The 2018 legislative session began with a sense of optimism that Vermont might finally overhaul its famously complex education funding system. But by the time lawmakers dispersed for their weeklong Town Meeting recess, the search for a simpler formula was looking increasingly quixotic.

House lawmakers are still hoping to create an income tax surcharge to reduce the statewide property tax, but even this scaled-back attempt faces an uncertain future.

In January, Gov. Phil Scott gave lawmakers an ultimatum: Hold all taxes level, including property taxes, which are largely driven by local spending on schools. At the time, officials anticipated a $95 million shortfall in the state education fund that would require an increase in the statewide property tax of 9 cents per $100 of assessed value.

Similarly concerned about ever-rising property taxes, House Speaker Mitzi Johnson (D-South Hero) announced that one of her top priorities was revamping the education finance system. Her thinking, she recently explained, was, "If we're not at least attempting it, we're not doing the job Vermonters sent us here for."

House Ways and Means Committee chair Janet Ancel (D-Calais) quickly began developing a simpler education funding formula that would encourage schools to spend less. She wanted to strengthen the connection between school districts' spending decisions and their tax rates. She also wanted to shift some of the tax burden from property to income because the latter better reflects people's ability to pay.

Ancel's counterpart on the House Education Committee, Rep. David Sharpe (D-Bristol), was enthusiastic. Speaking on Vermont Public Radio early last month, he declared the 20-year-old school funding system overdue for a makeover and said, "This year, there seems to be momentum."

The plan Ancel's committee came up with was an amalgamation of old and new concepts proposed in past decades by Democrats and Republicans. 

The committee proposed slashing the average property tax rate by nearly half and creating a new income tax to make up for the lost revenue. Its plan would also have eliminated a provision in current law known as income sensitivity that allows two-thirds of Vermont residents to pay school taxes based on their earnings instead of their property value.

And it would have caused tax rates to rise more steeply in school districts that spend more than a base amount, set at about $12,000 per student. Rep. Scott Beck (R-St. Johnsbury), who came up with this part of the proposal, noted that districts currently spend on average $15,500 per student.

Lawmakers wanted a base amount lower than what districts currently spend because otherwise school boards might be tempted to increase spending to that amount, Beck explained. He added, "We didn't want to make it too low because we didn't want to encourage a race to the bottom."

Ways and Means had been expected to approve the proposal on February 23 and send it on to the education committee. Instead, members abruptly scrapped the plan.

What happened?

Critics on the left disapproved of the elimination of income sensitivity, while critics on the right — including Scott — complained that the plan did nothing to drive down spending in 2019.

The Ways and Means bill did not incorporate any of the cost-cutting suggestions Scott had offered to the committee in a January memo, including several different types of spending caps, mandated student-to-staff ratios and a statewide teachers' health insurance benefit. Ancel said such pure cost-cutting measures fell outside her committee's purview.

What ultimately killed the bill, according to Ancel, was an analysis by the legislature's financial experts that showed the new system would increase the tax burden on low- and middle- income residents who live in high-spending districts.

"It was a big undertaking to do what we were trying to do in a short period of time," she said.

Sweeping reform began to seem less urgent after officials learned in February that the school budgets had risen only 1.5 percent, which was less than expected. There was still a hole in the education fund — largely because the state used onetime money and dipped into reserves last year — but it had shrunk to about $64 million, which would require just a 5 cent tax increase.

Both lawmakers and the administration can claim some credit for lower-than-anticipated spending. When Agency of Education finance manager Brad James asked school business managers why budgets had come in uncharacteristically low, a number of them cited Scott's repeated calls for spending restraint, including a memo he sent last November asking boards to increase their budgets by no more than 2.5 percent. Another common answer was that a 2015 state law encouraging school district mergers had resulted in cost-saving consolidations.

James cautioned, however, "One year does not make a trend."

Understanding this, Ways and Means went back to the drawing board. Just days after ditching its first plan, the committee voted out a scaled-back proposal.

The new version would reduce property taxes by $59 million but raise the same amount with an income tax surcharge on all residents. It preserves the tax penalty for spending more than $12,000 per pupil so that, as Ancel put it, the "consequences of local spending decisions will be more strongly felt in the local tax rate."

As for the mission of creating a simpler system? "That was a goal I guess we have to postpone to another year," Ancel said, noting that in tax policy, "there's always a tension between simplicity and fairness."

Still, Johnson is pleased with the effort and said that, among House members, at least, "there's a lot of energy and excitement about it."

That isn't the case at the left-leaning think tank Public Assets Institute, whose founder and executive director Paul Cillo has concluded that the proposal would make paying for schools "less simple, less understandable, less transparent." Cillo, a former House member who helped design the current education-funding system, was referring in particular to the provision that creates steeper tax increases when districts spend more than $12,000 per pupil.

Noting that the legislature passed something similar years ago only to repeal it, he said, "I think what they're on track to do this year is make a change that they regret and are gonna have to undo next year."

Lawmakers have yet to produce an analysis of the bill's tax impact on households with varying income levels, which is what sank the previous proposal. Because the current version maintains the income-sensitivity provision, however, it's not as likely to drastically change tax bills.

In the Senate, there's been noticeably less talk about revamping education funding. Senate Education Committee chair Phil Baruth (D/P-Chittenden) praised Ancel for doing "yeoman's work" on the proposal and said he's open to it, noting that his committee has been "very interested in moving toward a more income-based formula."

Ancel's counterpart, Senate Finance Committee chair Ann Cummings (D-Washington), said she's prepared to review it, too. But, she said, "I don't think that spending less on education is something we should necessarily be pushing for."

Perhaps most importantly, Scott doesn't appear to be on board. "I don't see that there's been any serious look at cost-containment," he told reporters when asked about the latest House proposal at a recent press conference.

His most significant cost-cutting idea — a reduction of student-to-staff ratios that he claims would save $30 million — has been deeply unpopular in the legislature. The House Education Committee did spend considerable time working on another proposal Scott supported: paying for special education with block grants. But that wouldn't achieve immediate savings. And according to Rep. Kate Webb (D-Shelburne), who serves on the committee, lawmakers need more time to make sure the new funding system won't run afoul of federal law.

Johnson's stance is that the Ways and Means proposal meets the governor's mandate. "This bill drops property taxes by 14 or 15 cents," she said. "We've done it."

That's a tenuous position. As Scott pointed out, the House plan accomplishes this by increasing the income tax. "At the end of the day, if we're not spending less, we're gonna pay just as much," he said. "It's just gonna come out of a different pocket."

In fact, Scott said he worries that the tax shift might lead to more spending if voters mistakenly believe they're getting a tax break. "I think that it just confuses people to change the formula without reducing costs, because it gives folks a false sense of security," he said.

Unless it closes the $64 million gap without raising new tax revenue, any legislative proposal is unlikely to pass muster with Scott. But given that most districts approved their school budgets last week, it's not clear how lawmakers can meet Scott's demand.

If they can't, the Democrat-controlled legislature could again find itself in a standoff with the Republican governor over education costs. Last year, Scott vetoed the budget because it didn't take into account the $27 million he said could be saved in teachers' health insurance plans.

Rep. Kurt Wright (R-Burlington) is a member of the Ways and Means Committee. He voted to advance the latest plan but said he, too, wants the final version to account for immediate cost savings.

Referring to the income tax surcharge, he said, "If Republicans are gonna swallow the pill of creating a new tax in order to reduce property taxes, then on the flip side you need to put something the Republicans and the governor want in terms of cost-containment."

"We have to do something," Wright said. "People are tired of us talking about it and not doing anything."