Can Tax Reform Fix the Mount Snow Valley's Economic Mystery?
Part one of this in-depth series (read it here) about the economic situation in Vermont's rural communities focused on the restaurant industry in the property rich ski towns of Dover & Wilmington, Vermont (aka, the Mount Snow Valley). The nearly $2 billion dollars of combined real estate value in these two towns presents something of a paradox since high property values are often seen as a sign of economic development success, yet most of the area's inns are up for sale, its restaurants are closing faster than new ones are opening, and its once famous youthful vitality has faded.
With so much epic natural beauty and relaxing outdoor activities available in the Valley year round like hiking Haystack Mountain, swimming in Lake Whitingham, or golfing at Mount Snow, surely the Valley must be able to attract a new generation of business owners and residents? Well, regardless of the amazing quality of life amenities the Valley offers, the economic reality is that it is not happening at the rate it should be.
Friends enjoying valley life in the summer
One recent creative attempt at turning over the Valley's many inns for sale was tried by the Hermitage Club. Through various leases, sales, and other arraignments, they took over operations of a handful of lodging properties totaling hundreds of rooms for use by their employees and private club members (they are also sometimes available to the public). It's been a mixed bag of results with most of the guest use inns staying unused the majority of nights during the year. Even with 10,000+ people skiing in town each winter weekend, there just isn't the demand to fill all the rooms in the valley as one would expect in a gorgeous Vermont ski town (more on this weird phenomenon in part three of this series focused on housing and the demographics of the winter visitors).
In short, market forces are indicating that the region's commercial properties are not yet inexpensive enough to convince new investors that a profit can be made if they step in and restore them to full operation. Listings on the Hermitage Deerfield Valley Real Estate website show a range of commercial properties available with prices ranging from the tens of thousands to the millions - some newly on the market, others that have been waiting years for a buyer. Recently, there was an auction held for the buildings at the main intersection of Route 9 & Route 100 in Wilmington (one of the busiest traffic intersections in all of Southern Vermont) and the reserve wasn't met.
So it is clear that the normally healthy business cycle of property sales and generational turnover has stalled out - even in these towns that are surrounded by billions of dollars in wealth.
The question is why?
The remainder of this real-life series will take a step-by-step look at the causes of this mysterious situation, and maybe uncover some solutions along the way.
One of the first issues most people talk about when they consider buying property in Vermont is taxes. Vermont's tax laws, tax rates and how taxes are spent is a hot topic of daily conversation up and down the state. Since taxes are a public issue, they inherently involve political discourse. Our perspective is purely a business one focused on the differing scenarios of potential tax reform. (For a useless political debate over taxes, there are plenty of other websites to read and cable news stations to watch). It isn't meant to be an exhaustive list of every possible tax option, just focusing on the main ones.
MAIN TYPES OF BUSINESS TAXES IN VERMONT
1) Sales, Meals & Rooms. This is a pass-through tax charged by the state to the consumer for each room night they stay (9%), meal they eat (10%), or taxable item they buy (6%). The local inn, restaurant or store is simply collecting the tax from the consumer and passing it along to the state. Whether this rate goes up or down has no real effect on a business's bottom line since it's technically never part of their income.
Arguments are often made that shaving one or two percentage points off this tax would make Vermont more visitor friendly. This is possibly true but it is unlikely that someone who wants to view the stunning foliage from Mt Olga's Fire Tower in Wilmington or take a dip in the secret swimming hole at Pikes Falls will turn around at the border simply because they have to pay an extra twenty cents for a bottle of local made maple syrup at the local grocery store. In theory, businesses and consumers benefit from this tax by receiving municipal services from the state (highways, bridges, educational support, tourism campaigns, etc.) - whether they actually receive the value they want is a scalding hot potato topic that dominates discussions throughout daily life in Vermont.
Would lowering this tax suddenly make commercial properties in the Mount Snow Valley attractive enough for investors to come in? Unlikely since it has no fundamental impact on a business's balance sheet.
Lowering it would allow the year round residents to spend less each time they go out to eat or shop, but even if they spend $100 a week locally, a 2% reduction would result in saving $2 a week, or $104 a year. Not exactly an economic game changer.
Starry summer night over Lake Whitingham
2) Property taxes. A majority of the time someone mentions a "high tax rate" in Vermont, they are referring to the property tax. This is a direct out-of-pocket expense paid by a local business to the town based on the appraised value of the property. In theory, the business is receiving local municipal benefits (fire, police, roads, etc.) equal to or greater than the value of what they are paying.
This tax dominates the political discussion and sucks the oxygen out of almost every economic development conversation in the region. To take a deeper dive into the numbers, we can turn to one of Vermont's cool quirks: the GRAND LIST. This is a publicly available register of all properties in town showing their appraised value and how much they pay in taxes. A quick look at the list shows that a core group of tourist related businesses (inns, restaurants, retail, etc.) along Dover's main commercial stretch of Route 100 pay an average of $12,571 per year to Dover in property taxes (a rate of 1.9% of each business's appraised property value).
Is $12,571 a lot? It depends on what level of revenue your business does and what your financial situation is. And here's where we find the first major disconnect in the system that could potentially be remedied: the property tax is tied to an artificial appraisal value, not to actual business revenue produced on the property. So even when a business has a difficult year due to extraordinary circumstances such as hurricanes, lack of snow, and personal medical emergencies, this property tax remains at its original value.
So what if property taxes were lowered by some ridiculous amount, say 10% (won't happen, but for sake of argument let's go with it). That's an average savings of $1,257 a year. For a business doing $250,000-$1,000,000+ in annual revenue, as most businesses along that stretch do, that amount is unlikely to have a large effect on the overall health of the business. It certainly isn't the tipping point that would suddenly make a potential new investor find it an attractive investment. Remember, that is $250,000-$1,000,000+ in revenue, not profit. Many of the businesses along this stretch barely squeak by after all their costs of goods and operating expenses are paid (another endless topic of conversation among business owners) so don't think that they are all driving around in brand new Teslas every year.
So would a small reform in this property tax suddenly make commercial properties in the Mount Snow Valley attractive enough for investors to come in? It's true that it would improve the business's bottom line but only by such a small amount that it's unlikely to open the flood gates of new entrepreneurs.
3) Federal taxes. Yeah, we're not touching that one since it's outside the control of what can be fixed locally in the town and state.
4) State Payroll taxes (FICA, SS, etc.). This is another out-of-pocket expense that Vermont businesses wrestle with each week. It's baked in to the cost of doing business and is extremely variable based on the type of business, how many employees they have, how much salary they have to pay to attract the right talent, etc.
The bottom line on these taxes is that they are annoying but small in the big picture.
Sunset from the Mt Olga Fire Tower in Wilmington
5) Income Tax. Vermont's business income tax rate caps out at 8.5% on bottom line profit income over $25,000 a year or more. So in theory, if a business profits $200,000 a year after all their expenses and deductions (assuming they make a profit at all), about $17,000 of that excess $200k goes to the state. While businesses would love to keep that $17k to re-invest in growing their business, a 1% decline in the income tax rate only saves them $2,000 a year.
Again, would it be nice to keep it? Sure. But a 1% decline in the income tax rate is unlikely to be the silver bullet that suddenly makes a local business attractive to a new owner who wasn't interested in it when the tax rate was 8.5%.
6) Second-home owner property tax. This sub-topic of the property tax discussion focuses on people who own most of the billions of dollars of real estate in the Valley. Strong arguments have been made that lowering the property tax will attract more new home buyers and give them more money to spend while in town.
But this raises the question: if a person from out-of-state is wealthy enough to own a second home in the first place, are they so likely to choose New Hampshire or Maine over Vermont because of a couple thousand of dollars that it is causing a massive lack of economic activity in the valley? And, more importantly, it is very likely that what they save in taxes on their Vermont property, they will spend in their daily lives back home out-of-state.
The property tax relationship between the towns that collect it and give it to the state is funky and makes some towns pay more to Montpelier than they get back (aka, a "sending town"). Dover is one of those towns due to its large real estate value. They send so much to the state that it's considered a "gold town". In 2015-2016, Dover's town report shows a $10,000,000+ payment of property taxes to the state that it never saw again.
Most of this money sent to the state by Dover is spent by the state on education and health care in other parts of Vermont. If Dover was to keep all of its property taxes, it would be an incredibly wealthy municipality. The argument made by the state is that Dover only benefits from its high real estate values due to Vermont's overall quality of life which needs to be maintained throughout the state - plus there is a State Supreme Court ruling which calls for equality of education funding for all Vermont students. It's an honest attempt at a well-intentioned policy meant to avert some towns having super wealthy schools just because they have a ski mountain while their neighboring town without one is much poorer.
So would a reform in the property tax create a sudden boom of economic spending by second home-owners? It's unlikely to change individual second home owners habits, but it would allow gold sending towns like Dover to keep more of its own money for potential local investment. Would Dover spend it in ways that would stimulate the economy back to a normal cycle again? We will likely never know.
But this is another potential piece of the larger solution. How much can a small town in Southern Vermont change the tax laws in Montpelier? Keep an eye on this.
View from the summit of Mount Snow looking over Somerset Reservoir
7) Local option tax. This one is interesting.
A few years ago, Vermont voted to give towns the option to add a 1% tax to sales, meals, and rooms activity in their towns. The customer pays this tax to the business, the business pays it to the state, the state then keeps 30% and sends 70% back to the town to use for economic development. This is where the discussion really heats up on a local scale: what does economic development mean?
In Dover's case, they created an economic development department to do all kinds of things including events, marketing, infrastructure upgrades, non-profit grants, and other ideas people propose at the bi-weekly select board meetings. In the last few years they have built miles of sidewalk (a HUGELY welcome improvement), sponsored various events big and small, built a park in the center of town, created a summer music series on that town park, given businesses grants for advertising and cosmetic property improvements, and the list goes on.
Is it working? It has had its moments of success but it has never fully become the powerful economic development force it could be. Plenty of ink has been spilled in the local Deerfield Valley News about this topic - but the outcome is clear, inns are still waiting to be bought and restaurants are still closing.
Of all the taxes at play in Vermont, this one might be most directly tied to local life and economic development.
So would a small reform in this tax suddenly make commercial properties in the Mount Snow Valley attractive enough for investors to come in? Unlikely but this one has the most potential to do some direct good for the area in the short run if the area's economic development leaders can craft and execute a good plan - something that's been spinning round and round for over a decade.
So there we have it.
Are changes in the tax structure going to suddenly create a booming economic environment in the Valley that attracts new investors, business turnover, and an increase of cultural appeal to the level that brings in new young residents?
It may attract one or two new folks, but it is unlikely to cause a major change even though here are some potential benefits to be found in small reforms to each of these.
So what's next to look at? Part-three of this in-depth series looks at the issues of housing and technology and their impact on solving this perplexing dilemma.