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Vt. Panel Mulls Income-Tax Surcharge To Pay for Schools

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A Vermont panel is considering a bold school-finance-restructuring plan that calls for paying for education with a locally determined income-tax surcharge instead of the residential property tax.

The income-tax idea is one of several as-yet-unreleased recommendations made by the Commission on Educational and Municipal Financing Reform, which was appointed in June by Gov. Howard B. Dean.

The council is made up of 20 state legislators, business leaders, educators, and municipal officials.

The Governor appointed the panel to develop more equitable methods of school funding than the property tax. The property-tax burden has long been a major issue in Vermont, which combines an above-average reliance on local property levies with one of the nation's highest ratios of school spending to personal income.

Currently, two-thirds of the state's general-education fund derives from local property taxes, more than half of which are paid by residential owners. The recession has devalued both assessed property values and house prices, placing an especially heavy load on property-poor districts.

During the past four months, the commission has concentrated on the issue of tax equity, developing a set of principles to use as a foundation for any reforms.

According to those principles, commission members explained, any new system would have to maintain vertical and horizontal equity. That is, more tax responsibility would be put on those with greater ability to pay, while cities in similar situations would receive equal tax treatment.

Other principles include structural integrity, administrative efficiency, and economic neutrality.

"In other words, we didn't want a new system which would encourage towns to use tax loopholes or compete against each other for tax benefits,'' said Deborah Brighton, a tax analyst and a member of the commission.

'A Very Hard Wall'

While they have not reached a consensus on specific reforms, all commission members have agreed that an income-tax model would best match the new set of principles.

Steven Jeffrey, a commission member and the executive vice president of the Vermont League of Cities and Towns, noted that other state commissions have attempted to improve the burdensome tax system. But, he said, this was the first to "radically restructure'' the system.

"All the other commissions have gotten together and said, 'Boy, this is a really big problem,' and left it at that,'' Mr. Jeffrey observed.

The new school income tax would be administered by and paid to the state. But local tax-surcharge rates would be set by town meetings according to local school needs.

Other municipal services, such as fire, police, and roads, would still depend on property taxes.

Backers contend that an income-tax-based program would eliminate the need for state programs that subsidize property taxes.

The commission's outline also calls for streamlining the tax process for business and vacation-home property. Business-inventory taxes would be eliminated, while property taxes for businesses and vacation homes would be taxed at the state rather than the local level.

Mr. Jeffrey stressed that the commission has not formally endorsed any of the recommendations.

The panel was still researching the possible impact of increasing the income tax, he noted, adding, "We don't want everyone taking the next bus to New Hampshire.''

Two public hearings on the commission's plan are slated for this fall, and legislative action on the proposals could begin in January.

Glen Greshanik, a spokesman for the Governor, said Mr. Dean would only support a set of guidelines approved by all commission members. Anything less would have little chance of passing the legislature, which in the past has rejected a statewide property tax to relieve local tax burdens.

"The tax issue is a very hard wall to knock your head against in Vermont,'' Mr. Greshanik noted.

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