Editor’s note: This is the first in a five-part series about the Vermont Blue Ribbon Tax Structure Commission Report. In addition to this analysis of the politics of taxation, in the coming week, VTDigger.org will examine the panel’s recommended changes to the sales tax (Part 2) and the income tax code (Part 3); suggestions to sunset tax expenditures (Part 4) and reform ideas that didn’t make the final cut (Part 5).
Gov. Peter Shumlin
Taxation is the third rail of politics in Vermont, regardless of which party is in power, and that fact hasn’t changed since Democrats seized control of the executive branch in November and held their majorities in the Vermont House and Senate. Though few Democratic lawmakers in the Statehouse are enthusiastic about Gov. Peter Shumlin’s proposed budget (even the governor himself, in his address, said: “My administration takes no pleasure in delivering this budget”), raising income taxes is not a part of the equation at the moment.
Shumlin took a no-new-taxes pledge in the General Election, and he has made it plain in repeated interviews that he has no intention of reneging on that promise — though he has proposed new taxes on insurers, home health agencies, dentists and hospitals in his budget.
“I am not one of those Democrats who feel that Vermont’s biggest challenge is that taxes are not high enough,” Shumlin said shortly after he was elected. “I think they’re too high. I do think they discourage economic growth. I don’t want to raise taxes.”
Dig Deeper
Article Navigation
Documents
- Vermont Blue Ribbon Tax Structure Commission’s report
- Gov. Shumlin’s A Vision for Vermont
- Doug Hoffer’s 2007 statement on Forbes business climate rankings
Links
The governor and the legislative leadership have worked hard over the last few months to quell the business community’s fears that the Democratic power juggernaut in Montpelier will lead to higher taxes.
House Speaker Shap Smith and Senate President Pro Tem John Campbell, both Democrats, have also expressed reluctance to look at income or sales tax hikes as options for resolving the state’s projected $176 million shortfall.
That means the Legislature and the governor’s administration will likely move ahead with plans to make cuts in benefits for Vermonters who are enrolled in the Catamount Health program; taxes on health programs; and reductions in funding for the state-funded mental health and disability service nonprofits.
In light of this political climate and the state’s budget crisis, it’s perhaps not surprising that state leaders have relegated the Vermont Blue Ribbon Tax Structure Commission’s report to the back burner. The commission’s 18 months of research, efforts to gather a full range of testimony and public debates on policy options didn’t warrant a footnote in the governor’s budget address.
In mid-January, the three-member panel outlined reforms to the state’s tax system. Though their suggestions are “revenue neutral,” meaning if taken as a whole, they don’t raise or lower taxes, the recommendations include significant changes to the tax code. The commission suggested that the Legislature consider two main policy changes:
- Collecting income taxes on adjusted gross income instead of taxable income;
- Extending the sales tax to services and clothing and shoes. In addition, the commission recommends that the state continue its efforts to force Internet retailers, such as Amazon.com, to collect Vermont sales taxes. It also recommends that the Legislature re-evaluate tax expenditures. If adopted, the proposals would broaden the tax base and enable the state to lower income and sales tax rates.
Though these concepts are new to Vermont, they aren’t exactly novel. They are standard fare in the world of tax policy, according to analysts interviewed for this series. Economists from across the political spectrum agree with the thrust of the commission’s reforms, which boil down to this simple idea: If you broaden the tax base (make more income, services and goods subject to taxation), you can lower the rates.
House Speaker Shap Smith
Policy experts have been recommending that states around the country make these kinds of changes to the tax code for some time. The problem is not the quality of such proposals, tax analysts say, the issue is politics.
Kail Padgitt, an economist at the conservative Tax Foundation, gives the report high marks because it is revenue neutral and it proposes to broaden the tax base and lower rates.
“On the whole, it’s a good plan,” Padgitt said. “It’s always a question of how far is the Legislature willing to go. Every service tax comes with a strong special interest group.”
When the Legislature carves out exemptions to protect certain constituencies, other taxpayers pick up the tab. Those exemptions can add up — in Vermont’s case, the tax “expenditures,” or breaks for individuals, groups and companies total $1 billion.
“Economists have a united front on good tax policy,” Padgitt said. “Over time the politics of it, the special interest groups whittle away the code, they carve out exemptions for different things.”
And in that regard, Vermont is no different from other states. The Democratic leadership appears to be leery of making major changes to the tax code until the political winds start blowing in one direction.
Shumlin went on the attack when the commission’s recommendations were released, and openly dismissed the sales tax on services. In statements to the press, Shumlin praised the panel’s work (“The report provides an excellent foundation for an important conversation, which I welcome”) — and agreed with the income tax reform proposal in theory, but he said he remains “skeptical of any increased reliance on the sales tax.”
The fact of the matter is, if the top rate is 8.95 percent, the reality is, no one is paying 8.95 percent in income taxes.”
~Exec. Dir. Matt Gardner,
Institute on Taxation and Economic Policy
Signals from the legislative leadership also indicate that the sales tax recommendations could be dead in the water. Senate President Pro-Tem Campbell, who hails from Windsor County, doesn’t have an appetite for broadening the sales tax to include services, or certain goods like clothing and shoes.
“I’m on the (N.H.) border,” Campbell said. “I hear more discussion about sales taxes than other people do. One of the things I found of interest was the expansion of the base where we could possibly actually reduce the sales tax. If we took away all the exemptions, the sales tax would be 1.8 (percent). The problem with that is, that always leaves room to raising it down the road to 3 percent or 4 percent. That’s a potential problem.”
House Speaker Smith fully endorsed the commission’s work in December before the final report was released (see our Q & A with Smith), and last week he reiterated his willingness to take a “full look” at the recommendations. He was cautious, however, about backing the sales tax extension to services unless the 6 percent tax can be cut in half to roughly 3 percent. The commission’s recommendation is 4.5 percent.
Smith has charged the House Ways and Means Committee with fully vetting the report, and lawmakers have taken testimony over the last several weeks. No omnibus bill based on the recommendations has been drafted yet, though two lawmakers on the Committee have introduced bills based on pieces of the proposal.
“I’m committed to taking a look at all aspects of the Tax Commission report and having full vetting in the committees,” Smith said. “We’ll clearly have push back on the sales tax on services, and (changes to the income tax).”
House Chamber stamps
When a bill might emerge from the House is an open question. Political observers say lawmakers will wait as long as they can to decide whether they will adopt any or all of the recommendations. Some lawmakers speculate the report will languish until the second half of the legislative biennium (right before the 2012 election cycle) when the commission is slated to present its findings and recommendations for the state’s property tax system.
Campbell dispels that notion. He pointed out that the House has already started vetting the report, and he said he has asked the Senate Finance Committee to take testimony so that “when and if something comes over we’ll be up to speed.”
“We will have reached a decision by the end of the session,” he said in a telephone interview.
Campbell described the change in the income tax code as “a commonsense decision to do,” and he said that portion of the report has a “favorable possibility.”
As for the sales tax? Not likely, Campbell says. “That is a more difficult conversation to have, and one I don’t think we’ll be completely (finished with) by the end of session.” He expects lawmakers will either reject it outright or fail to reach consensus on an expansion of the sales tax base.
When perception becomes reality
Remember this line? “Vermont ranks as 47th best state to do business. Is that good enough? (Yes or NO.)”
That was the No. 1 refrain of Lt. Gov. Brian Dubie’s campaign, sung in tandem with the second line: Vermont is one of the highest taxed states in the country. Dubie repeatedly used these two phrases on the stump, and they appeared in his television and print ads, and most notably, on the New York Times website.
Democrats haven’t forgotten. Shumlin won by 1.8 percent over Dubie, whose Vermont-taxes-are-bad-for-business campaign, gave him the traction to finish the gubernatorial race a close second.
Over time, Padgitt said, politicians allow special interest groups to erode the code. How can you give a tax break or deduction to one group without hurting another? You can’t, basically, in Padgitt’s view.”
The specter of the 2012 election cycle isn’t far away, and Democrats appear to be most worried about their right flank in light of their gubernatorial standard-bearer’s narrow win, even though Shumlin’s views on taxes aren’t as different from his Republican counterpart’s as you might think.
Shumlin sang Dubie’s song in a slightly different key. He portrayed Vermont’s business climate in a positive light, but just like Dubie, he called for reforming the tax structure so that the wealthiest 1 percent of residents who pay “more than a quarter of Vermont’s income taxes” don’t feel compelled to flee to other states. (Read page 22 of Shumlin’s “A Vision for Vermont.”) Campbell, like the governor, believes middle-class Vermonters are tapped out and wealthy residents are leaving the state.
Are these assumptions true? Are Vermonters overtaxed? Do poor and middle class Vermonters pay their fair share? Are wealthy individuals leaving the state?
It depends on who you ask. Dubie based his advertisement on Vermont’s Forbes Magazine 2009 ranking. In 2010, the state moved up two notches to 45th. Vermont Business Magazine pointed out that Forbes gave high rankings to states that have lighter regulation and cheaper energy.
The Tax Foundation ranks Vermont 38th in the nation for overall business climate in 2011, and Vermont comes in 8th place for the highest state and local taxes, according to the Foundation.
The problem with the Tax Foundation and Forbes rankings, according to a 2007 statement from Burlington-based policy analyst Doug Hoffer, is they were created in a vacuum (the calculation methods are not transparent), and they are based on erroneous information. In addition, Hoffer argues that both organizations have a conservative point of view that skews the objectivity of the rankings. The Burlington Free Press agreed with this assessment.
Part of the problem is the complexity of Vermont’s income tax system. The state has five tax brackets, and the state taxes income after itemized and standardized deductions have been subtracted from adjusted gross income. Most states have fewer brackets and they tax on the AGI.
Senate President Pro Tempore John Campbell
Vermont’s top marginal rate is 8.95 percent for income over $373,650; 8.9 percent for incomes between $171,850 and $373,650; 8 percent for incomes between $82,400 and $171,850 and 7 percent for incomes between $34,000 and $82,400. Anyone who earns less than $34,000 pays a 3.55 percent income tax rate. The tiers look like a wedding cake: People who earn more than $373,650 pay the top rate on income above that amount; the lower tax rates apply to the income below that total. The first $34,000 earned, for example, is taxed at 3.55 percent, no matter how high a Vermonter’s income is.
Tom Kavet, the consulting economist to the Legislature, says the published rates, which are on the high end, are a public relations problem. That’s because what Vermonters actually pay — the effective rate — is a lot lower than what outside groups like Forbes and the Tax Foundation suggest.
The effective rate, or the amount of personal income tax rate actually paid by Vermont residents, has averaged 3.08 percent for the last 32 years, according to data from the Department of Taxes.
An analysis by Montpelier-based Public Assets Institute shows that rankings based on effective income tax rates place Vermont in the “middle of the pack.” Vermont ranks 23rd in the PAI study, based on the actual percentage paid by residents.
The Tax Commission’s findings
The bipartisan Vermont Blue Ribbon Tax Structure Commission began its work with a thorough vetting of tax information. The commission spent months gathering facts, data, expert opinions and anecdotal testimony before it began to consider tax reform models.
The commission encourages Vermonters to abandon the discussion of what wealthy Vermonters are doing based on their taxes. Such speculation is murky and, even if it were not so, it is questionable and dangerous to design a tax code for fewer than 200 people.”
~ Vermont Blue Ribbon Tax Commission
The commission’s three members — Bill Schubart (who is president of the Vermont Journalism Trust board, which is the parent organization for VTDigger.org); Kathy Hoyt, former chief of staff for Democratic Gov. Howard Dean; and Bill Sayre, chair of the Associated Industries of Vermont — attempted to examine tax reform options without looking through the lens of politics. Near the end of their deliberations, however, Sayre, a conservative, split from the more liberal majority group, Schubart and Hoyt, and issued a minority statement. The report that the commission published is a reflection of all three members’ views, except in certain instances, cited in Sayre’s minority opinion, which is included in a separate section.
The report attempts to debunk certain myths about taxes in its findings of fact. The commission determined that misperceptions about the state’s tax code have been based on apples-to-oranges comparisons between Vermont’s rates and those of other states. Because our rates are high, outside groups incorrectly assumed the amount Vermonters actually pay in taxes is also high. In fact, the commission found that because Vermont allows taxpayers to take so many deductions, the state’s rates are comparable to, or lower than, those of its neighbors in New England, which all limit deductions. (New Hampshire, is the notable exception, because it has no income tax.)
Another myth? The idea that some Vermonters don’t pay taxes. Not true, says the commission. Everyone pays, and the distribution is relatively even across income levels. Poor people who pay a very small tax on their income contribute through regressive sales taxes.
That said, only a small proportion of Vermont taxpayers generate most of the state’s income tax revenue. Eleven percent of Vermonters who earned more than $100,000 in 2008 were responsible for generating 59.5 percent of the state’s income tax revenues. The report includes a chart that shows that this group of taxpayers contributed just 30 percent of the state’s income revenue in 1991. In the intervening 17-year-period, wages for the three lowest income classes below $75,000 saw a corresponding drop in earnings. The report points to this dramatic shift as an indication that middle- and low-income Vermonters have seen wages stagnate or drop since 1991.
Are rich people leaving the state? According to information from the IRS, tax filers moving into the state earn about 18 percent more on average than taxpayers who leave the state. In 2008, the average income of a new Vermonter was about $53,000, while the wages of the average Vermonter migrating out of state were about $44,000.
As for the 3,926 high-income taxpayers in Vermont who had adjusted gross incomes of $500,000-plus in 2007, more than a third saw their incomes decline precipitously in the following year. The commission concluded that the high single-year incomes were “event driven.”
“The commission encourages Vermonters to abandon the discussion of what wealthy Vermonters are doing based on their taxes,” the authors wrote. “Such speculation is murky and, even if it were not so, it is questionable and dangerous to design a tax code for fewer than 200 people.”
On this point, Sayre disagreed. In his minority report, he said, “Vermonters should not be satisfied if anyone is leaving Vermont due to high taxes, and there is substantial anecdotal evidence that it happens frequently.”
What the experts say
Vermont’s Blue Ribbon Tax Commission report generally gets high marks outside the state because it continues to provide a level of progressivity (poor people pay less, the rich contribute more); it simplifies the tax code by compressing the number of brackets down from five to three; and it removes itemized deductions from the income tax rules and eliminates exemptions for services. The latter is important because over time, Vermonters (and Americans on the whole) are spending more money on services and less on consumer goods purchased from brick-and-mortar retail stores.
The tax economists’ Golden Rule (regardless of political persuasion) is broaden the base, lower the rates, and the commission’s recommendations do just that, experts say. Fundamental to that effort is eliminating itemized income tax deductions for mortgages, charities, health care costs, moving
expenses and the like. On the sales tax front, economists say most goods and services should be taxed. Some economists even recommend putting a levy on food and medicine, as long as people in the lowest income bracket get a tax credit at the end of the year for sales taxes.
Jeff Thompson
Jeffrey Thompson, an associate professor with the Political Economy Research Institute based in Amherst, Mass., described the report as “very sober and thoughtful.”
As far as taxation policy goes, what the commission has proposed isn’t exactly radical, Thompson said. What they have recommended is standard operating procedure in economic circles.
“They certainly wouldn’t be confused for a band of progressive reformers,” Thompson said. The report, he said, is “a great example of thoughtful good government.”
Kail Padgitt, the economist at the conservative Tax Foundation, agreed with that assessment.
Padgitt said if Vermont follows the commission’s recommendations, “it would definitely be an improvement,” and the Green Mountain State would likely rise through the ranks of the less-than-business-friendly states in the Tax Foundation’s annual ranking. (That upward shift would be due in part, though, because other states will be likely facing tax hikes this year.)
“I think it would help the rankings for the state certainly,” Padgitt said. “Even if the overall tax rates stay the same, if the state lowers the top rate (down from) 9 percent, it would have an effect on business.”
What are the potential pitfalls? Pure politics. Over time, Padgitt said, politicians allow special interest groups to erode the code. How can you give a tax break or deduction to one group without hurting another? You can’t, basically, in Padgitt’s view.
“They (lawmakers) carve out exemptions for different things,” Padgitt said. Once lawmakers go down that path, it’s hard to maintain tax fairness, he said.
The shift from adjusted gross income to taxable income is a no-brainer as far as Matt Gardner, executive director of the Institute on Taxation and Economic Policy, is concerned.
“The fact of the matter is, if the top rate is 8.95 percent, the reality is, no one is paying 8.95 percent in income taxes,” Gardner said. “A good goal is to make it clearer what people are paying. Going to AGI (adjusted gross income) makes it easier to understand what the rates are.”
Gardner said the commission has identified the main problem with Vermont’s tax code: “The proliferation of deductions and exemptions that reduce the yield of the tax system.”
“Their recommendations seem like an excellent first step toward making the system more sustainable,” Gardner said. “When you face…budget deficits, that’s its own political will. When it’s spending cuts, it’s a lot easier. They’re running out of easy ways to make cuts on the spending side. It’s been acted on in states in the last year. I think the problems identified in the report are very real and will have a very real long-term impact.”
Reform, Gardner said, is “just facing facts.”
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Thanks Anne. A few quick comments.
You said “Vermont’s Blue Ribbon Tax Commission report generally gets high marks outside the state because it continues to provide a level of progressivity (poor people pay less, the rich contribute more)…”
I agree for the most part. However, the income tax recommendation would reduce progressivity. The commission recommended we reduce the aggregate “burden” on the 399 wealthiest Vermonters by $9.4 million for an average savings of $23,580. And the effective rates would increase for the middle class but go down for the wealthy. I’m struggling to understand why those who earn more than $1 million need a tax reduction.
It appears the Commission intended (in part) to replace the lost income tax revenue with greater sales tax receipts (from taxing services, which I support). But the sales tax is regressive. Why should we give $9.4 million to the richest 399 Vermonters while we increase the burden of the sales tax?
Note: It’s possible these recommendations represent efforts by the majority to meet the minority member in the middle. But since that individual eventually bolted and wrote a minority report, why should the majority stick with the compromise? Note that the minority recommended that we give the wealthiest Vermonters $17 million for an average savings of $43,000. Nice.
The Tax Foundation’s Mr. Padgitt said “if the state lowers the top rate (down from) 9 percent, it would have an effect on business.”
Baloney. They’ve been saying this for years (like the Chamber, AIV, and others). There is absolutely no evidence to support the assertion that state tax rates impede job growth.
Overall, I think the commission did a good job and I’m disappointed that the Governor and the Legislature seem unwilling to tackle these issues.
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Bill Sayre is suggesting a novel approach to public policy: ““The commission encourages Vermonters to abandon the discussion of what wealthy Vermonters are doing based on their taxes,” the authors wrote. “Such speculation is murky and, even if it were not so, it is questionable and dangerous to design a tax code for fewer than 200 people.”
On this point, Sayre disagreed. In his minority report, he said, “Vermonters should not be satisfied if anyone is leaving Vermont due to high taxes, and there is substantial anecdotal evidence that it happens frequently.””
Applying his standard to ANY other domain shows just how ludicrous it is. Polls (and election results) tell us that the majority of Vermonters support gay marriage. But anecdotal evidence tells us that a few Vermonters left the State after the passage of the law. We should therefore outlaw gay marriage.
Is there anyone who believes this is a sensible way to conduct public policy?
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The more I hear from Doug Hoffer, the more I think it’s a real shame he didn’t win the race for auditor⎯or even governor⎯but of course he didn’t run for the latter. We levy taxes to pay for infrastructure which benefits all. We levy taxes to support programs to benefit the needy, the unfortunate, and the feeble. We shape the tax code to protect the vulnerable from excessive tax burden. One tool we use to accomplish this is called an exemption. Tax code, which places the burden to pay on the shoulders of those who can afford it⎯and keeps it off those who cannot⎯is referred to as progressive. How did progressive tax code become the new evil? Besides a bunch of rich whiners, who is pushing for change in tax policy? We have a higher percentage of wealthy living in Vermont than in many other states. If the number of wealthy leaving the state is to be used as a barometer of tax code fairness, then I would suggest that high taxes aren’t driving them out fast enough.
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Anne – Thanks for the effort to bring the Tax Reform Commission’s work to center stage. I found the Commission’s report well done and absent of any agenda to raise, lower or keep the same Vermont’s tax burdens. It is a sensible and Vermont specific review of important structural issues in our tax system.
Your review above does have one major flaw.
After describing the Tax Foundation as “conservative”, you reference their analysis that Vermont’s tax burden ranks 8th highest among states. You then proceed with a lengthy critique of the “problem with the Tax Foundation’s….ranking” that discusses in depth Vermont’s marginal income tax rates and how these differ from effective income tax rates. You quote other analysts and observers in this regard without reference to their conservative, liberal or progressive leanings.
The Tax Foundation’s analysis, however, is based on tax burdens – the amount collectively paid relative to income – and is thus structured to reflect effective tax burdens independent of the many marginal income tax rate structures among states. Further, the Tax Foundation analysis was not based on just income tax burdens, but on a broad array of taxes reported annually to the U.S.census including the sales tax, property tax, and corporate income tax burdens among others. Here is a link to the Tax Foundation’s analysis and methodology. http://www.taxfoundation.org/files/sr163.pdf The Tax Foundation found the overall tax burden in Vermont to be 10.3% of income, ranking us as noted at 8th highest among states.
The Vermont’s Tax Reform Commission also independently presented an analysis of tax burdens on page 24 of their report which you did not reference. The Commission’s focus was only on the income, property, and sales tax (all of which are included in the Tax Foundation analysis) and found Vermont’s tax burden relative to income to be between 8% and 10% depending upon income. Given the Tax Reform Commission’s more limited scope relative to taxes analyzed, the tax burden findings of the Tax Foundation and those of Vermont’s Tax Reform Commission are not demonstrably incompatible.
Also, some other data points are helpful to appreciate Vermont’s relative tax burden such as these:
http://www.census.gov/compendia/statab/2011/ranks/rank33.html
http://www.census.gov/compendia/statab/2011/ranks/rank29.html
http://www.bea.gov/newsreleases/regional/gdp_state/2010/pdf/gsp1110.pdf
Vermont is clearly a middle-of-the-road state economically, with per capita income ranking at 24th, household income ranking 20th, and Gross State Product per capita ranking 37th. The ability of Vermonters to support government services is relatively constrained, a circumstance well understood by Governor Dean, Governor Douglas and most recently, Governor Shumlin.
Finally, you mentioned only briefly the Tax Reform Commission’s profile of Vermont’s high income taxpayers located on pages 39 – 41 of their report. For the sake of ease, I’ve pasted the entire narrative below given the on-going discussions about higher taxes for Vermont’s wealthy. (Access to the referenced charts can be obtained by using the link to the full report above.) The further analysis of these high income returns reveals a very sizable portions are at or near 65 years of age. While further taxes on the rich may be the appropriate path at the national level, in Vermont it substantially leads to higher taxes on the savings of aging Vermonters – some wealthy but many not – who diligently nurtured an asset in preparation for their retirement. Further, given the changes in tax law in 2010 over the Governor’s veto, starting this calendar year even the elderly lose the 40% capital gains exemption on such assets.
High-Income Earners Versus High-Income Events
Next, the Commission examined the behavior of high income tax filers over time. Conventional wisdom holds that Vermont is dependent on a few high-income taxpayers and that we are at risk if they move out of state. While there is no doubt that Vermont is very fortunate to have some wealthy residents who choose to maintain their residence here and could move if they wished, what the analysis shows is that the number of taxpayers in the top income brackets is not a fixed population each year but rather, in most cases, event driven. Whether from the sale of investment property or a business, high income is often a one-time event.
The Commission examined data that tracked high-income taxpayers in Vermont over a nine-year period. There were 3,926 Vermont taxpayers who had adjusted gross income (AGI) of $500,000 or more in any one year during 2000–2008. More than half of these taxpayers had high income in just one year; only 3.5 percent had an adjusted gross income of $500,000 or in all nine years.
The natural question raised by this data is: Where do these taxpayers go in the tax system as their income dips below $500,000? The Commission examined 2007 as a representative tax year to determine the year-to-year volatility for high-income taxpayers.
The following chart uses 2007 as the base year, when there were 1,656 taxpayers with income above $500,000, and then provides data on which income class those taxpayers were in the previous year and the following year. In 2008, for example, 101 of 2007’s high earners had dropped to an Adjusted Gross Income between $100,000 and $150,000; forty-nine had dropped to under $25,000 Adjusted Gross Income.
High-income earners are not a solid block of consistent interests; rather, they comprise a patchwork of tax filers that may have high income one year and then return to a much lower bracket never to return to high-income status again.
All the Commission can say is that the conventional wisdom is not supported by the data. Furthermore, the Commission encourages Vermonters to abandon the discussion of what wealthy Vermonters are doing based on their taxes. Such speculation is murky and, even if it were not so, it is questionable and dangerous to design a tax code for fewer than 200 people.
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Mr. Pelham is misrepresenting the facts on the ground.
In support of the Tax Foundation’s misleading reports, he said that their “analysis…is based on tax burdens – the amount collectively paid relative to income – and is thus structured to reflect effective tax burdens independent of the many marginal income tax rate structures among states.”
The Tax Foundation ranks states based on per capita tax “burden” (note how they don’t call it tax “obligation”). As was made very clear in Part 2 of the JFO Tax Study, per capita figures mask significant differences in the effective rates for people at different income levels. Ranking us 8th is just silly, as are all such aggregate rankings. We’re in the middle of the pack for almost all income classes. I’m a little surprised that Mr. Pelham would keep shilling for the Tax Foundation at this late date.
He also said that “Vermont is clearly a middle-of-the-road state economically, with per capita income ranking at 24th, household income ranking 20th, and Gross State Product per capita ranking 37th. The ability of Vermonters to support government services is relatively constrained…”
Actually, those three measures are not terribly useful as indicators of our ability to pay for government services. As with per capita tax “burden,” per capita income tells us nothing about the distribution of income. Likewise, household income is the median, which also tells us nothing about the capacity at the high end.
And finally, Mr. Pelham said that “While further taxes on the rich may be the appropriate path at the national level, in Vermont it substantially leads to higher taxes on the savings of aging Vermonters – some wealthy but many not – who diligently nurtured an asset in preparation for their retirement. Further, given the changes in tax law in 2010 over the Governor’s veto, starting this calendar year even the elderly lose the 40% capital gains exemption on such assets.”
Wow. Turn down those violins.
1. If the taxes are only on the wealthy, then it won’t affect those who aren’t. In fact, according to the Tax Department, there were only 1,400 Vermonters over 65 who earned more than $200,000 in 2008; that’s less than 2% of all those over 65.
2. The 40% capital gains exemption has only been around since 2003 so it’s not exactly a cherished tradition. Somehow we managed for the last 50 years without it (and only a handful of other states have anything like it AND it cost the state over $150 million in lost revenue in just five years; the vast majority going to the wealthiest among us).
3. Long-term capital gains are taxed at a lower rate than regular income at the federal level.
4. It is estimated by ITEP / PAI that the recent reauthorization of the Bush tax cuts will net the wealthiest Vermonters a $190 million savings (and that’s after years of already enjoying the Bush tax cuts).
The arguments don’t seem to change, but neither do the facts.
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Well, so be it. I guess in Mr. Hoffer’s eyes I’m simply a silly shill because I dared reference statistical measures such as averages and medians published by the Tax Foundation, the U.S. Census and U.S. Bureau of Economic Analysis. Shameful for sure!
But Mr. Hoffer cherry picks from my post. My discussion of tax burdens included not only references to the above simple averages and medians, but incorporated an explicit reference to the Tax Reform Commission’s analysis on page 24 profiling the distribution of tax burdens in Vermont by income group – a.k.a. “facts on the ground” maybe? I fully understand there are no statistical silver bullets that tell an entire story in one measure.
Regarding taxing the wealthy and the Bush tax cuts, I’ve offered my opinion on that here http://vtdigger.org/2010/12/10/pelham-good-faith-negotiators-needed/ on Vt. Digger. Regrettably, President Obama and the Congress didn’t agree. However, here, on-the-ground in Vermont, it may be Mr. Hoffer’s desire to raise state taxes on the one-time retirement savings of the elderly to fuel Mr. Hoffer’s sense of “obligation” to himself and others, but that’s not my view. Even if someone is cashing in an apartment building, an auto body shop, a country store, whatever, that’s been nurtured over the years for a few hundred thousand, or even a million, to fund retirement, a safe investment in a five year Certificate of Deposit at the credit union only pays 2.4%. Even at a million dollars, a yield of $24,000 annually, plus social security, is likely not enough to include a golf membership in the retirement package. Besides, there is always the estate tax on the retirement savings of those who can truly fund a high end retirement.
In Hoffer v. Dept. of Taxes Mr. Hoffer pursued his point of view all the way to the Vermont Supreme Court. At issue was whether or not he deserved a higher educational property tax prebate payment on a property co-owned with another. Mr. Hoffer lost his case, with the Court finding in one instance that “Petitioner’s so-called “irrebuttable” presumption is not irrebuttable.” One can read the case here: http://libraries.vermont.gov/sites/libraries/files/supct/177/2003-547eo.txt Mr. Hoffer pursues his beliefs with both passion and little doubt, but as the Supreme Court found, he can be totally wrong. Dismissing others and their points of view with pejoratives such as being a shill or silly doesn’t strengthen his case either.
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Mr. Pelham just can’t let it go.
The fact that the Tax Foundation uses official government data does not prevent them from misusing it in order to mislead people. The measures used by the Tax Foundation have been refuted by both the Joint Fiscal Office and now the Blue Ribbon Tax Commission.
For example, Mr. Pelham refers to “simple averages” as if that is enough to soothe a skeptic’s nerves. But as I pointed out, the average in question is per capita, which is quite simply the wrong measure for this task.
As for tax burdens and the Tax Commission’s analysis on page 24, I fail to see how that helps his case. Page 24 includes a graph with data from ITEP (that I have referenced for years). It shows clearly that the top 5% of Vermont filers pay a lower percentage of income for all state and local taxes than the middle class.
Moreover, and to Mr. Pelham’s point, this data does not show that “the tax burden findings of the Tax Foundation and those of Vermont’s Tax Reform Commission are not demonstrably incompatible.” Quite the contrary.
The Tax Foundation said that Vermont’s “burden” was 10.3%. The ITEP data used by the Tax Commission showed a range from just over 8% to just under 10% depending on income. The Tax Foundation approach is a blunt instrument that ignores critical nuances in the data. In contrast, the ITEP approach shows quite clearly that a single number cannot fairly represent all Vermonters.
The thought of raising taxes on the wealthy has moved Mr. Pelham to become a story teller instead of an analyst. He waxes eloquently about the “one-time retirement savings of the elderly” and their meager retirement income under attack by meanies like me.
Let’s try a hypothetical. Regardless of the source of the income, the income tax on $1 million in Vermont is about $80,000 +/-. Thus, the $1 million becomes $920,000. Invested at 2.4% as Mr. Pelham suggests (rather low for those with such assets), it will produce $22,080 per year. If we raise the effective tax on the wealthy by 10%, the tax liability increases to $88,000. The amount remaining for investment is now $912,000 and the annual return = $21,888. That’s a decline of $192 per year.
It is interesting that Mr. Pelham chose to tell a story about a Vermonter with a million dollar asset who has no retirement except interest income and Social Security. How likely is that? No business retirement account? No IRA or 401K? We don’t know the answer but we can’t let a lack of information get in the way of an anecdote.
Moreover, he latched onto the finding about people moving in and out of the top bracket but his example represents a tiny portion of filers. That is, the Tax Commission said that some of those who report top earnings do so because of a single event and then drop back to some other income class. Mr. Pelham’s example was someone whose income after the sale of an asset would be under $50,000 (the $24,000 investment income plus Social Security). In fact, less than 3% of filers fit that profile. But hey, it was a good story.
Sadly, Mr. Pelham ends with a reference to a lawsuit that has no bearing on this discussion and which he mischaracterizes. I’m headed out but will return to this later today.
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Pelham, have you been reduced to introducing someone’s legal filings in a debate about numbers? Really?
For someone so opposed to taxing as you Tom, I think it should be pointed out that as tax commissioner your arbitrarily re-interpreted Vermont law regarding developmental home providers and taxable income – all on your very own.
Of course the fact that this resulted in instantaneous tax increases in the thousands of dollars on a large number of unknowing Vermonters didn’t hinder your re-interpretation of Vermont law one iota. We can call this short lived attempt by you, Mr. Pelham, as The Pelham Tax!
But then again maybe, Tom, you prefer raising taxes on the lower incomes rather than those with high incomes.
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Rama…. For the record, please read on and reveiw the letter to Speaker Symington below.
A Tax Department audit found that some, but not all, contractors to the state providing in-home care to developmentally disabled clients were not reporting income from these contracts as required by law for purposes of income sensitivity, thus receiveing a higher benefit then allowed by law. This stirred a controversy as it appeared that, despite the clear language of the law, some staffers at the Agency of Human Services advised contractors that such payments were not required to be reported. Possibly, this occurred because such payments are not required to be reported for state and federal income tax purposes.
Below is a letter to then Speaker Symington from then Secretary Mike Smith addressing this issue. Please note the position of the League of Cities and Towns and current Tax Commissioner Mary Petterson, who at the time was a State Representative. Both supported the resolution of this issue endorsed by the Tax Department. In the end, the Legislature fully cost shifted this tax exemption onto property tax payers and properly, Rep. Petterson did not sign the conference report and the Governor refused to sign the bill but let it become law without his signature.
Representative Gaye Symington
Speaker of the House
State House
Montpelier, Vermont 05602
Dear Speaker Symington:
I know you to be a strong defender of the Education Fund and that you speak often against the use of Education Funds for non-education purposes. Most recently, you opposed “raiding the education fund” to support development incentives for affordable housing. In view of your strong beliefs in this area, I write to seek your help with H. 274.
As you know, last session a compromise was achieved by the legislature relative to the exemption of payments to providers of adult foster care for persons with developmental disabilities for purposes of property tax rebates and prebates. These payments are already tax exempt at both the state and federal levels. The compromise allowed that the first $6,500 of such payments be exempt, consisted with a limited number of other such exemptions.
This year, pursuant to the recommendation of Commissioner Flood, the Administration adopted the $6,500 exemption and also included $450,000 of non-education funds in the DAIL budget to increase payments to these providers. The House agreed, and adopted this position in the Appropriations Act. However, in a separate bill dealing with technical definitional issues relating to foster care, H. 274, the Senate charted a different course.
Here’s what Steve Jeffrey of VLCT said of the Senate’s action.
“The Senate Health and Welfare Committee has proposed an amendment to H. 274 that will totally exempt these payments from the definition of household income in determining property tax adjustments under Act 60. As these payments will be deemed not to be income, these caregivers’ income is reduced, meaning that they pay less in education taxes, which means that everyone’s property taxes will go up to make up the difference. ……VLCT has testified in opposition to such an exclusion because it is yet another attempt to shift more costs onto the property tax and is a new use of the state Education Fund……”
Further, Jeffrey’s argues:
“The ‘slippery slope’ or the ‘camel’s nose under the tent’ are pretty popular sayings in the State House. This example is a good one where we see more opportunity for the state to offload its obligations onto the property tax.”
In consideration of the above, the Administration and the House took the proper course. I think we can agree that many workers in both the private and public sector have undertaken difficult jobs at modest wages, yet their incomes must be reported in order that they pay their fair share under Vermont’s income-based property tax system. For these adult foster care providers, whom everyone agrees provide a valuable service, both the Administration and the House directly increased their payments, while the Senate redirected the funds set aside for these providers to other purposes, and shifted the burden onto the Education Fund.
Unfortunately, two of the House members of the Conference Committee on H. 274, after a couple of brief meetings, conceded to the Senate’s position. Only Representative Petterson, on behalf of the House Ways and Means Committee, has indicated she will not sign the Conference Committee report. I have to believe, given the original position of the House on this matter and your strong opposition to raids on the Education Fund that your views are more in accord with Mr. Jeffrey’s and Representative Petterson’s.
I would like to meet with you at your earliest convenience to see how we might restore the House’s position on this matter. I know the Governor will not sign H. 274, yet we all desire to ensure proper funding for these human service providers. As this matter is still a point of disagreement in the Appropriations Conference Committee, if it can be resolved there in favor of the House’s position, the House can then reject the Conference Committee report on H. 274. This course would both protect the Education Fund while providing increase payments to these adult foster care providers.
Thank you for your attention to this matter.
Sincerely,
Michael K. Smith
Secretary
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I have not read the Tax Commission Report, only articles about the report, such as this. So far I have not heard anything about beefing up enforcement of tax laws. Every year we hear news reports about estimates of how many people or businesses have not filed tax returns, or who are in arrears with their taxes. This happens at the federal, state and local levels.
For example, in Rutland City they keep having to raise the Water and Sewer rates for various reasons. But one of the reasons is that some businesses are not paying their water and sewer bills, so they end up sticking it the rest of the taxpayers (year after year). Rutland City contracts out with businesses in Rutland Town, and some of them don’t pay their tax bills (i.e. Diamond Run Mall).
In addition to the proposed tax reforms by the Tax Commission, I think at the state level, Vermont should do a better job at beefing up enforcement and go after the tax cheats, tax evaders, etc. That could help to lower the tax rates, albeit slightly. I realize enforcement requires further tax spending to pay for the investigators and collectors. However, it would send a message that Vermont is not going to be taken as a chump. It’s just not fair to the rest of us who pay our taxes!
Turning in tax cheats to become more profitable
http://www.wcax.com/Global/story.asp?S=13846300
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And that changes what you did how?
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VT needs to raise taxes, use the rainy day fund and put an end to cutting human services for the disability community!
Incluson is a Birthright not a PrIVALAGE!
SAVE OUR STATE!