Tax impasse pushes session into next week
By Peter Hirschfeld
Vermont Press Bureau | May 11,2013
MONTPELIER — A late-session standoff over tax policy has postponed what was to be a Saturday adjournment as leaders in the House and Senate decide whether to proceed with major changes to the tax code in the face of thinly veiled veto threats from Gov. Peter Shumlin.
In a stark warning to a House and Senate controlled by members of his own party, the Democratic governor Friday cautioned against proposed revisions to the income tax code that would raise burdens on the rich and bring down tax bills for the middle class.
House Speaker Shap Smith and Senate President John Campbell say the changes are revenue neutral, and therefore don’t violate the no-new-taxes bargain they cut with the Democratic governor earlier this week.
Shumlin, however, said the proposal would derail the state’s economic recovery.
“This is a bad idea at the wrong time,” Shumlin said late Friday evening. “I’ve made it very clear: We should not raise income taxes, we will not raise income taxes, and we must not raise income taxes.”
Rep. Janet Ancel, an East Montpelier Democrat and chairwoman of the House Committee on Ways and Means, said Thursday the proposal isn’t an income tax hike at all. She said the plan would function as a middle-class tax cut that benefits about 250,000 taxpayers — nearly three-quarters of all income tax filers.
The proposal would cap the dollar value of the deductions used mostly by wealthier Vermonters to reduce their income tax obligations. Lawmakers would then use that revenue to buy down income tax rates across the board.
Lawmakers say it’s an attempt to inject some fairness into a system where unlimited deductions allow some high earners to minimize their contributions to the state treasury.
People making $200,000 and up would see their tax burdens climb in the aggregate by $5.4 million per year, based on 2010 tax data. Filers reporting incomes of less than $150,000, meanwhile, would see their obligations drop by a total of $4 million annually.
The changes would be especially drastic for people earning more than $1 million, about 100 of which, based on tax data from 2010, would see their annual tax bills jump on average by nearly $25,000.
The benefits to lower-income and middle-class Vermonters aren’t huge — filers earning between $75,000 and $100,000 would see their annual tax bills drop on average by about $80. But given the passage earlier this year of an increase in the gas tax, Ancel said, it makes sense for elected officials to find ways to make other taxes more progressive.
“The gas tax is a regressive tax, so to the extent that we just increased a regressive tax, it makes sense to me to see if we can make the income tax more progressive at the same time,” she said Thursday.
Shumlin disagreed forcefully. He said the proposal materialized in the waning days of the session, and that lawmakers haven’t sufficiently vetted its potential impacts on Vermont’s fragile economic recovery. And he said he has emerging data to indicate the proposal isn’t revenue-neutral.
The Legislature based its analysis on tax returns from 2010, the most recent year for which data were available. Administration Secretary Jeb Spaulding said 2010 data are anomalous, as they reflect “the low point coming out of the recession.”
The Legislature’s proposal would cap income tax deductions at 2½ times the standard deduction, meaning filers could claim maximum deductions of about $30,000.
Shumlin said preliminary analyses by the administration of the Legislature’s proposal based on tax data from 2007 — “a year more like we’re in now,” according to Spaulding — forecasts revenue increases “in the ballpark” of $10 million.”
Shumlin didn’t have the copies of that analysis available for review at an ad hoc press conference Friday evening.
“Vermonters don’t want the Legislature extending the session, going into overtime to raise income taxes, and passing tax packages on the fly when we don’t know what they do,” Shumlin said.
Ancel and Sen. Tim Ashe, chairman of the Senate Committee on Finance, say the proposal is anything but new. Ancel’s committee has been working on the issue of limiting deductions since 2010, when the Blue Ribbon Tax Commission — a panel created by then-Senate President Peter Shumlin — touted the approach not only as a way to improve equity in the tax code, but also as a way to bring down the marginal rates that lend to Vermont’s image as a high-tax state.
“It will have a significant impact on our economy, on our job growth,” Shumlin said.
And Shumlin made it clear he won’t abide the change if it’s passed into law.
“I cannot tell you more clearly, though I don’t make veto threats, this is the wrong thing to do it, we don’t know what we’re doing, it’s the wrong time, we should not do it,” Shumlin said.
The fight over tax policy has highlighted the ideological divisions within a one-party rule that has, for the most part, held together without incident over the first three years of the second-term governor’s reign.
If the split over tax policy yields legislation for which Shumlin cannot stand, the governor may have to turn to allies in the Republican super-minorities in the House and Senate.
High-ranking administration officials in recent days have sought to gauge support for their position among Republicans, should they need the minority caucuses’ support to sustain a veto.
House Minority Leader Don Turner said he was approached Thursday by a top Shumlin aide about the stance of his caucus on the issue of taxes. Turner earlier this year managed to get 55 “no” votes on the House’s version of the tax bill.
It was enough, he noted at the time, to sustain a veto should the governor be so inclined. That bill raised $23 million by raising taxes on everything from soda and candy to bottled water and clothing.
Turner said the Shumlin aide “just wanted to make sure we were still in that mindset.” Turner said he told the aide, “Our caucus is absolutely committed to not raising taxes, and I know I can deliver those votes.”
Hopes of a Saturday adjournment were dashed shortly after 5 p.m. Friday, when Smith and Campbell emerged from an hour-long meeting in the speaker’s office with the heads of the bodies’ tax and budget committees.
The two leaders said unresolved issues over the tax bill and the budget wouldn’t be untangled that night, and that the Legislature would return Saturday and Monday to finish its business. Minutes later, following a small revolt among rank-and-file senators, the schedule was altered again: Lawmakers will take the weekend off, and return Monday and Tuesday.
Smith said he hopes to find resolution on a tax bill that’s amenable to all parties. But he made it clear that “we don’t have to have agreement with the governor on the tax bill.”
By Monday, members of the House and Senate will find out whether their speaker and president have dropped the proposal, of if they’ll attempt to drag the governor kicking into what would be the most significant fiscal reform in recent memory.