Home News and Features Income-Based Property Tax Credits May Provide Less Help Next Year

Income-Based Property Tax Credits May Provide Less Help Next Year

Notes: The tax rates from which these dollar increases are calculated are estimates that could change, particularly in the case of the school tax, which is subject to later legislative decisions. Most Montpelier taxpayers will see lower increases than shown because they qualify for some degree of income-based school tax relief, while a much smaller number of taxpayers qualify for municipal tax relief. The municipal tax increase assumes passage of two ballot items that normally are approved: Kellogg-Hubbard Library and Central Vermont Home, Health, and Hospice. The municipal tax rate will rise 4.06% if the municipal budget and both ballot items are approved. The school tax rate would rise 24% if the school budget passes, but again that estimate is subject to change.
With proposed school budget increases approaching $250 million statewide and average property tax bills expected to rise by about 20% (24% in Montpelier), according to the latest estimates, legislators in the House Ways and Means Committee have been taking a closer look at the state’s property tax credit system to see how it functions in a year when budgets are rising at a record pace.

Because of a lag in the way the credit is calculated and the big budget increases proposed this year, it will provide less protection to homeowners next year than it would if budgets were rising at a more typical pace. 

At a Feb. 13 Ways and Means meeting, chair Rep. Emilie Kornheiser (D-Brattleboro) said  “I’ve heard from quite a few people thinking that all the conversations around property tax increases this year won’t make a difference for folks who pay on income. It will.”

The Legislature might still come up with ways to lessen the impact on property owners next year — including raising new revenues for the Education Fund — although it seems unlikely any solution will be in place before Town Meeting Day.

Property tax credits are of keen interest to the approximately two-thirds of Vermont homeowners who qualify for partial reductions in their property tax based on income. In Montpelier, about 64% of homeowners qualified for the current fiscal year.

Specifically, 1,212 Montpelier households out of 1,894 received an education property tax credit, while 313 of those also received a municipal tax credit, according to state figures.

The credit reduces the amount of property tax due. The average combined credit for a Montpelier household this year was $1,866, although the amount received varies depending on income and house value. In total, Montpelier homeowners received $1.84 million in education property tax credits from the Education Fund and $422,194 for municipal tax credits, from the General Fund.

Julia Richter, senior fiscal analyst in the Joint Fiscal Office presented on property taxe credits to the Feb. 13, Ways and Means. She reviewed the various credits at different household income levels (which includes both taxable and nontaxable income).

For those with household income equal to or below $47,000, two calculations apply, providing a reduction in both school and municipal taxes on a housesite value of up to $400,000 (a housesite is a primary home and up to two acres). For example, a household with income of $40,000 pays no more than 3% of household income in municipal taxes and no more than 2% of income in school taxes.

A household with income from $47,001 to $90,000 gets no property tax credit on municipal taxes, but pays school property taxes based on the local school income rate. However, the income rate only covers the first $400,000 in house value, with value above that taxed at the regular property tax rate.

For households with a household income of $90,001 to $128,000, the property tax credit may be used only on the first $225,000 of value, with the regular tax rate applied to the value above that level. Households with incomes greater than $128,000 do not qualify for any credit, although that level varies from year to year.

Richter said the property tax credit is on a “lag,” meaning the property tax income rate for next year (FY2025) is based on 2023 calendar year income and FY2024 local school spending. The number has already been calculated for Montpelier at 2.24%.

At the committee meeting, Richter presented an example of the calculations that showed typical tax credits for a household with a house worth $400,000, income of $80,000, and average tax rates. For this household, the property tax credit — reducing the tax bill — for FY2026 would be $4,080, less than the property tax credit of $4,896 if there was no lag.

“This means the household will not receive the property tax credit corresponding to the increase in tax liability until fiscal year 2026,” Richter said. In other words, because of next year’s potentially big school tax rate increases, income-based taxpayers will not get as much protection as they would if there was no lag.

The Ways and Means Committee asked Richter to illustrate how taxes would be affected by various potential legislative changes. One scheme would increase the property tax credit by either 10% or 20%. However, the average tax rate would then increase from 19.99% to either 21.06% or 22.12%, which would hurt both those paying on the full rate and those getting a tax credit.

Another possible change would hold the average tax bill increase to 10% or 15%, while increasing the non-homestead  rate by either 28.62% or 24.26%. One problem noted by the committee is the non-homestead tax applies to apartments as well as commercial properties and land, so this could lead to significant rent increases. 

The committee came to no conclusions about changes to the property tax credit or tax rates. Rep. Peter Anthony (D-Barre) likened the Education Fund to a balloon. “If we push on one side it pops out the other,” he said.

Inflation Has Eroded Property Tax Credits 

The key income levels in the property tax credit system — $47,000 and $90,000 — were set many years ago (1995 and 2005, respectively). If those levels were updated for inflation, more homeowners would be getting tax credits, and their tax credits would be significantly larger.

Updated for inflation, the $47,000 level set in 1995 would be $96,444 today. The $90,000 level adjusted for inflation would be $137,131.