When an 8-cent property tax break isn't 8 cents

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MONTPELIER — Towns rushing to get school district mergers approved before a Nov. 30 deadline have one more incentive: the potentially $80 million hole in the education fund that threatens to raise tax rates 8 cents. Even if that increase washes out the 8-cent tax break towns can get by beating the deadline, they still end up better off than districts that aren't merging.

Brad James, education finance manager for the Agency of Education, says the overall rate increase of 8 cents can offset the 8-cent incentive.

"In theory, yes, all else being constant," James said. "In reality, it will all depend on where towns start compared to the new (unified district's) incentive rate."

State officials have warned that every school district could see an 8-cent increase in the statewide property tax rate because the education fund has a $50 million hole. That gap is expected to grow to $80 million when the state accounts for school budget increases of roughly 3 percent on average. A 1-cent increase in the average homestead tax rate raises about $10 million for the education fund.

Property taxes support $1.06 billion of the $1.58 billion education fund.

Adding 8 cents to the average homestead property tax rate of $1.51 means a home valued at $250,000 would see a $200 tax hike.

Meanwhile, school districts that have merged with neighboring districts have been told to expect tax breaks, starting at 8 cents, to help cover the costs of consolidation.

While merging districts can expect a tax break, the anticipated statewide tax hike will likely eat up most of the savings.

"Lots of people think that the 8 cents means their tax rate will be 8 cents lower than the prior year. That is not the case," said James.

Act 46, the law driving consolidation, protects merging towns from huge swings in tax rates as they merge with other districts that may have higher or lower rates. The homestead rate can't increase or decrease more than 5 percent a year, until all towns in the new district have the same rate.

"What 8 cents means is: The new unified district has a tax rate reduced by 8 cents, and that is the rate the towns will be moving toward," said James.

He said if a unified tax rate for merging districts is $1.50, then the target rate for the towns would become $1.42, with the tax break.

Using that same hypothetical rate, James gave an example of how rates would change for each of four merging districts, with the 5 percent threshold taken into account:

Town A's prior year rate was $1.30; it becomes $1.365 (105 percent of $1.30).

Town B's rate was $1.40; it becomes $1.42.

Town C's rate was $1.45; it becomes $1.42.

Town D's rate was $1.50; it becomes $1.425 (95 percent of $1.50).

"The tax rate reduction from the prior year all depends on the starting point of the town and the incentive rate it is moving to," he added.

Tax breaks are available for towns that have voter-approved mergers by Nov. 30.

The Joint Fiscal Office, the Legislature's nonpartisan research arm, said last year's tax incentives for school district mergers cost the education fund $10 million. An estimate for this year is not yet available. It's unclear how mergers will affect the $50 million gap in the education fund.

Nicole Mace, executive director of the Vermont School Boards Association, said districts are better off in this fiscal environment if they've merged small districts into larger ones.

"It is hard to believe we will walk out of next session with an 8-cent tax increase," Mace said. "There will likely be some attempt to push down school spending, and if you are in a larger school district you will be better able to respond than if you are in a tiny district with no room left to cut."

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