Steve Cairns: A new, unintended consequence of the 24-year-old Act 60

Editor’s note: This commentary is by Steve Cairns, owner of Advisor Tax Services. He lives in Stowe.

Recently I discovered a new quirk (or maybe inadvertent carve-out) in the calculation of homeowner property tax credits for this coming fiscal year 2021-22 that, unless changed, may result in a considerable unplanned increase in residential Property Tax Credits to be issued by the state beginning this July.

As you may already know, a large majority of Vermont primary homeowners have their property tax calculated based on their prior calendar year “household income” (HI). In the Vermont Statutes, 32 V.S.A 6061(5) defines “federal adjusted gross income” (AGI) as the beginning point for the calculation of HI. Then the statute adds several specific non-taxable items back into HI (e.g. Social Security). There are also a few exclusions. So any new form of income that is non-taxable will not be in AGI and will not be added back because it is not specifically stated in the statute.

This has had many unintended consequences, but the biggest one that I can remember just revealed itself. All the PPP/EIDL loan money that Vermont small businesses have received from the U.S. Treasury and is expected to be forgiven will be treated as non-taxable income (per the Dec. 20 COVID relief bill) on federal tax returns, and therefore will not be in AGI. However, the business expenses paid with this relief money will still be deductible, and therefore will still reduce AGI.

The end result of this is that there could be a significant decrease in collective HI, resulting in a significant increase in property tax credits paid out by the state next fiscal year. I wonder if this situation is getting any attention from the Legislature. It may be a blip or a huge bubble, I have no clue.

The calculation of household income is fraught with inequities. The original mantra of Act 60 was to assess school taxes based on the ability to pay. The Legislature based the calculation of property tax and the resulting credit on the concept of household income (taxable and non-taxable income of all members). The resulting law adds back non-taxable items such as Social Security, workers’ compensation, veterans’ benefits and some state support monies (such as Reach Up and child care support), but not all (VT EITC, 3 Squares, Liheap, etc.).

Almost immediately, the idea that “household income” reflected ability to pay began to erode. The Legislature has never added back any federal refundable tax credits such as Earned Income Tax Credit, Additional Child Tax Credit and tuition credits. In 2010, the Legislature added several arbitrary adjustments to HI designed to penalize certain undesirable groups. Now the state is specifically excluding the EIP (“stimulus”) and PPP/EIDL from that calculation (because they are not in the statute).

As a result of these arbitrary exclusions, we can confidently state that household income as a measurement of ability to pay is a joke. It is clearly not.

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