Chairwoman Kornheiser opened the House Ways and Means Committee meeting on Tuesday by saying, ”we have put a bunch of big ideas out into the world because that is the only way can get work done right? Someone has to put something on paper for people to react to… and it’s fairly intense…. It does not mean these are hills we want to die on. It’s a necessary part of the process.” She noted that the draft yield bill has “multiple decision points” that range through FY2027.

She noted that on the heels of H.850, they were transitioning to balancing what short term cost containment mechanisms they have for FY2026 in order to “minimize the impacts on taxpayers” while maintaining the “balance between local decisions and the forces at play, both legislative forces and national forces.” As they look to FY2027 and beyond, they “need to maintain an profoundly equitable system in Vermont and we need a new finance system to do that,” she stated.

Representative Beck reiterated that they are “trying to more closely connect school district spending decisions to their tax rate.” Additionally, they need to make budgets and votes “simpler and more understandable.”

Legislative Counsel began walking through the draft bill for the Committee. No placeholder numbers for the homestead property tax yields or the non-homestead rate were provided. However, the draft does include a cloud tax on pre-written software.

The bill would also make FY2025 capital reserve expenditures exempt from property tax increases. This would mean that a school district could fund their capital reserves without impacting their tax rate.

NOTE: The goal here is presumably to incentivize spending on reserves, but there doesn’t seem to be a check on this ability. Meaning it creates more “free money” in the system.

One of the more interesting parts of the bill is new ballot language for FY2026 that would spell out an estimated tax rate for voters to better understand the impact of their vote. Additionally, the language would spell out the percentage change in spending and the associated tax rate for the following year.

NOTE: This is a positive change it as helps contextualize the impact of a budget vote.

A new position would be created at the Agency of Education (AOE) to provide assistance to districts and supervisory unions to follow “financially sound processes, effectively managing school district.” Additionally, an Education Fund Advisory Committee would be created to examine necessary changes to weighting factors, categorical aid, property tax credits, and revenue sources.

Kornheiser commented that she is “struck by how disparate the resources related to a deep understanding of the Education Fund financing system was, and that more collective expertise is needed. We are not cultivating expertise in leadership on this issue across the state outside this room… which is a room that turns over every two years.”

There are also several mechanisms included in the draft that would attempt to smooth out fluctuations in local tax rates by changing the basis for the Common Level of Appraisal.

Another significant portion of the draft would re-institute an excess spending penalty based on how much per student a district spends in relation to the highest spending district in the state. Any amount a district spend above this allowable threshold would be subject to a penalty.

A further change would add “educational opportunity payments” directly to school districts for each student they account for. These payments would be exempted from the excess spending penalty.

Chairwoman Kornheiser brought them back to the yield bill later that morning, saying that her first choice for revenues was looking at reserves. Apparently, school districts carried forward $36.7M in revenues from FY2024 that seem to be ending up in reserves according to Agency of Education data.

It was recommended that school districts only retain 5-8% for reserves, and the rest should be used to buy down property tax rates. Representative Demrow questioned if they knew how they would “claw back” any excess fund balances (it seems like they were going this direction.

Representative Beck suggested language along the lines of “all education spending in FY25 that is not (currently) appropriated in FY25 stays in the Education Fund.” He felt like this capture “everything” because “they aren’t buying down rates, they are buying down education spending when they make these decisions.”

Representative Anthony commented that it wasn’t clear that there were any constraints on funds being carried over from year to year or moved from one line item to another. It seemed to him that the Uniform Chart of Accounts that the legislature has bene trying to get in place (for years now) should address this.

There was a suggested that they hear from the school business administrators about this.

Nicole Lee (Director of Education Finance, Agency of Education) joined the Committee discussion, saying that the mechanism the Committee is considering where construction reserves are excluded from education spending would impact the yield numbers. The Joint Fiscal Office (JFO) would need additional data from the Agency of Education to model this.

Shifting gears, they examined the Short-Term Rental (STR) language in the bill. They are considering a 3% surcharge on STR’s which would generate $14M in revenue. JFO had done a fiscal note on a previous 10% proposal.

The Committee asked JFO to create modeling an STR Surcharge (STRS) as well as the Cloud Tax proposals with rates that would “raise enough revenue to get the average (property tax) bill increase down to 15%.”

Anthony noted that he prefers a rate higher than 1.5% and lower than 4% which is where, he asserted, the elasticity begins to affect revenues.

Representative Sims added that she likes the idea of a Homestead Rate under 15% but was more comfortable with an STR surcharge less than 10% or maybe about 3% and wants to continue discussion about “existing surplus and reserves revenue that is already in the system.”

Beck was hesitant, saying that they didn’t know enough about the STR industry they were picking winners & Losers. He added that they know the hotel and resorts are engaged in the STR business and yet are not registered in the STR categories. They don’t know enough to go on here.

“If the lodging industry is where we want to go then I think we should be looking a tax… that would impact the entire industry and not just one component that we just don’t know much about,” he stated.

Representatives Demrow and Branagan agreed while other members of the Committee debated instituting a 3% surcharge with a sunset.

The Committee returned to this topic on Thursday morning. Chairwoman Kornheiser noted that they had finished Draft 1.2 last night. After meeting with all the four-letter organizations, it was clear to her that the current reserve language they had included was unworkable as districts use those funds very differently.

There was still support for setting minimum standards for reserves. “I myself am thinking it's a recommendation,” she stated. “However, given the atmosphere, I am in favor of being more prescriptive because it’s just turned into a shell game.”

She also noted that they are trying to balance the need to move quickly to respond to this moment in time while balancing the need to have time to study the impacts of making the changes they are considering. "This balance feels like a good way to respond to this moment," she stated. Further, she commented that "I think the field is in chaos right now with budget votes, and I don't think any of the folks who are working out there and developing budgets have the wherewithal to really fully engage with this issue this year even though it might be what they need."

As they dug into the surplus language, it became clear that if a school's audit reveals a surplus, it has two options: carry the funds forward into the next year's revenue or warn a vote to either deposit the money into a capital reserve fund or use the funds for anything else.

Representative Beck raised concerns that the next legislature will rip out the available growth rates (in January) after school boards and superintendents fight to remove them and allow access to "cheap money." He seemed to want a mechanism to prevent that or a more realistic expectation about how sticky that cost-containing mechanism was.

There was also push back from school districts about the Agency of Education position. Representative Anthony stated that "in the spirit of signaling where we're going, I think it's important to leave a section in there with the board position and one or two sentences of where we're going with that would be useful."

Austin Davis (Director of government affairs, Lake Champlain Chamber) spoke to the Committee "on behalf of non-homestead rate payers," and expressed frustration that the additional $25M short-term rental surcharge to further buy down the decision of Voters is "not truly acceptable."

In response to a question from Anthony, he stated that there was a disparity in regulatory and state treatment of lodging properties and short-term rentals, at the same time they are both part of a larger hospitality ecosystem. "Going to an extreme with a surcharge would send the wrong message to tourists," he stated. He stressed that we need to rethink our tax system and look at growth very seriously in our state.

He made the argument that the "eclipse brought 160,000 new Vermonters to Vermont... The world didn't fall apart, and Vermont can handle that many new people."

Julie Marks (Executive Director of the Vermont Short-term Rental Alliance) spoke next. She grew up in Vernon and Hinesburg, Vermont and works as a vacation rental manager and has also gotten into long-term housing through her father and other family members.

The Association in 2021 to represent Vermont homeowners and Vermont property managers. They have learned a lot about the industry by getting to know people and developing partnerships with larger industry data collectors. The proposal to put a surcharge tax on short term rentals requires a recognition of who is actually paying the tax, she argued. It is the tax on visitors who are staying in short term rentals because that's what works best for them.

She believes that taxes discourage visitors because they send a message that New England is not as welcoming and encouraging of visitors as it used to be, and it also affects people who are relying on the short-term mental income. This tax really puts pressure on people to lower their rate, which means they're bringing in less income for themselves. We know that a lot of people in this community are women, and that over 55% are over 55 years old.

Some owners are cutting out the middleman and managing their own properties to save money. She didn't have a read on how many people are doing that, but it's becoming more popular. This would cause a problem with the new surcharge because they would now have to collect that tax instead of a platform like AirBnB or VRBO. She added that people's motivation for renting out short term is “very personal and very unique.”

There were also concerns raised that the rules between hotel and lodging establishments are different, and that farm stays could go through the process of becoming a hotel and then exempt short-term rental charge. The main distinction between a lodging establishment and a short-term rental is twofold. Either there are three or more distinct units being rented out to different parties on the same property, versus a little cluster of cabins.

Frank Salani operates a pottery in Montpelier called Greenhouse Pottery. He purchased the building that was previously the Barry Street Market and renovated it while operating a short-term rental apartment upstairs. He was not against an additional tax on people renting short-term rentals but was concerned about the rate of the tax and where those funds were going. He pointed to the problems they have locally with affordable housing.

Representative Sims was curious to hear more about this. She agreed it makes sense that short-term rental taxes go towards investments in housing, which would also reduce property tax burdens (by increasing grand list values).