Vermont battles declining tax revenues and a $21 million deficit

When President Reagan initiated his three-year plan to cut federal taxes in 1981, the country seemed to sigh with relief. In Vermont, however, that plan has backfired. The state's taxes are linked to the federal tax structure. When federal income taxes dropped, Vermont sadly watched its own revenues fall with it. Now this rural state faces a $21 million budget deficit and can't keep up with such major demands as adequate schooling.

This problem, along with other major cracks in the state's sales, property, and income tax structure, is now pushing officials here toward a complete tax overhaul.

``The Reagan tax cuts,'' says Democrat Peter Welch, the state Senate's president pro tem, ``became part of Vermont law, resulting in a $35 million deficit under the [previous] Snelling administration. . . .''

Rhode Island and Nebraska also tie their state income taxes to the federal, according to Robert Pitcher, a research attorney for the Federation of Tax Administrators in Washington. As the Reagan tax cuts took place, he says, both states raised their percentage of the federal payment. Rhode Island, he adds, recently lowered its rate slightly. But the case of Nebraska is complicated by the decline in farming, which plays an important economic role in that state.

Vermont's property taxation system, also seen by many as insufficient (especially for the growing educational needs of local communities), hits homeowners and farmers unduly, while undertaxing nonresidents and profitable businesses, its critics say.

At the same time the income tax changes occurred, Vermont revamped its system of local property taxation by revising its state aid-to-education formula. The new rules require the state's 251 towns to appraise properties according to the standard of Aggregate Fair Market Value or face a penalty of a 25 percent cut in state aid.

The direct result of this 1981 change has been the gradual reappraisal of properties. The indirect result has been generally higher appraisals (and therefore taxes) for residences and farmlands and lower ones for commercial and industrial properties.

Meanwhile, Democratic Gov. Madeleine Kunin has promised to wipe out the remaining $21 million deficit and to add $10 million to the existing $70.9 million (in a state budget of $388 million) in total state aid. Add to this the forthcoming end to federal revenue sharing and the furor over the impact of Fair Market Appraisals, and you have set the stage for numerous tax reform proposals.

Governor Kunin proposes a $10.5 million Homestead Credit Program by which the state would reimburse towns for the tax on the first $5,000 of each piece of taxable property. The administration hopes the program can be funded with existing revenues, but it will consider such measures as extending the sales tax to soft drinks.

The Fair Tax Initiative calls for a use-value criterion for property assessments and a statewide property tax to be used only for education, a delinking of income taxes from the federal system, and a Homestead Credit that would apply to the first $25,000 of the value of each piece of property. Increased revenues for these expenditures would come from the altered tax structure and would hit higher-income individuals and corporations.

The Vermont League of Cities and Towns advocates a $7,500 homestead exemption, a state revenue-sharing program to replace the federal one, and a $20 million increase in next year's state aid to education. The funds would come by expanding the sales tax to some currently exempt items and by continuing the current income-tax surcharges beyond their sunset dates.

Addressing the question of educational funding more directly is a proposal that would create a statewide income tax of 3.5 percent, which would be fed back to localities in the form of allotments of $1,680 per pupil.

Other proposals for reforms exist as well. Republican legislators, for instance, are working on a comprehensive and expanded property-tax relief program to be funded by an increased property-transfer tax.