Is property tax actually regressive, and should we care?
Note: posts by individual CVDSA members do not necessarily reflect the views of the broader membership or of its leadership and should not be regarded as official statements by the chapter.
All political parties’ policy priorities reflect the material interests of their power bases. A workers’ party, which derives its primary support from labor unions, can say so directly and proudly. Every other type of party has to make up some other reason for why it’s doing whatever it’s doing, which its representatives usually end up believing wholeheartedly.
In Vermont, the big topic on all three major parties’ minds is property tax. This year, the average homeowner received a 13.8% hike on the largest portion of their bill: the homestead education tax, which pays for public schools. Amid widespread outrage, all three parties have agreed that something must be done to protect struggling homeowners.
For Republicans and many Democrats, that means cutting spending. For the Progressives, it above all means designing a more “equitable” tax system. Their apparent instincts about how to do it say a lot about the political and economic makeup of the party.
The Burlington Progressives, whose municipal electeds played no role in boosting the homestead education tax rate, evidently share the statewide party’s concern about placing an excessive burden on the average homeowner. Municipal taxes account for a smaller portion of the average homestead’s overall bill, but naturally, taxpayers are eager for savings at every level.
After her campaign platform’s lengthy “community safety” plank, Progressive Mayor Emma Mulvaney-Stanak’s number-one policy proposal last winter was to “create a more progressive and sustainable municipal property tax system.” Several of the Progressive Burlington City Councilors, who released a video on the same theme this summer, have also pointed to the “regressive” nature of the current property tax regime.
They’re not the first politicians, nationally or locally, to level this criticism. But what does the word “regressive” mean in the context of property tax specifically? There are a few possibilities.
Across the country, advocates for tax fairness have observed that local authorities tend to assess cheap houses at a significantly higher percentage of their market value than expensive houses, and they can cite various studies to back up the claim. Intriguingly, the City of Boston abates the first $100,000 of every home’s assessed value – a big chunk of the total for a modest house, but only a small fraction for a mansion – partly as a means to counteract the unfairness produced by this tendency, which may prove difficult to correct in itself.
In Burlington, many of the complaints about property taxes focus on 2021’s citywide reappraisal in particular, which assessed commercial properties at what seemed to be a pandemic-era low point, thereby shifting more of the responsibility for funding city services onto homeowners. This is “regressive” in a hazy, populist sense in which “business owners and landlords are getting off easy” while “ordinary folks” pick up the slack, but it’s not clear that many commercial properties actually were assessed incorrectly, and the ideal division of the tax burden between homestead property owners and commercial property owners is subjective in any case. Many American cities charge separate rates for residential, commercial, and even industrial properties, but we have no established formula that would allow us to say in mathematical terms whether one tax regime is more progressive than another on that basis.
Elsewhere, critics of the regressive property tax have lamented its flat rate. While the income tax has a bracketed structure, with higher rates for higher earners, a homeowner with a $200,000 house pays the same property tax rate as a homeowner with a $2 million house. Introducing progressive marginal tax rates for more expensive properties would go hand-in-hand with abating the first portion of the property value in that both changes would mirror the structure of the federal income tax, which, thanks to the standard deduction, offers a 0% tax rate on earnings below $14,600.
Finally – and most importantly, it seems – a property tax is said to be regressive in the same way as a sales tax. A sales tax is regressive because, over the course of a year, a high earner pays less in sales tax as a percentage of their annual income than a low earner does. This will hold true even if, as expected, the high earner treats themself to a significantly higher level of consumption than the low earner can.
Under this formulation, there are many examples of regressive taxes – from the payroll tax that funds Social Security to user fees on public goods, such as bus fares – but only one tax can be strictly progressive: the income tax itself. On a trivial, case-by-case basis, even a wealth tax on multimillionaires would sometimes fail the test.
Imagine, for instance, a pair of plutocrats, one of whom invests primarily in growth stocks while the other invests primarily in dividend stocks. The former may have a slightly larger net worth than the latter, and if so, they’d pay a slightly bigger wealth tax, even though their friend’s income would be greater on account of the dividends.
Does this “regressive” hypothetical present a problem? Not to me. Obviously, the purpose of the wealth tax is to tax wealth, not income. In a sense, the same is true of the property tax. Targeting a single asset and declining to account for liabilities, it nonetheless remains the closest thing that we have in America today to a wealth tax.
Consider another hypothetical. A 68-year-old Burlingtonian, who owns a house worth $800,000, has retired after a remunerative career. Their overall net worth is $1.5 million, but so far, they haven’t cashed in on any of the unrealized capital gains in their IRA. Thanks to Social Security and interest on savings and bonds, their income in 2023 was $50,000.
Half a mile away, in a crummy apartment, lives a 31-year-old renter who earned $55,000 last year. They own no significant assets, so due to student debt, their net worth is negative.
According to the crude theory of progressive taxation, the renter should have paid more in taxes than the homeowner. By this understanding, the property tax, which prevented that from happening, intruded regressively upon the perfect justice of the income tax.
Yet the fundamental principle of progressive taxation is not necessarily that income matters above all but that an individual’s tax burden should depend upon their “ability to pay.” Once we remember that wealth exists, we realize that we have no way to measure with certain accuracy or confidence that ability for anyone. Neither the City of Burlington nor the State of Vermont knows my net worth or yours; the state knows our income, which functions with imperfect reliability as a proxy for general economic well-being.
We should still strive to achieve tax fairness, but the problem of how to do it is more ambiguous than many of the concept’s proponents let on, and the retiree of relatively high wealth and relatively low income presents an especially ambiguous case. And it’s not an unusual one in Vermont, which has the third-highest median age in the country. In order to grapple honestly with the difficult question of how much the aforementioned retiree should pay in taxes, we have to recognize some kind of difference between them and the no-wealth, low-income worker.
Over the next year or two, we may see various new “equity”-based proposals on the city and state levels to phase out or reduce homestead property tax as a revenue source, with new or increased income taxes replacing it, or to expand income-based property tax adjustments. Such proposals are incomplete if they assess their own progressivity strictly as a comparative measure of how much high-, middle-, and low-income Vermonters would pay as a share of their income under the revised system. Ideally, they would also consider their progressivity in terms of how much high-, middle-, and low-wealth Vermonters would pay as a share of their wealth.
This alternative method of gauging progressivity would not suddenly unmask the progressive income tax as a regressive nightmare. In general, of course, low-wealth people tend also to have lower incomes (and thus pay little in tax), and high-wealth people tend to have higher incomes (and thus pay more). Senior citizens make up only 21% of Vermont’s population, and the truly wealthy ones receive big enough regular payouts from their investments to remain high-income even after retirement, if they ever had a job beyond “investing” in the first place.
Yet an up-close look at each wealth ventile on our hypothetical graph would reveal a huge number of disconcerting outliers and notable microtrends. In the low-wealth groups, we’d find high-salary but nearly assetless young professionals paying a big income tax; in the middle-wealth groups, we’d find ordinary retirees paying extremely little income tax despite the considerable value of their paid-off houses; and in the highest-wealth group, we’d find one-percenters with stock portfolios so enormous that, even with significant investment income and a high tax rate on it to match, the income tax could never amount to anything more than a miniscule sliver of their wealth.
How would we address these subgroups? The solution would not be to discontinue the income tax but to introduce additional taxes to ensure that every middle-wealth Vermonter contributes in a reasonable way to the system and to ensure that all high-wealth Vermonters pay considerably more than an income tax alone can extract. The homestead property tax isn’t the best way to do even a portion of the job, but it has some merits – most of all, the very considerable merit of existing already.
A wealth-based analysis of tax progressivity can only be imagined, since Vermont doesn’t collect precise data on personal wealth. But if such data existed, would anyone want to crunch the numbers? The movement in support of a more strongly income-based tax system transparently includes both blue-collar homeowners for whom the property tax represents a serious expense for which they must economize and bourgeois retirees who’d simply prefer not to pay. Without the political power of the latter, it wouldn’t have come so far. Both groups benefit by keeping silent about the mixed composition of their coalition and presenting their preferred tax policy as a truly straightforward, across-the-board improvement in equity.
In Burlington, where the median home value exceeds $500,000, the rare figure of the working-class homeowner occupies an especially outsized role in local political discourse. This is so the bourgeois homeowner can hide behind them. Most Burlingtonians are renters, and among working-class Burlingtonians specifically, it’d be hard to argue that renters aren’t an overwhelming supermajority. Homeownership is especially rare in the wards that tend to vote for Progressives, but you wouldn’t know it from the party’s rhetoric or policy focus.
I’ve gone to a few meetings and events organized by the Burlington Progressives and have observed the demographic character of the party’s active supporters and internal committee members, most of whom belong to a generation where homeownership wasn’t necessarily an outlandish dream for a family of relatively modest means. I don’t think it would be unfair to assume that this plugged-in group of longtime partisans plays a larger role than the average Progressive voter in determining the party’s political outlook. Logically, the average Progressive voter wouldn’t care at all about property taxes because the average Progressive voter doesn’t pay property taxes, except indirectly as a portion of their rent. For them, the rent is what matters.
As a transplant, I found the Progs’ fixation on the injustice of property tax especially striking upon arriving in Vermont from New York City, where every left-of-center politician has set a laser focus – rhetorically, at least – on the problem of high rents. Among all the meetings that I attended as a socialist activist in North Brooklyn or as a journalist covering the Democratic Party in a part of town that would soon elect three DSA-endorsed public officials, I never once encountered a proposal to lower homeowners’ property taxes as a means to make the city more affordable. The idea would’ve seemed comical. Now I hear about it all the time, and it’s driven me crazy enough to write this essay.
Of course, left-wing politicians in different places have to adapt to different realities. But the difference between the rates of homeownership in Burlington and New York City isn’t as dramatic as you might think: here, 38% of homes are owner-occupied, and down there, 33% are.
Deprioritizing property tax reform could help the Burlington Progressives form a more vibrant and meaningful connection with both young people and the city’s working-class majority. It might also benefit their municipal electeds’ political fortunes for the simple reason that municipalities have very little power to change the tax system, which means that a mayor or city councilor’s promise of action is very likely to yield disappointment.
State law determines what sorts of taxes cities in Vermont may collect and how those taxes work. Without action in Montpelier, Burlington can’t set different tax rates for different types of properties (e.g., second homes), create progressive tax brackets for expensive properties, or introduce a preset abatement.
Unfortunately, it’s not clear that anyone outside of a few policy wonks has any interest in any of those reforms anyway. The central demand of the “low- and moderate-income homeowners” in Burlington is to modify the municipal property tax for the purpose of duplicating the income-sensitized structure of the homestead education tax. The State of Vermont’s Education Fund derives its revenue through a complex mathematical formula that sets a property tax rate for each town based on the local school district’s spending per “equalized” pupil, but only one third of homeowners pay that rate, while households earning below $128,000 receive a sliding deduction, capped at $5,600. On the municipal level, only households earning below $47,000 receive a deduction, capped at $2,400, which the state refunds to the municipality.
On its own, the City of Burlington could theoretically mimic the education tax’s more expansive deduction in a jury-rigged, back-end fashion by offering a sliding rebate on municipal taxes for homeowners who would submit their income tax returns to City Hall as proof of their low or moderate earnings. Calculating their refunds and mailing out their checks would probably amount to a pretty costly administrative burden, but the bigger foreseeable obstacle is that, in order to maintain revenue neutrality, the city would have to convince residents to authorize a big increase on the statutory municipal property tax rate, which would become the effective rate only for high earners. A hard-to-understand promise of progressive redistribution on the basis of income – in which a lot of the biggest checks, however, probably would go out to comfortably retired Joan Shannon voters in the southern Hill Section – might not sway a majority of voters.
Another problem of sorts is that, even with income sensitivity, homeowners still hate the homestead education tax, still say it’s regressive, and still want it abolished. On the state level, this is a Progressive priority, and in 2022, a legislative committee authored a report that put forward a blueprint for funding public schools via income tax.
Unlike mayors and city councilors, state legislators have real power to change Vermont’s tax system. The current proposals are a little disappointing.
Right now, Vermont’s tax system funds public education through local property tax bills whose payments subsequently mingle in a statewide Education Fund that redistributes them to the school districts, and its rather clever design ensures that a property-rich town and a property-poor town will always pay the same education property tax rate as long as both towns’ school districts decide to spend the same amount of money per “equalized” pupil. The purpose of the system is to allow property-poor towns to spend more on education than they otherwise could afford to, and one of the results is that, in the towns where the houses are expensive, homeowners pay a lot more property tax than they would in a purely local tax system, where a property-rich town could have a nice school even with a pretty low tax rate.
This creates a lot of anger about education property taxes among the Vermonters with the loudest collective political voice of all: upper-middle-class homeowners. They represent one more big reason why getting rid of education property taxes has become a popular idea, despite its radicalism of a sort (currently, every American state uses property tax as a major revenue source for education). According to Vermont Public, the proposed method for doing so – replacing the homestead education tax with a new income tax based on the same fundamental structure, where income-rich towns and income-poor towns would pay identical rates for identical per-equalized-pupil spending – would offer “modest decreases” in taxation for most Vermonters who earn between $90,000 and $175,000. It would make up the difference progressively, with “significant increases” for Vermonters earning more than $250,000, but on its own terms, reducing the tax burden of the former group is a bad idea.
I’m not sure that “modest decreases” would pacify them anyway. With the homestead education tax abolished, their anger would likely shift to the perceived problem of excessive spending. One of the major critiques of Vermont’s system for funding education observes that it discourages cost containment because, for each local district, which sets its own budget, the full benefit of each dollar spent stays local while the cost of each dollar spent is to some degree distributed throughout the state. This incentive structure doesn’t seem like a big problem as long as you’re in favor of generous school budgets, but the system ends up producing a total education expenditure derived from the clumsy interplay between 122 self-interested school districts and a mathematical formula that hardly anyone really understands, and in the end, the figure feels pretty random. Evidently, it can generate a lot of outrage.
The best way to undo the byzantine structure of Vermont’s education funding system would be to get rid of local budgetary decision-making altogether and to allow the legislature simply to set an education budget on the state level, sending an identical per-equalized-pupil distribution to every school in Vermont while prohibiting rich towns from supplementing this funding for their own schools through any local mechanism. This would create a clear, simple process for determining whether we as a society want to spend more or less on education than we currently do, but there’s no visible push on the state level to adopt a system of this kind.
Instead, we have a big, longstanding debate about whether to continue to fund schools through an education property tax tied to local spending or to introduce an education income tax tied to local spending. The income-based tax would have benefits in terms of progressivity by the standard measure – which, for all its limitations, should probably remain the standard measure – but it’s worth noting that the income-sensitized property tax is not wildly regressive, either.
2022’s Act 175 report contains a graph showing the amount of education property tax currently paid as a percentage of income for low earners, middle earners, and high earners. By fits and starts, the line goes up until it hits the 18th ventile (Vermonters who make $141,000 to $171,000), where it begins to descend and then drops precipitously for households with more than $233,000 in income. The same graph would look better with an income-based tax.
It would be very difficult to correct the education property tax’s tendency to go relatively easy on the highest earners. We could make the tax system as a whole more progressive by replacing the education property tax, as proposed, or by reducing its share within rich people’s overall tax burden without reducing or abolishing the tax itself. The latter could be achieved simply by upping the normal income tax at the highest levels. Think of it this way: a left-wing government’s ideal tax system would for various purposes include secondary and tertiary taxes of imperfect progressivity (New York City’s failed congestion pricing, for example) – it doesn’t matter much unless the sum total of all the taxes is insufficiently progressive.
Earlier this year, Fair Share Vermont advocated for H.828, a somewhat gimmicky proposal to add a 3% marginal “surcharge” on individual income over $500,000. Logically, it would make a lot more sense to add new income tax brackets at normal increments than to tax every dollar between $229,550 and $499,999 at the same rate and then insert a bump at $500,000, but the political experts must’ve determined that people making $400,000 are essentially sympathetic while people making $600,000 aren’t. Still, it didn’t pass, although it came pretty close.
Fair Share Vermont also pushed for H.827, a more radical bill that would’ve applied a tax on unrealized capital gains for taxpayers worth more than $10 million. This proposal, which presidential candidate Kamala Harris now claims to support on the federal level, represented an important recognition that wealth – not just income – matters, yet it restricted its scope to what people seem to regard as the most income-like portion of an individual’s wealth: the net appreciation of their assets over the course of a year, a sort of on-paper income that would be taxed as real income.
Politically, this move had two potential benefits: a lot of people don’t know what unrealized capital gains are, so it might be hard to stir up popular outrage over an effort to tax them; and a tax that looks a lot like an income tax might be conceptually less frightening to those in the know than a tax on net assets, since we’ve already acclimated ourselves to income tax. But it had a big practical downside (or would have if it had passed): the tax’s volatility.
In a year where the stock market goes down, a tax on unrealized gains would collect virtually no revenue at all, whereas a tax on net assets would remain relatively stable. The latter might also hit a more expansive range of assets: it’d be reasonable to ask Vermont’s lone billionaire to include a rough estimate of the market value of his Picasso in a calculation of his overall wealth, but his accountant genuinely might not know how much its price has changed from one year to the next. Once more, the perceived political advantages of a somewhat stupider tax didn’t get it across the finish line.
Proposals of this general sort, however, remain the real key to improving Vermont’s tax system. Crucially, they are not revenue-neutral. They bring in money.
Social democracy costs a lot of money – Denmark collects almost twice as much tax per dollar of GDP than the United States does – and a left-wing fiscal politics should begin with an understanding that almost no one in the United States is overtaxed in absolute terms. A middle-class American is overtaxed in a relative sense: they should be paying somewhat more, while a wealthy American should be paying much, much more. But the movement for property tax reform in Vermont promotes the notion that a vast swath of homeowners pay too many actual dollars in tax and that we need to find a way to make them pay fewer while maintaining revenue at its existing level.
This won’t get us anywhere. While we can’t ask people to pay for government services that don’t yet exist in our country or our state, we can ask them – moderate-income homeowners included – to pay more to shore up our existing underfunded public sector, where improvements would help generate an appetite for new social programs.
This isn’t to say that every property tax reform idea is bad. Some are very good, although the good ones (like transitioning to a land-value tax) tend to get less attention than the mixed-at-best ones, which appear to derive a lot of their political momentum from a popular misunderstanding of how property tax works. Most homeowners believe that if the value of their house has gone up, so too has their property tax burden. In reality, public services cost whatever they cost, and unless a home has risen in value proportionally more than the average property, its owner’s share of that cost stays the same.
Partly for that reason, dramatic mismatches between a homeowner’s property tax bill and their ability to pay are fairly infrequent. Property value inflation in an in-demand city (or in a state with a housing shortage) may place an outrageous price tag on a middle-sized, middle-quality house, but the city asks the middle-class owner of that house to cover roughly the same middling percentage of its spending as it did when its owner deemed the house affordable to buy. Over the years, however, the cost of public services has gone up, and the owner may blame an unfair property tax burden for a bill that, to them, no longer feels appropriate.
The homeowner imagines that someone else is getting a free ride, and of course they’re right in a way. There’s no persuasive philosophical justification for taxing the value of property but not taxing the value of stocks or bonds. It’s not a coincidence that real estate is the only form of personal wealth whose ownership isn’t concentrated almost exclusively among the investor class and also the only form of personal wealth whose ownership comes with a tax.
But if we created a true wealth tax tomorrow, we’d probably want to keep the property tax, too, because, for ease of collection, the wealth tax would likely begin at a very high net worth, while the property tax would ensure that we continue to capture a portion of the wealth at lower levels. And until then, the abolition of the property tax – or even just of the homestead education portion – would seem to dim the prospects for enacting a wealth tax, since the argument against both is basically the same: “Hey, just because I have a valuable asset, that doesn’t mean I have cash lying around to pay a tax on it.” We can’t afford to make that argument victorious.
Moreover, after replacing the property tax – or the lion’s share of it, anyway – with a second income tax, we might have a harder time raising the normal income tax thereafter. Immediately, Vermonters would begin paying the highest total income tax rate in the country. At some point, assetless earners would begin to contend that, by placing too large a burden on income and almost none on property, we’re advantaging current homeowners and taxing away the next generation’s ability to build wealth of its own.
It wouldn’t be a disaster if the legislature did it anyway. It sounds insane to say so after writing thousands of words on the topic, but I don’t especially care one way or the other. Whether we fund schools through property tax or income tax ultimately has very little to do with the core economic injustices in our state. Right now, a Vermont household earning $40,000 annually, if it pays the education property tax, contributes $800; although details remain uncertain, a bracketed education income tax would likely bring that figure down to about $680, and while the same unimpressive savings could be achieved in a hundred other ways, the household in question wouldn’t say no to $120. What troubles me is the Progressives’ excessive focus on this battle.
It shows whom they’re talking to, and in those conversations, the cruder arguments against the education property tax end up trickling down into an equal hostility against property tax on the municipal level, where there’s no realistic plan to replace it with a municipal income tax. Instead, we’ll just have to give in to cheapskate homeowners and defund our city.
A common knock against the property tax in general, for example, is that it strains the average retiree’s ability to “age in place,” but this can be viewed as a bug or – particularly within a politics that aims to reconceptualize housing as a public utility, not a private asset – as a feature. Disincentivizing empty-nesters from continuing to live in big, energy-eating, single-family houses, instead of passing them on to the families with children who actually need space, makes sense, but unfortunately, Vermont doesn’t currently offer a lot of opportunities for easy downsizing.
That’s because, for decades, homeowners have used their political power to prevent the development of multifamily housing. We need to change that. In the meantime, retired homeowners can continue to count on the Vermont Property Tax Credit to ease their burden. I wouldn’t support expanding the municipal deduction – $47,000 sounds like a low ceiling until you remember that Vermont’s smaller tax credit for renters expires at $23,900 in individual income in Chittenden County (or at $34,100 for a family of four) and even less elsewhere, and somehow our politicians never talk about it – but I could make peace with the state’s current program with just a couple changes.
First, very expensive houses should be fully ineligible, regardless of their owners’ incomes. We don’t owe anyone the ability to live in a mansion; if they can’t afford the property tax, they should cash in and move somewhere normal. Second, if the program genuinely intends to prevent forced sales and tax lien foreclosures (that is, if it intends to prevent displacement, not simply to give away public dollars to homeowners), we should defer the deducted tax until the home’s sale instead of forgiving it. We have to take seriously the need to raise revenue if we’re going to build a different kind of society.
Instead, thanks to a liberal susceptibility to contrived middle-class sob stories, the Progs are playing a part in driving a Reaganite taxpayer revolt by helping to convince homeowners that they’re all getting ripped off. Of the six elected Progressives serving the City of Burlington, four are homeowners themselves, and that probably makes a difference. They may still love income-based taxation, but on the municipal level, the property tax is what we have, and if we can’t embrace it, we can’t do much.
It’s true that the municipal tax rate in Burlington is already higher than in rural towns. I’d like to see it go higher still, but there are limits. Half an hour south, Vermonters in Charlotte pay little in municipal property tax because they live in a rich, quiet suburb that doesn’t need a police department, but most of them work in Burlington, earning large incomes that they wouldn’t have if not for the particular economic opportunities afforded by a city, which can’t operate without an expensive municipal workforce. Using this reasoning, we must demand injections of state-level funding for urban services – most of all, public transit, which, at a high level, always requires broader support. The whole state benefits when its cities prosper.
But we can’t wait around for the state to save us. Regular Burlington homeowners have to be willing to pay for a functional city, and their leaders have to tell them that it’s their responsibility to do so. A sentimental leftism with a fuzzy class analysis – under which we’re all innocents and victims beside the billionaires and big corporations – becomes a major obstacle in this task. Without a change of perspective, things will get worse, and there are bad signs already.
For instance, in June, facing a major budgetary deficit, Mayor Mulvaney-Stanak declined to use the full authorized amount of a new public safety tax increase, sparing homeowners from paying the rate that they themselves, in a reactionary fit of panic about crime that temporarily overrode their usual stinginess, had approved at Town Meeting Day. Revenue from the public safety tax can’t directly pay for anything other than police and fire, but because that revenue covers only a fraction of those departments’ budgets, a boost could’ve defrayed a portion of the general fund transfer that pays for the rest, freeing up those dollars for other parts of city government, which, as it is, had to leave 17 positions unfilled.
Ultimately, the bare-bones staffing at City Hall – which inevitably affects the quality of public services, which most of all affects the quality of life of Burlingtonians who can’t afford to buy houses – isn’t Mulvaney-Stanak’s fault, but instead of presenting this year’s austerity as an unfortunate necessity that we must work to reverse, she framed the FY25 budget as a “right-sizing” of city government. This is just normal fiscal conservatism, and that’s where we’re headed.
