WILMINGTON — We taxpayers reach into several different pockets to pay our various taxes.
We extract money from the economic activities of our daily lives, and that money makes up the revenue streams that make possible the civic life from which we all benefit. When our money arrives in Montpelier, it lands in one of several buckets, called funds, the two largest of which are the general fund and the education fund.
Our public discourse is generally about spending and, therefore, taxes being too high. Little is widely known about the actual structure of those funds and how their very design can act as upward or downward pressure on spending, regardless of policy choices made by the Legislature and the governor.
So, in the spirit of shining a bright light on our money, here is a brief discussion about the two largest funds, how their very design affects how tax dollars are spent, and how the interrelationship between the general fund and the education fund affects how deeply we taxpayers have to reach into our various pockets in the first place.
This walk admittedly will take us a little way into the weeds. But if you care about the ever-increasing burden of your property tax and about the future of your community’s schools, I hope you will find these observations instructive.
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The general fund is the big-daddy fund used to pay for most of the obligations of state government. It is a very stable fund, and I suspect that most readers will be surprised to learn that your legislature and your governor and his administration, regardless of political party, are very good stewards of your tax money.
Supporting our schools is a joint responsibility of both state and local governments, and we (lawmakers and constituents alike) have not yet figured out what tools can help us to arrive at a sustainable level of spending that assures all our children a good education no matter where they live in the state.
Economists agree on consensus revenue forecasts, and lawmakers enact expenditures based on those forecasts, resulting in a balanced budget. Structures are in place to assure that it remains in balance throughout the year, in spite of the fact that Vermont, unlike most states, does not have a constitutional requirement for a balanced budget.
All the wrangling over what to spend the money on happens within this framework.
The General Fund, then, is revenue driven, meaning that spending is adjusted to meet expected revenues. One additional element is present in the general fund, and that is the political pressure exerted on 181 elected officials (150 representatives, 30 senators and one governor) who have to publicly vote to increase the taxes that make up the revenues that are deposited into this fund.
All attempts to balance the budget without raising taxes act as powerful downward pressures on spending within the general fund.
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The education fund, by contrast, works very differently.
School boards prepare budgets to be accepted or modified by the voters in each of Vermont’s 246 school districts. Through a process that, in the opinion of many, is too complex and opaque, those budgets are then aggregated, and school property tax rates are set statewide and locally.
The resulting revenues are then deposited into the education fund and redistributed to schools via a complex system based on an equal per-pupil expenditure. (A discussion of the complexity of the education revenue generation and distribution system is certainly needed, but best left to another day.)
The education fund’s design, unlike that of the general fund, actually results in upward pressure on spending. Here’s how:
First, the method by which the property tax is raised is so complex, it is not subject to the same political dynamic to “not raise taxes” that is present with the general fund.
Next, while just under 70 percent of the 2009 $1.3 billion education fund comes from property tax revenues, the balance of the 30 percent is made up of several items.
Two percent of the 6 percent sales tax you pay goes into this fund, as do the lottery profits of about $21 million, and several other smaller items.
The larger part of that last 30 percent, however, is a transfer from the general fund.
This transfer represents a huge chunk of the budget — in 2009, it was 25 percent of the $1.1 billion general fund — and it has many other demands on it. This chunk has a powerful structure that fosters downward pressure on spending.
Can you just see a hand creeping out of the general fund bucket and planting a few of its obligations into another bucket?
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And then there is the education fund bucket itself.
It was originally created in 1997 so that low-spending districts were encouraged to increase spending, paid for, theoretically anyway, by “excess” property tax revenues from sending towns. Subsequently, penalties were imposed on high per-pupil spending districts.
However, so many more districts are able to increase spending that, in the aggregate, the demand for revenues in the education fund escalates with few structural elements to stop it. Thus, the basic design of the education fund acts as upward pressure on spending.
It is certainly true that containing spending in both funds leads to the need for less revenue in both. But the power of the state to adjust spending in the general fund is direct.
Supporting our schools is a joint responsibility of both state and local governments. Policy makers have for several years focused on strategies aimed at shrinking school governance and closing small schools, strategies that the state does not have the power to implement unless it were to take over the running of schools in Vermont.
If we as citizens of Vermont (including legislators) collectively want our schools to remain a central element of our communities, as they now are, if we want to get a handle on property-tax creep, and if we want to reduce the stress that exists between state and local officials, then state policy makers need to look at the root causes of these problems, one of which is the basic structure of the buckets into which our tax money is deposited.