Senator’s proposal would transform one-time purchase surcharge into yearly assessment

by Compass Vermont

In a letter to VTDigger, Senator Kesha Ram Hinsdale has proposed expanding Vermont’s property transfer tax surcharge on second homes into an annual vacancy tax, arguing that the state should differentiate between “homes people live in” and properties used only occasionally. The proposal aims to address Vermont’s dual challenges of housing affordability and rising education costs by shifting more of the tax burden to non-resident property owners.

The Current System: How Vermont Already Taxes Second Homes

Vermont currently imposes what Senator Hinsdale calls a “vacancy tax” at the time of purchase through Act 181, enacted in 2024. Under this law, buyers of residential property who will not use it as their primary residence face a property transfer tax rate of 3.4%—dramatically higher than the standard 1.25% rate applied to primary residences. The higher rate applies unless the buyer obtains a landlord certificate proving intent to rent the property long-term.

The standard property transfer tax revenue is distributed according to a statutory formula: 33% to the General Fund for state operations, 50% to the Housing and Conservation Trust Fund, and 17% to the Municipal and Regional Planning Fund. An additional 0.22% surcharge supports the Clean Water Fund.

Revenue Performance Exceeds Expectations

Senator Hinsdale’s claim that the current purchase-time surcharge “brought in more revenue than state forecasters predicted” is supported by Joint Fiscal Office reports. In November 2024, the property transfer tax performed 28.3% above its monthly target and 21.4% above its cumulative forecast for the year, even as other revenue streams showed volatility.

This over-performance suggests that buyers with the capacity to purchase second homes remain willing to pay the higher one-time tax, validating the Senator’s assertion that such individuals are “willing to pay more quietly and without much fuss” when seeking property in Vermont’s high-amenity environment.

The Economic Mobility Question: A Factual Dispute

Senator Hinsdale states that Vermont was “just ranked last in economic mobility,” but comprehensive data contradicts this claim. According to the Archbridge Institute’s 2025 Social Mobility Index, Vermont ranks second in the nation for social mobility, trailing only Utah. The ranking considers educational attainment, social capital, and economic opportunity.

Research from Opportunity Insights, led by Harvard economist Raj Chetty, similarly identifies Vermont as having among the highest levels of social capital in the nation—a primary driver of upward mobility. While Vermont, like most states, has experienced a decline in absolute income mobility over recent decades, it has not fallen to the bottom of national rankings.

Vermont’s Second Home Reality

The Senator’s characterization of Vermont as having the “highest rate of second homeownership in the nation” is nearly accurate. According to U.S. Census data and Vermont Joint Fiscal Office tax studies, Vermont has the second-highest percentage of second homes in the country, behind only Maine.

This demographic profile creates a unique fiscal dynamic: non-resident homeowners contribute substantially to Vermont’s Education Fund through property taxes while placing minimal demand on the state’s most expensive service—the public school system. This allows Vermont to effectively “export” a portion of its tax burden to out-of-state owners.

The Rate Disparity: When Residents Pay More Than Second Homeowners

Senator Hinsdale’s claim that “in more than a third of Vermont communities, second homeowners currently pay less than the homestead rate” reflects the mechanics of Vermont’s dual property tax system. The state applies different rates to homestead properties (primary residences) and non-homestead properties (second homes, businesses, and rentals).

Homestead rates are determined by local per-pupil spending approved by voters in each school district, while the non-homestead rate is set uniformly by the state legislature. When local communities approve budgets that result in high per-pupil spending, their homestead rate can exceed the statewide non-homestead rate.

For fiscal year 2026, towns including Hartland, Killington, Plymouth, Jamaica, Barnard, and Brattleboro all show homestead rates higher than their non-homestead rates—meaning primary residents pay more per dollar of property value than second-home owners.

However, this disparity results primarily from local democratic choices about school spending rather than a failure of state tax policy. Additionally, non-homestead properties cannot claim “income sensitivity” credits, meaning their actual tax payments per dollar of property value are often higher than many residents who receive state tax adjustments.

The Income Sensitivity Protection

A critical component not addressed in the Senator’s commentary is Vermont’s existing “income sensitivity” or property tax credit system. Approximately 65% of Vermont homeowners currently receive credits that cap their school tax liability at a percentage of household income rather than property value.

For a family earning $50,000 annually in a town with $10,000 per-pupil spending, the tax bill remains fixed regardless of whether their home value is $200,000 or $400,000. This mechanism already protects many working families from property value inflation.

Commercial Vacancy: Downtown Storefronts

Senator Hinsdale extends the vacancy tax logic to commercial properties, arguing that “perverse financial incentives” encourage leaving storefronts empty rather than lowering rents. Research into commercial real estate identifies several mechanisms that may favor vacancy:

Commercial property valuations are often calculated based on rental income, meaning lowering rent for a new tenant could officially devalue the building and potentially trigger loan-to-value violations in mortgage contracts. Landlords may also prefer waiting for high-credit national tenants rather than signing lower-rent leases with local startups perceived as higher risk. In markets with high asset price appreciation, capital gains may exceed lost rental income.

Similar commercial vacancy taxes have been explored in San Francisco and Vancouver with varying degrees of success.

Implementation Questions

The Senator asserts that implementing a vacancy tax “does not require intrusion or looking through people’s windows” because Vermont already uses Homestead Declarations and Landlord Certificates. However, these documents identify residency for tax credit purposes, not daily occupancy.

A true vacancy tax would require more granular reporting to distinguish between frequently used second homes and truly abandoned properties, potentially increasing administrative burdens for the Department of Taxes and raising privacy concerns about occupancy verification.

The Tourism Economy Factor

The proposal does not address potential impacts on Vermont’s tourism economy. Second homes often function as short-term rentals, and heavily taxing them could affect the state’s Meals and Rooms tax revenue and overall tourism sector. Additionally, out-of-state owners frequently invest in rehabilitation and maintenance of Vermont’s aging housing stock.

What Happens Next

Senator Hinsdale’s proposal represents a significant expansion of Vermont’s existing property transfer tax surcharge into an ongoing annual assessment. The concept would require legislative action to implement and would fundamentally alter how Vermont taxes non-resident property ownership.

The debate will likely center on several key trade-offs: the potential for new revenue to fund workforce housing and infrastructure versus the risk of destabilizing a reliable tax-exportation model; the administrative complexity of verifying vacancy versus the existing homestead declaration system; and the balance between making housing more affordable for residents while maintaining Vermont’s attractiveness to out-of-state investment that currently subsidizes education funding.

As the 2025 legislative session progresses, lawmakers will need to weigh these competing interests while addressing the underlying housing affordability crisis that motivated the proposal. The success of the existing purchase-time surcharge in generating above-forecast revenue suggests appetite exists among policymakers for exploring additional mechanisms to shift tax burdens toward second-home owners, though the specifics of any annual vacancy tax proposal remain to be drafted and debated.