Vermont lawmakers are expanding a housing program (Act 69) that helps fund down-payment assistance for homebuyers. The mechanism behind it is a financial structure that most taxpayers rarely see: tax credits sold at a discount to large financial institutions.
At first glance the program sounds straightforward. The state authorizes tax credits, the Vermont Housing Finance Agency (VHFA) sells those credits, and the proceeds fund down-payment assistance loans for homebuyers.
But when you follow the money, a more interesting question emerges: why are those discounted tax credits being sold almost exclusively to banks and insurance companies instead of Vermont taxpayers themselves?
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How the system works
The Legislature authorizes a pool of tax credits for the housing program. Under the current proposal, the annual allocation for the Down Payment Assistance Program would rise to $350,000 starting in fiscal year 2027.
VHFA then sells those credits to financial institutions.
The key detail is that the credits typically sell below face value. For example, a bank might pay roughly $90,000 to buy a $100,000 tax credit.
Later, when tax time comes around, the bank applies the credit against its Vermont tax bill.
If the bank owed $100,000 in Vermont taxes, that credit reduces the tax bill to zero. Because the bank paid only $90,000 to acquire the credit, it effectively receives $100,000 in tax relief for a $90,000 cost.
That leaves a roughly $10,000 margin for the buyer.
Meanwhile, VHFA uses the $90,000 it received from the sale to fund down-payment assistance loans.
The state, however, ultimately collects $100,000 less in tax revenue when the credit is used.
The difference between deductions and credits
Part of what makes the program confusing is the difference between a tax deduction and a tax credit.
Most individual taxpayers are familiar with deductions.
A deduction lowers the amount of income that is taxed. For example, if someone receives a $1,000 deduction and is in a 6 percent tax bracket, the deduction might reduce their taxes by about $60.
A credit works differently.
A tax credit reduces the tax bill dollar-for-dollar.
If someone has a $100 credit, their tax bill drops by exactly $100.
Because credits directly reduce taxes owed, they are far more powerful than deductions.
That’s why tax credits are often used to finance specific policy programs, including housing development.
The question of who gets access
The structure of the housing credit program effectively creates a small market where buyers can obtain tax relief at a discount.
Financial institutions purchase the credits, VHFA receives the cash, and the proceeds fund housing assistance.
But the arrangement raises an obvious question.
If financial institutions can buy $1 of tax relief for roughly 90 cents, why couldn’t Vermont taxpayers participate in a similar structure?
For example, imagine a group of Vermonters pooling money to buy the same credits.
If 3,500 Vermonters each contributed $90, the group would raise $315,000 — roughly the amount VHFA might receive from selling $350,000 in tax credits at a discount.
Each participant could receive a $100 tax credit.
Someone with a $1,000 Vermont tax bill would see their taxes reduced to $900, effectively receiving $100 in tax relief after contributing $90.
The math would mirror the same transaction that institutional buyers are making today.
Why banks end up buying the credits
In practice, tax-credit markets tend to attract large institutional buyers.
Banks and insurance companies typically have predictable tax liabilities large enough to absorb the full value of the credits. They also have the accounting systems needed to handle multi-year credit allocations and tax reporting.
Selling credits in large blocks to a single buyer is also administratively simpler than distributing them among thousands of small purchasers.
Still, the underlying structure raises a broader policy question.
If the state is willing to offer discounted tax relief to help finance housing programs, lawmakers could theoretically design the system so ordinary taxpayers participate in that market as well.
A policy choice
The housing program itself is not particularly large in the context of Vermont’s overall budget. The fiscal note estimates the down-payment assistance credits would reduce General Fund revenue by $350,000 in fiscal year 2027, increasing over time as credits accumulate.
But the structure of the program illustrates a larger point about how tax policy works.
When Vermont uses tax credits to finance programs, it is effectively choosing who receives the opportunity to convert discounted tax relief into funding.
Right now, that opportunity largely flows through financial institutions.
The question lawmakers have not clearly addressed is whether that opportunity should be available more broadly to Vermont taxpayers themselves.
Dave Soulia | FYIVT
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