A tea party of his own? Douglas may threaten veto over taxes

Gov. Jim Douglas, April 29, 2010

Gov. Jim Douglas frequently rails against old — and new — taxes. But in the last few days, the volume and pitch of his anti-tax rhetoric has reached new levels. In coded and overt ways, he’s sounding the alarm: If the Legislature doesn’t do what he wants — reduce both spending and taxes more than they already have — he may veto the budget.

Tom Evslin Challenges letter, May 4, 2010
Letter from Jim Reardon regarding legislative budget

The governor appears to have his veto pen poised in mid-air, although as of yesterday, he wouldn’t say whether he would reject any single bill in the budget package, which typically includes a tax bill, a capital investment bill and the budget itself. (This year, Challenges for Change, the government restructuring plan, is also part of the mix.)

“The Senate’s budget, like that of the House, relies on the $21 million in new taxes that were passed last year,” Douglas said in last week’s press conference. “I’ve asked for the capital gains and estate taxes to be rolled back, and I’ve presented a balanced budget that does exactly that. If legislative leaders are as committed to creating jobs as I am, then they will listen to employers like those who came to their own legislative jobs forum in January who testified that those tax increases are sending people out of state and hindering investment.”

In the governor’s view, the Legislature’s decision last year to raise estate taxes and eliminate a 40 percent capital gains tax loophole remain burdensome to well-heeled Vermonters.

In the governor’s view, the Legislature’s decision last year to raise estate taxes and eliminate a 40 percent capital gains tax loophole remain burdensome to well-heeled Vermonters. Both passed last year over his veto. Douglas wants them both gone by Jan. 1, 2011, a move that would cut the budget by about $21 million. The Legislature, however, has not obliged. Consequently, wealthy Vermonters, in Douglas’ view, will continue to contribute more than their fair share of property, income, estate and capital gains taxes to the state’s coffers. His contention is that some Vermonters, who can pay lower taxes in a state like Florida, will leave.

At the same time, his policy proposals have targeted expenditures as too high in the following areas: small schools, the prison system, community mental health and developmental disability services, programs for needy Vermonters and supports for elderly citizens who need long-term care.

Last year, Douglas lost ground on his efforts to reduce taxation and spending when the Democratic majority in the House and Senate overrode his historic veto of the budget (no other Vermont governor had ever before refused to sign a budget).

The governor’s administration and lawmakers appeared to resolve some of their differences when they came together last fall, in the face of enormous ongoing deficits, to forge the Challenges proposal for reorganizing state government.

The governor has launched a new offensive against lawmakers’ budget and tax proposals in what appears to be a run up to yet another veto threat before the Legislature finishes reconciling the Senate and House versions of the budget in conference committee in time for adjournment on Saturday.

And up until now, there was an uneasy truce. On Monday, however, the governor launched a new offensive against lawmakers’ budget and tax proposals in what appears to be a run up to yet another veto threat before the Legislature finishes reconciling the Senate and House versions of the budget in conference committee in time for adjournment on Saturday.

House Speaker Shap Smith took the criticism from the governor in stride.

“In my seven years here as a legislator, I don’t remember a time that the governor didn’t have strong objections to the budget that was being considered by the House and the Senate,” Smith said. “I consider this largely to be a negotiating tactic, and I believe all the parties want to get to a place where we do not repeat what happened last year, and I remain committed to doing it.”

“Vermonters are best served by us coming to some common ground, and I remain committed to getting there.”

Smith said the Legislature has no plans to sunset the estate tax as the federal law is now in flux; he said it would be inappropriate to change the capital gains exclusion until the state tax commission reports back with suggestions for structural changes.

He said he expects the Legislature and the administration to negotiate in good faith through the end of the session.

“Since the beginning of the session, we’ve been trying to set a tone where we work together to come to agreement to do what’s best for Vermonters, and I think the House and Senate share that goal, and I think the governor does too,” Smith said. “Vermonters are best served by us coming to some common ground, and I remain committed to getting there.”

Negotiations a la the media?

After the unemployment insurance trust fund deal was struck on Monday, the Douglas administration let fly with a volley of criticism about some of the Legislature’s budget actions.

On Tuesday, the governor took the lead at a press conference held by the Associated Industries of Vermont. The business group opposes the production deduction cap (a 9 percent tax break for corporations that the Legislature wants to hold at the current level — 6 percent– for two years). Today, he will stand in solidarity with business leaders to protest increases to capital gains and estate taxes that currently raise for the state about $21 million.

A press conference wasn’t even necessary to alert the news media to what turned out to be three rapid-fire statements from team Douglas detailing the administration’s displeasure with lawmakers budget, tax and Challenges decisions — the buzz factor in the Statehouse was enough.

A 13-page letter from Commissioner of Finance and Management Jim Reardon insisted that lawmakers pass a Jan. 1, 2011 sunset provision for estate and capital gains taxes and revoke all new taxes in this year’s budget (none of which are broad-based tax increases, such as income or sales taxes). He also detailed more than 30 legislative items in the House and Senate budgets that the administration takes issue with, large and small.

Tax Commissioner Richard Westman echoed all of Reardon’s tax objections.

He said he opposes a 0.8 percent fee increase on fuel oil, designed to cover costs of the state’s petroleum cleanup fund; sales tax “preferences” for nonprofit organizations (such as ticket sales for the Flynn Theater); an asset test for property owners who seek rebates for their property taxes and hold more than $1 million in assets; retroactive relief for late income tax filers; and a one-time filing of the homestead declaration for property owners.

Evslin said lawmakers have only been able to identify $17 million in savings and has hamstrung the administration in its efforts to pursue the $31 million in restructuring plans it has developed.

Westman opposes the asset test because it would be difficult for his department to verify an individual’s personal property. He said in his letter to lawmakers that their proposed study of tax “expenditures” — the $1 billion the state spends on exemptions and deductions for individuals and businesses — potentially “irrelevant.”

Rep. Janet Ancel, D-Calais, a member of the House Ways and Means Committee, disagrees. She said re-evaluating the state’s tax breaks is crucial for good management.

“Tax expenditures are where we’re spending a lot of money,” Ancel said. “It’s credits, exemptions, deductions and exclusions. Any way that, either by passing through federal tax expenditures or by enacting them ourselves, we’re basically spending money, we’re just doing it by forgoing revenue.”

Meanwhile, Chief Technology Officer Tom Evslin, the governor’s point man on Challenges, summarized in a nine-page document lawmakers’ slow progress on the government reorganization legislation. Challenges is designed to produce $38 million in savings but, Evlsin said, has yet to yield the expected payoffs on paper.

He said lawmakers have only been able to identify $17 million in savings and has hamstrung the administration in its efforts to pursue the $31 million in restructuring plans it has developed. Evslin said the administration is prepared on its own to find the $7 million shortfall and put the state on track to save $72 million in structural changes by fiscal year 2012.

If the Legislature is unwilling to provide the administration with the authority it needs to pursue the reorganization, he wrote, “then we must frankly face the fact that we need to trim an additional $14 million from the budget bill.”

“It will be a loss for Vermonters if special interests manage to protect the status quo and torpedo this change to make government more effective,” Evslin wrote.

House Speaker Shap Smith said he believes, however, the Legislature can resolve issues around the Challenges by Saturday.

“I think it’s fair to say we had extensive concerns about what was proposed by the administration; we worked hard through those concerns in our process,” Smith said. “We’ve continued to work on the Challenges since that bill passed … and over the next four days, we remain committed to trying to find some resolution on it. There are some legitimate concerns about whether the proposal that was given to us by the administration put forward something that totaled $31 million in savings and also was something that was workable.”

The budget objections

In his letter to key legislators, Reardon outlined large areas of concern: “The House and Senate budgets rely on over $21 million in increased taxes imposed by the Legislature last year, plus more new taxes this year at a time when Vermonters can least afford it.”

He said the new taxes are having a “reverse impact” on the state’s economic recovery, and the state’s only option is to address the underlying “structural” issue, Reardon wrote.

“We feel that the budget, as based on House- and Senate-passed versions, establishes spending at an unsustainable level that Vermonters can’t afford,” Reardon said in an interview. “And it relies on last year’s taxes that they raised over the governor’s objections of $21 million, plus additional tax increases this year, when Vermont individuals, families and businesses can least afford to pay more in taxes.”

He said the new taxes are having a “reverse impact” on the state’s economic recovery, and the state’s only option is to address the underlying “structural” issue, Reardon wrote.

“We are asking the Legislature not to rely on any additional taxes in this year’s budget,” Reardon said.

The House and Senate have passed tax bills that include new fees on fuel distributors and dietary supplements. They have also proposed a two-year cap for the domestic production deduction at 6 percent, blocking a federal increase to 9 percent in fiscal year 2011 and 2012, after which the cap would sunset. (The exemption costs the state $9 million a year. cap would sunset instead of allowing it to increase to 9 percent under federal tax law.

All these taxes, in the aggregate, add up, Reardon said.

“You have high statewide prop taxes that affect businesses – everyone agreed we had to resolve the unemployment fund issue, which places an additional burden on businesses — then you don’t pass along the domestic production reduction and then you, last year, passed the increase in the capital gains tax,” Reardon said. “These all begin to add up to place a significant burden on individuals, families, farmers and other businesses. You have to look at it cumulatively.”

Reardon’s case in point? Increased spending on human services between fiscal years 2009 and 2011. The Legislature increased spending throughout the Agency of Human Services by $128.5 million, or 7.99 percent, in fiscal year 2009; $127 million, or 7.3 percent in fiscal year 2010; and between $70.7 million or $81.2 million in fiscal year 2011. His calculations include a significant boost in Medicaid dollars to the state from the federal stimulus package, designed to help defray the impacts of the recession on laid off workers. Without structural changes, Reardon maintains that unsustainable AHS budget increases “will persist for years to come.”

Reardon predicts statewide property taxes could go up 11 cents

Next year, he warns, the newly elected governor and lawmakers will be saddled with a $100 million General Fund deficit and a Hobson’s choice between funding education and human services. Reardon predicts the state will not be able to spend an additional $70 million in programs for the state’s children, elderly, disabled, mentally ill and needy – and transfer $76 million from the General Fund to the Education Fund in fiscal year 2012 to support school spending.

Because of the Legislature’s unwillingness to make necessary, mandatory structural changes in education, Reardon said, the property tax rate could increase 2 cents this year and 2 cents next year.

The state will transfer $240 million from the General Fund to the Education Fund this year; it will need to transfer roughly $300 million next year, he said, because of statutory, inflationary increases in the transfer and a loss of $38.6 million in stimulus funds.

If lawmakers decide to fund human services at the same rate next year, he believes they will have no option but to renege on their obligation to fund an increased contribution to the Education Fund.

He said the statewide property tax rate will go up 7 cents if the state is unable to transfer the $76 million additional General Fund monies to the Education Fund in fiscal year 2012. And because of the Legislature’s unwillingness to make necessary, mandatory structural changes in education, Reardon said, the property tax rate could increase 2 cents this year and 2 cents next year.

Under the Challenges for Change law, the state must find a total of $40.5 million in savings, $23 million from the General Fund and $17 million from the Education Fund, which would result in a drop in property taxes. The House identified $23 million in savings total.

The administration’s recommendations for mandatory cost-cutting statewide were ignored, Reardon said, including a 20 percent teacher contribution to health care premiums and increasing the teacher-to-student ratio to 1 to 13.

The House Challenges bill recommends savings targets of $23 million for fiscal year 2012, but that figure could prove illusory, he said, if school boards, on a voluntarily basis, can’t find 2 percent savings in education spending.

As a result of missed cost-cutting targets and potential problems with the increased Education Fund transfer, Reardon projects a statewide property tax increase of 11 cents in fiscal year 2012.

A usurpation of executive authority

Last year, the administration went to court over a clause in the budget that restricted the executive branch from reducing the state workforce by more than 1 percent, or about 70 workers, without legislative approval.

Though the judge didn’t give the case a full hearing because the law didn’t go into effect until July, Reardon said, he feels they could win in court this time. He sees the provision as a legislative intrusion into the workings of the executive branch.

He objects, for the same reason, to a budget item he said is tantamount to the Legislature micromanaging the Department of Fish and Wildlife. The lawmakers want to retain two conservation specialist positions in the department that are largely funded by the federal government; the department wants to use the General Fund portion of their salaries to pay for a fifth additional game warden, which would bring the statewide total to 40.

Reardon also justified the administration’s request to purchase “Marshall 86,” a web monitoring system for state employees, in a two-page analysis.

He said the system acts as a deterrent to workers who might be tempted to surf the Internet for pornography or gambling sites. Other states, he said, have seen a 72 percent decrease in Internet usage by employees after the filtering program was installed.

A Challenge on the Challenges

Five out of seven Challenges have not been met, according to Evslin, the governor’s point man on the government restructuring project. At this point, just four days before the session’s scheduled end, Evslin wrote in a letter addressed to Sens. Peter Shumlin, President Pro Tem of the Senate, and Susan Bartlett, chair of the Senate Appropriations Committee, lawmakers have made no progress in two areas: education and economic development.

Evslin wrote that if H.792, the Challenges 2 bill, were passed “as is,” “we would be hard-pressed to find $24 million in Challenge-related savings for FY11 and have a huge hole in the FY12 budget.”

The total amount the state has budgeted in reductions through the Challenges is $38 million. Of that, the House approved $17 million, he estimates; the Senate Appropriations Committee has not yet taken up Challenges in education and economic development, and progress in the remaining areas has been slow.

Evslin blames “service provider resistance” to performance-based contracting and “restrictions on the ability of the administration to act” for lawmakers’ inability to find more than half the $17 million savings target in human services for fiscal year 2011.

The administration’s economic development proposals have been “stymied by refusal of providers to recognize the need to restructure and become more effective,” Evslin wrote.

On the education front, Evslin wrote that the outcomes have been “totally ignored,” and no progress has been made toward structural change, such as mandated student-teacher ratios, for fiscal year 2012.

Evslin detailed the changes to existing state law that the administration wants lawmakers to make in order to move ahead with its proposals, the most notable of which is closing the South East State Correctional Facility Windsor Work Camp, which the administration says would save the state $2.64 million.

Sen. Dick Sears, D-Bennington, said he doesn’t think closing South East will reduce incarceration costs for the state. Work camps are the only place where offenders get “good time,” he said, or extra credit for time previously served, “so by eliminating that, any of those offenders would have to stay in prison two years instead of one year.”

In addition, the administration wants the Legislature to approve the creation of a “supervised release” status for inmates who have served one-third of minimum sentence. This change in policy would save $3.83 million, according to Evslin.

Though Sears is a proponent of the supervised release of nonviolent offenders, he was adamantly opposed to the notion of potentially letting violent inmates, including sex offenders, out of prison early, under supervision. He called it “a threat to public safety.”