The Prebate Paradox: Wendy Wilton on Who Really Pays

(Every "fix" of Act 60 leads to more problems and another jury rig.  The latest of these is Act 185 which raised very serious issues of privacy and fairness.  We have been following this issue closely and were delighted when Wendy Wilton, Rutland City Treasurer, asked if we would publish the insights she has gained in her time as town treasurer of Rutland which is to say ... one who actually enforces the law and knows how it works in the real world, as opposed to the committee rooms of the statehouse.  Ms. Wilton's essay, which follows, ought to be required reading in Montpelier and various editorial offices around the state.)

Vermont’s Middle Class Missing Out on Prebates
By
Wendy Wilton

Property tax adjustments, or prebates, represent more than 10% of the Ed Fund's $1.238 billion expenditure, according to the Ed Fund Outlook from the Joint Fiscal Office. In 2007 this money was sent to Vermont’s municipalities, rather than directly to recipient taxpayers as part of Act 185.  This created a controversy about the privacy of tax bill information as the amount of the subsidy is now printed on the tax bill for those who receive prebates.  In addition to the privacy issue, cost and fairness issues effecting taxpayers should be addressed by the legislature.

Administration of the new law has cost local and state government as it is fraught with complexities despite the availability of software to cope with the data.  I have estimated the net cost to the City of Rutland to be over $45,000 based on staff time required to do the related work.  Real estate closings have become tangled up in the process.  On the plus side, the applied prebate has been helpful for the towns as the money has been credited against the tax obligation which has benefited the receiving taxpayers. 

By sending prebate money to the towns the legislature has exposed the inner workings of prebate qualification to local officials.  Those of us working at the forefront of property tax collection are now keenly aware of the application of prebates within our grand list, and some serious questions have arisen as a result.  Very large prebates have been received by taxpayers with significant assets which may not have been intended by policymakers.  Taxpayers in the middle are complaining about getting insignificant subsidies (or no subsidy this year) making their tax burden tougher to swallow.

In recent years the legislature increased the threshold for home value and income qualification for prebates—likely in an effort to provide tax relief to greater numbers of Vermonters.  The household income limit is now $90,000, and the house site value limit is $200,000.  This legislation appears to have backfired as many asset-rich individuals are receiving significant subsidies due to the legislated formula, and a generous cap, (previously $25,000).  Many moderate income taxpayers, especially two-wage- earner couples with modest homes, have seen their prebate shrink or disappear altogether as a function of the new expanded formula.

But program qualification is not limited to homes valued at $200,000 or less.  The limit is really a carve-out of the total assessed value subject to calculation for homes over $200,000.  Thus, property owners with very expensive homes are qualifying for the program on the first $200,000 of value which still provides substantial weight in the formula. 

Therefore, people who own a valuable home and can manage their incomes below the threshold are eligible for some of the highest amounts based on the formula: the more skewed your income to house value ratio is, the larger your prebate.  According to VT Tax Department statistics, in 2006, 41% of prebates were over $1,000 and accounted for 73% of the total subsidy budget; 4% of prebates were over $3,000 comprising 18% of the total, including two prebates over $20,000 each. 

Savvy tax and investment advisors are aware of how this works and manage to reduce their client’s income through deferred compensation or other avenues.  While it’s tough to fault anyone for taking advantage of the law as written, I’m not sure this is what Vermonters intended and I believe most of us would want to ensure the subsidies go to people who really need it.  Some recipients of these large subsidies have quietly expressed concern to me that they are receiving tax subsidy they don’t really need.

Many poor and elderly Vermonters also receive significant prebates--which they depend on in order to pay their property tax burden.  These cases are obvious examples of need.  Yet a loophole in the law provides that if the prebate is greater than the person’s property tax obligation, then the town must issue a payment to the property owner for the difference out of town resources.  Many town treasurers were floored to discover this. Most Vermonters would think it reasonable and fair to require property owners of very modest means to pay some minimum tax amount, even if small, to support town services and/or education.  The existence of prebates that meet or exceed the tax bill raise questions about the program.

Conversely, some unaware elderly taxpayers did not file a homestead declaration because they don’t file income taxes.  This resulted in some eligible taxpayers missing the prebate opportunity and being levied at the non-residential rate for education tax.

The end result of this formula and its implementation is that a portion of Vermonters are paying the freight for education costs and municipal taxes, while others—mainly moderately wealthy or those of lesser means--are often not.  A recent opinion by the Vermont Attorney General will make it difficult for town officials to keep this information from the public.  Meantime, the word is already out among taxpayers about the disparity in the application of the prebate formula.  The fairness rationale, upon which Act 60 and 68 were supposed to be based, is inconsistent with the reality of the situation at the local level. 

The legislature is likely to look at fixing the privacy concern created by Act 185 based on public outcry about the property tax adjustment information now sent to the towns.  However, there are problems with fairness and integrity that must be addressed.  The legislature appears to have missed the mark in ensuring this program would meet its intended objectives.  This ought to encourage the legislature and the public to give pause about the real world outcomes of policy and formulas as other property tax solutions are debated, especially as the legislature continues to ask local government to do the work of the state.

Wendy Wilton
Rutland City Treasurer

Sources:
Joint Fiscal Office, Ed Fund Outlook:    http://www.leg.state.vt.us/jfo/Education.htm
Vermont Tax Department Statistics, 2006 Property Tax Adjustments: http://www.state.vt.us/tax/statisticspropadj.shtml
Vermont Tax Department, 2007 Property Tax Adjustments: http://www.state.vt.us/tax/pdf.word.excel/pvr/paymentstomunicipalities.pdf

Comments

[Mike Bernhardt]

Please remember that last year the cap on the payments was $10,000 and this year the cap is $8000. There are some 'wealthy folk" in this state who have had no control over their property value growth. No everyone lives in Rutland.

[Wendy Wilton]

If taxpayers have real estate values and tax bills so high that an $8000 subsidy from the state is necessary then is it likely the tax rate is too high for everyone?