing property tax programs in the income tax code. Efforts to mitigate losers erodes ability to offer rate relief, particularly since additional help in lowest bracket helps all taxpayers. (Most expensive to lower bottom rate.) Household Income and Taxable Income are not the same making comparisons very difficult.

13 Models 9A & 9B: Considerations (2) Doubling down on an unpopular tax. Property tax bills are a volatile issue where many Vermonters feel pinched. Connection between property tax increases and income tax cuts may be lost on some property owners.

14 Next Steps 1. Provide staff with direction for future deliberations.