Key Facts & Figures: 8. Vermont’s Housing Market/Property Taxes

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Vermont and its towns rely on property taxes to i) provide for many of the operating and maintenance costs of municipalities, and ii) fund the bulk of K-12 education expenditures.

Unfortunately, the costs to run a town and provide education are not strongly correlated to the value of property.

As discussed in the previous article, during the ten-year period ended in 2017, Vermont’s property values declined.  According to the Vermont Department of Taxes, seventeen towns conducted property reappraisals in 2017.  In eleven of these towns, Grand List values declined.

One consistent measure of Vermont’s aggregate property value is the “Equalized Education Property Value” calculated annually by the Department of Taxes.  This is based on the Grand List values of municipalities, subject to certain equalizing adjustments, and is intended to mirror market values.  The chart below shows the total Equalized Education Property Value for the last ten years.

Equalized Education Property Value ($ Billions)

Year Vermont Equalized Education Property Value
2017 82.4
2016 81.0
2015 79.9
2014 78.8
2013 78.1
2012 78.5
2011 79.6
2010 81.3
2009 82.6
2008 80.9

Source: Vermont Department of Taxes, Annual Report Based on 2017 Grand List Data, January 11, 2018

The decline in property values for tax purposes through 2013 and subsequent modest recovery track the decline in market values discussed in the previous article.  The shift in aggregate property tax values was less volatile than the change in market prices as Vermont experienced new construction that added to the housing stock throughout this period.  Taking stock of both market price declines and new construction, Vermont’s property tax base was only 1.85% higher in 2017 than it was in 2008.

While property values were declining, the costs funded by property taxes were moving in the other direction.  As reported by the Department of Taxes, education spending went from $1.11 billion in 2008 to 1.35 billion in 2017.  Municipal tax receipts grew from $368 million in 2008 to $496 million in 2017.

With flat to declining property values and rising costs, something had to give.  As outlined in the chart below, property tax rates have increased steadily over the last ten years to fill the gaps.

Total Effective Property Tax Rate (%)

Year Homestead Effective Tax Rate Non-Residential Effective Tax Rate
2017 2.08 2.10
2016 2.10 2.11
2015 2.08 2.09
2014 2.04 2.05
2013 1.92 1.96
2012 1.84 1.90
2011 1.76 1.86
2010 1.71 1.83
2009 1.65 1.77
2008 1.61 1.72

Source: Vermont Department of Taxes, Annual Report Based on 2017 Grand List Data, January 11, 2018

The table above presents statewide averages and the property tax rates in any single community could be higher or lower.

The increase in Vermont’s property tax rates is striking.  Vermont’s Homestead Effective Property Tax Rate in 2017 was 29% higher than 2008.   The Education component increased from 1.18 to 1.49, a 26% increase.  The municipal component increased from 0.43 to 0.59, a 37% increase.  So long as these costs continue to rise at a faster pace than underlying property values, there will be pressure to increase property tax rates.

Impact on Value

As discussed above, property values are not strongly correlated to education or municipal costs.  However, property values are directly correlated to property tax rates.

As property tax rates go up, the future cash burden on the homeowner goes up in step, therefore increasing the fixed cost of home ownership.  If the future cost of ownership increases, the amount one is willing to pay up front and absorb that obligation will decrease.  The same is true for interest rates.  If mortgage rates are lower or higher, home values tend to increase or decrease accordingly.

Homeowners have the option to fix their interest rates, thereby eliminating the risk that their mortgage costs will increase over a 20-30 year time frame. Unfortunately, property tax rates cannot be fixed.  There is a risk of property tax increases every year.  To the extent the market believes the risk of tax increases is high, the negative impact on property values could be even greater.

Over the last ten years, declining interest rates have helped to offset the cost of increasing property tax rates.  Property values during this period have been largely flat to down.  Now, interest rates are higher and property tax rates seem unlikely to decrease.  For new buyers, the cash burden of home ownership looks likely to increase further.

 

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