Shifting tax burden to the rich: The fight isn’t over
By PETER HIRSCHFELD
Vermont Press Bureau | August 25,2013
MONTPELIER — A controversial tax proposal earlier this year ignited one of the biggest standoffs yet between Gov. Peter Shumlin and a Legislature controlled by members of his own party. But while lawmakers may have bowed to gubernatorial pressure back in May, they’re preparing to renew the fight next January.
The late-session drama ended when House Speaker Shap Smith and Senate President John Campbell opted to withdraw a revenue-neutral tax proposal that would have shifted a portion of the middle-class tax burden onto the rich.
They shelved the plan in the face of biting opposition from Shumlin, who said the proposal violated the terms of the no-new-taxes agreement they’d struck just days earlier.
But the Legislature’s fight to limit the number of deductions used by higher-income Vermonters to minimize their tax liabilities has begun anew. And the heads of the House’s and Senate’s top tax committees are gearing up for what will likely be another showdown over revenue policy with their fellow Democrat in the governor’s office.
Sen. Tim Ashe, chairman of the Senate Committee on Finance, plans to convene a “traveling road show” later this fall in which his committee will hold five “informal” meetings in locations across Vermont.
“I’d like to invite some groups to join us and have a broad conversation about all of these issues, so that we can start to see what the appetite is for various potential paths we could go down,” Ashe says.
Ashe and Rep. Janet Ancel, chairwoman of the House Committee on Ways and Means, have already met with a group of nonprofit organizations, the leaders of which had been concerned about how limiting income-tax deductions would affect giving from larger donors.
“It being summer, there hasn’t been a lot of activity, but (the proposal) is still something we anticipate taking up in January,” Ancel says. “We will probably gear up and do more advance work when we get into fall.”
Ancel and Ashe’s proposal, which may undergo tweaks before January, would cap income-tax deductions at 2½ times the standard deduction, meaning filers could claim maximum deductions of about $30,000.
They say the plan is an attempt to inject some fairness into a system where unlimited deductions allow some high earners to minimize their contributions to the state treasury.
According to a report by the Joint Fiscal Office based on data from 2010, 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 whom would see their annual tax bills jump on average by nearly $25,000.
The benefits to lower-income and middle-class Vermonters aren’t enormous: Filers earning $75,000 to $100,000 would see their annual tax bills drop on average by about $80.
But Ashe and Ancel say the proposal would not only address defects in tax policy — like the fact that residents can claim deductions for mortgages on vacation homes in the Caribbean — but would also deliver needed tax relief to a struggling middle class.
More than 70 percent of Vermont filers would see their tax bills go down under the plan; fewer than 5 percent would experience an increase.
“Most of the time I think that policy and politics take us in different directions,” Ancel says. “But the part of this proposal that’s so appealing to me and all my colleagues is the fact that it’s a tax cut for 70 percent of Vermont taxpayers … and a relatively small number that would pay more.”
She adds, “When you can give a tax cut to 70 percent or more of Vermont filers or households, that seems like something that is good politics and good policy both.”
Shumlin thus far has been of a different mind. Back in May, he said the plan had been poorly vetted and might not be as revenue neutral as lawmakers believed. He said the proposal could also put Vermont at a competitive disadvantage tax-wise with neighboring states that allow unlimited deductions.
In addition to concerns about tax flight, the administration is now questioning the wisdom of moving ahead with a major tax code overhaul in 2014 when the Legislature will grapple with the issue of health care financing just a year later.
The Legislature in 2015 is scheduled to begin crafting a $1.6 billion public financing program for the single-payer health system Shumlin has promised to deliver by 2017.
“We’re willing to listen and talk,” Administration Secretary Jeb Spaulding said last week. “But we think it would be better to do tax reform in the context of how we reconfigure our payment system for health care in the 2015 session.”
Ashe says that if the Legislature and administration can identify flaws in the tax system now, then it doesn’t necessarily make fiscal sense to let them linger solely because there might be a debate over health care financing a year from now.
And deferring major conversations about key components of the state’s tax code, Ashe says, will deny Vermont businesses the clarity they need to plan ahead.
“The challenge that we face is some will say, ‘let’s wait a few years and just do it all at once when we have to do health care reform,’” Ashe says. “If you follow that logic, what you’re really saying is, ‘Hey, business community, and everybody else that’s a taxpayer, sit tight with anxiety and we’ll spring a big tax change on you right at the last second.’”