The Chamber of Commerce

Position Statement: Tax and Fiscal Policy and Education Funding

Tax and Fiscal Policy
The Lake Champlain Regional Chamber of Commerce and GBIC strongly believe that the State of Vermont's tax system should be designed with public policy in mind and with priorities that promote economic and social investment, and fairness for all of its citizens. Furthermore, the long-term sustainability and the economic health of the system should serve to benefit all Vermonters. Guiding principles to ensure sustainable tax and spending policy include "fiscal restraint," "sustainability," "stability," "simplicity" and "prioritization of programs and funding."

According to a 2004 comprehensive study conducted by the Federal Reserve Bank of Boston, Vermont ranks in the top quartile of states in the nation for percent of overall business profits that are claimed by taxes. It is not only Vermont businesses that are affected by Vermont's fiscal policy; every Vermonter experiences pressure from these burdens as they are reflected in our cost of living. For example, housing in the Greater Burlington Area is 26% higher than the national average, utilities are 16% higher, and miscellaneous goods and services are 10% higher. Specific recommendations to address these issues are outlined below:

• Examine the overall structure of state government to identify opportunities for restructuring, streamlining or eliminating programs and processes to increase efficiency, reduce costs and enhance accountability, with the review to include examining the 2005 key findings of the Vermont Institute of Government Effectiveness, Inc.
• Establish a budget planning process that includes a three to five-year financial plan, similar to what was adopted for the Medicaid budget.
• Use state transportation fund revenues, which come from taxes and user fees derived from transportation activities, only to support the Agency of Transportation budget and transportation projects that are included in the State Transportation Capital Program. Over time, the transfer of transportation fund dollars to the general fund should be reduced and eventually eliminated.
• Consider the total capital needs of the state when the Capital Debt Affordability Advisory Committee establishes a bonding cap recommendation. The capital needs should be weighed along with factors such as maintaining the state's high bond rating as well as total outstanding debt, debt per capita and current market conditions.
• Evaluate and consider the impact of tax and fiscal policy and the overall tax burden on economic development and business activity in Vermont.
• Evaluate the existing taxation practices of the region's municipalities to determine the long-term impact of these policies on the economic competitiveness, sustainability and viability of the region.
• Oppose proposals that give Vermont cities and towns the option to enact local sales taxes or rooms and meals taxes except for regional investments that are deemed appropriate. Any tax increase must be tied to economic growth and stimulation and solely benefit the specific investment.
• As a general rule, balance the state's budget by reducing or controlling costs rather than increasing the overall tax burden. If spending cuts are necessary to balance the budget, cuts should be made based on an evaluation and prioritization of programs rather than across-the-board cuts.
• Consistent with the items above, control spending so that any increase in overall spending is (a) limited to the extent necessary and (b) does not exceed the annual percentage rate increase in the gross state product or the Consumer Price Index, whichever is less. Within the overall spending limit, we support prudent allocations to budget items that represent investment spending (e.g., spending that provides a return to the state in terms of increased tax dollars and a higher gross state product).
• Accomplish the above goals while at the same time maintaining a high debt-rating and working to restore all of the “rainy day funds”—general fund, transportation fund and education fund reserve accounts—to five percent of budgeted expenditures. In the future, the goal should be to increase the rainy day funds to eight percent of budgeted expenditures so that a larger reserve is available in the event of an economic downturn. The dollars in those funds should only be accessed to balance the state's books if necessary at the end of any fiscal year and only after appropriate budget balancing measures are taken.
• Support the direct coupling of the Vermont income tax to a federally determined tax system.
• In light of the passage of a new unitary tax system in 2004, a thorough review of the system and applicable rules is necessary to understand all impacts before the law takes effect in 2006.

Education Funding
The Lake Champlain Regional Chamber of Commerce and GBIC support access to a quality education for all Vermont children. The system for funding a quality education for our children should be fair and understandable. It should not cause divisiveness among communities or discourage economic development. In addition, the education funding system should include measures to control education costs and ensure cost-effective education tied to results.

In 2003, the Vermont Legislature passed a bill (Act 68) to revise the Act 60 education funding system. Act 68 increases the block grant amount, eliminates the sharing pool mechanism, creates a split grand list property tax system and increases the sales tax from 5% to 6% and the telecommunications tax from 4.36% to 6%. The sales/use and purchase/use taxes alone are projected to generate $135.9 million in new revenue for the fiscal year 2006 Education Fund.

Some of our concerns with the Act 60 education funding system were not addressed in Act 68. Furthermore, Act 68 raised new issues. A summary of our concerns and recommendations are as follows:

• Implement cost controls to address two key issues:
  1. There is a disconnect between revenue sources and spending decisions. Act 60 created an education funding system under which revenues are collected by the state while decisions on spending are made locally. Because of the lack of connection between spending and how education is financed, education costs have increased dramatically since Act 60 was passed. Although Act 68 made some changes to address the disconnect, issues remain and efforts must be undertaken to control spending.
  2. Education spending continues to outpace revenues despite statewide enrollment reductions. A significant emphasis on cost control should be instituted including a thorough evaluation of the spending patterns of the administrative oversight of the educational system. Approaches to controlling costs are outlined in more detail in the Chamber/GBIC Position Statement on Education Costs.
• Oppose increases in the non-homestead property tax rate. Beginning in fiscal year 2005, property taxes have been assessed based on a new split grand list system, with homestead and non-homestead property taxed at different rates. During that time, the Education Fund grew 31% from fiscal year 2004 to 2005 and is projected to increase again in fiscal year 2006. For fiscal year 2006, the property tax rate for homestead property (defined as a home of a Vermont resident and all contiguous land) will be $1.02 per $100 of assessed valuation (equalized), with income sensitivity increased to $85,000 in 2006 ($90,000 in 2007), and a homestead cap of $200,000. The non-homestead (including business) tax rate will be a fixed rate of $1.51. Although Act 68 has provided property tax relief in some communities, increased school costs (despite lower student numbers) and rapidly rising property values are outweighing the rate reduction, and contributing to a projected increase in 2006 non-homestead property taxes. The Chamber and GBIC support an annual decrease in the non-homestead property tax rate, corresponding to the increased value of the grand list. Requiring non-homestead property owners to pay a higher rate will undercut the cost control mechanism of the split grand list system. Any changes made to the property tax rates should be performed proportionately and not by an equal amount (i.e., five cents each).
• Oppose increases in the income or other tax mechanisms to fund education. We do not support adjustments to the income tax to fund education or a separate education income tax because of their negative impact on the economy.
• Modify the excess spending cap to consider cost of living differences among regions. Act 68 provides that school districts that spend over 125% of the previous year's statewide average spending per pupil (with the 125% phased in over 3 years) are assessed an excess spending surcharge. In order to make the excess spending penalty fair across regions, the penalty amount should incorporate cost of living differences among regions.
• Address property valuation and other property tax issues. The legislature needs to perform a detailed review of our property valuation and equalization system to ensure that the system is statistically acceptable, fair and equitable. In addition, a permanent change in statute is needed in order to ensure that statewide education property tax rates are adjusted downward for any year that undesignated surpluses above the 5% reserve level occur (e.g., in times of rising property values and big common level of appraisal adjustments in communities).
• Conduct further analysis. Act 68 was enacted without a comprehensive analysis. Under pressure to pass a bill in 2003, the Legislature focused primarily on the general concepts of funding in the first years and not on the whether the new education funding system is sustainable over the long term and its impact on the economy. A thorough, independent review and analysis is required, including careful tracking of economic and other indicators to measure the short- and long-term impacts of the new law.
• Examine additional modifications: Additional modifications should be considered including the following: (1) incorporate cost of living differences among regions in the block grant amount, and (2) address inequities between districts in funding for transportation and special education. In addition, our Congressional delegation should be encouraged to initiate and support legislation that provides more federal assistance for special education.

Note: The Chamber and GBIC have a number of other position statements that reference tax issues and spending policies, including position statements on economic development, transportation, education cost, and technology. Please refer to the Position Statement on Education Costs for a greater discussion of the need for cost effective education tied to results (including special education).

Approved by the Chamber and GBIC Executive Committees on September 19, 2005. Approved by the Chamber Board on September 28, 2005.