Forecasting Property Tax Revnue

My notes

VT property tax has two components:
- education property tax funds the state’s K-12 education system.
- municipal property tax funds local government spending.
Education property tax (EPT) has two categories:
- homestead: primary residence
- non-homestead: second homes, business, rentals, undeveloped land
EPT rates are two-specific for both homestead and non-homestead rates. But, they are based on statewide base rates adjusted by local factors.

From Gemini

Building a forecasting model for Vermont’s property tax revenue requires a deep understanding of its unique, two-part system, particularly the State Education Property Tax, which is the largest component and is centrally managed.

Here is a step-by-step approach to building the model, broken down by components:

Step 1: Vermont Property Tax Structure

Vermont’s property tax is split into two parts:

Municipal Tax: Funds local services (set by the town/city). You are primarily interested in the State revenue, so this is generally excluded from the state’s official Education Fund revenue forecasts.
Education Property Tax (The State’s Revenue): Funds the state’s Education Fund. This tax has two rates:
- Homestead Rate: For a Vermonter’s primary residence (declared via Form HS-122).
- Non-Homestead Rate: For all other properties (second homes, businesses, rentals, undeveloped land).

The total revenue for the state’s Education Fund is the primary target of your forecast.

\[\text{Total Education Tax Revenue} = \left(\sum_{\text{Towns}} \text{Homestead Tax Base}_{\text{Town}} \times \text{Homestead Rate}_{\text{Town}}\right) + \left(\sum_{\text{Towns}} \text{Non-Homestead Tax Base}_{\text{Town}} \times \text{Non-Homestead Rate}_{\text{Town}}\right)\]

How Vermont’s Education Tax Rates Vary by Town

Vermont’s education tax rates are town-specific for both Homestead and Non-Homestead properties, but they are based on statewide base rates adjusted by local factors.

This is due to a unique equalization mechanism designed to ensure that the total revenue for the state’s Education Fund is fair, regardless of when a town last conducted a full property reappraisal.

The final tax rate you see on a property bill is calculated in two main steps:

1. Determining the Base Rate

Rate Type	Determined By	Statewide or Local?
Non-Homestead Rate (Businesses, second homes, rentals)	A uniform statewide rate set annually by the Vermont Legislature.	Statewide
Homestead Rate (Primary residences)	A district-level rate based on voter-approved per-pupil spending in the local school district.	Local (Voter-driven)

2. The Town-Specific Adjustment

Both the Non-Homestead and Homestead base rates are then adjusted by a town-specific ratio called the Common Level of Appraisal (CLA).

The CLA is the ratio of a town’s local property Assessed Value (Grand List) to the estimated Fair Market Value (FMV) based on recent property sales. The state calculates the CLA annually for every town.

\[\text{Final Town Tax Rate} = \frac{\text{Base Tax Rate}}{\text{Town's CLA}}\]

If a town’s CLA is below 100% (e.g., 80%): This means the town is generally undervaluing its property relative to the current market. To ensure the town pays its fair share to the statewide Education Fund, the tax rate is increased (divided by 0.80) to bring the taxable value up to 100% of FMV.
If a town’s CLA is above 100% (e.g., 110%): This means the town is generally overvaluing its property. The tax rate is decreased (divided by 1.10) to prevent the town from overpaying.

Conclusion for your Model:

You cannot use a single statewide tax rate. Your model must incorporate the town-by-town \(\text{CLA}\) data (from the VT Department of Taxes Equalization Study) to accurately calculate the effective rates that drive the state’s total tax revenue.

Step 2: Key Variables for the Forecasting Model

The two critical and dynamic variables you need to forecast are the Tax Base and the Effective Tax Rate for both homestead and non-homestead properties.

Variable	Description & Forecasting Input	Data Source
Education Fund Budget	The total amount the state needs to raise for the Education Fund. This is the driver for the statewide rates.	Vermont Legislative Joint Fiscal Office (JFO), Agency of Administration, Annual Budget Bills (Yield Bill).
Equalized Tax Base (Grand List)	The total Fair Market Value (FMV) of all taxable property. The non-homestead base is generally the easiest to forecast.	VT Dept. of Taxes, Annual Equalization Study, PVR Reports.
Common Level of Appraisal (CLA)	A town-specific ratio of Assessed Value to Fair Market Value. It is used to adjust the tax rate (or the tax base) to ensure taxes are collected on 100% of FMV statewide.	VT Dept. of Taxes, Annual Equalization Study.
Homestead Property Yield	A key factor set annually by the Legislature that determines the homestead tax rate, aiming to keep the effective rate stable based on per-pupil spending.	Vermont Legislative Act (Yield Bill).
Property Transfer Tax	While not a property tax, revenue from the transfer tax (collected when property is sold) often goes into the Education Fund and is a proxy for real estate market activity.	VT Dept. of Taxes, Consensus Revenue Forecasts.
Economic/Market Data	Housing market data (median sales price, volume), interest rates, and construction permits.	Vermont Realtors Association, Federal Reserve, US Census.

Step 3: Model Methodology (Focus on Education Tax)

The most robust model would forecast the components of the Education Fund revenue, which is the state’s property tax revenue.

1. Forecast the Equalized Tax Base

Base Value: Start with the prior year’s total Equalized Grand List Value (EGL).
Growth: Forecast the growth rate of the EGL. This growth comes from:
- Appreciation/Inflation: Apply a forecasted percentage increase based on housing price trends (e.g., use an auto-regressive model on historical CLA data and median sales price data).
- New Construction: Add an estimated value of new taxable property coming onto the grand list (based on building permit values/history).
- TIF Districts: Account for any revenue diversion or capture from Tax Increment Financing (TIF) districts.

2. Forecast the Required Education Tax Levy

The State Legislature determines the total amount of money required for the Education Fund. You need to use the official legislative Consensus Revenue Forecasts for the next year’s required education spending and subtract non-property tax revenues (e.g., sales tax, lottery, meals and rooms tax) that flow into the Education Fund.

\[\text{Required Levy} = \text{Total Education Spending} - \text{Non-Property Tax Education Revenue}\]

3. Calculate the Final Forecast

The final forecast for the state’s property tax revenue is simply the Required Education Tax Levy.

Note on Rates: In Vermont’s system, the rates are an output of the required spending and the equalized tax base, not an input to the total revenue. If the spending requirement goes up, and the equalized base does not grow as fast, the effective property tax rates must increase to collect the mandated revenue.

\[\text{Forecasted Property Tax Revenue} \approx \text{Forecasted Required Levy}\]

Step 4: Data Sources and Model Validation

Official Forecasts: Always benchmark your model against the official Consensus Revenue Forecast published by the Vermont Legislative Joint Fiscal Office (JFO) and the Agency of Administration. These reports often include detailed forecasts for the Education Fund.
Historical Data: Obtain historical data for:
- Equalized Grand List (EGL) and CLA history (from the VT Dept. of Taxes, Division of Property Valuation and Review).
- Education Fund Revenue and Expenditures (from JFO and state budget documents).
- Non-Homestead Tax Rate (set annually by the Legislature).
Model Type: Use a time-series model (ARIMA/ARIMAX) for base growth, incorporating external economic variables like housing permits and interest rates. For the final revenue number, a deterministic model based on the official budget process (as outlined in Step 3) is most appropriate, as the total levy is largely set by legislative action.

Critical Caution: Vermont’s property tax is extremely complex and subject to annual legislative adjustments (e.g., the Common Level of Appraisal (CLA) calculation changes under Act 183 beginning in FY 2026). A viable forecast must track these legislative changes and use the official forecasts for the Education Fund spending as its primary anchor.