Editor’s note: Don Keelan is an accountant who lives in Arlington.
If the Vermont State Legislature decides to take up the Blue Ribbon Tax Structure Commission’s final report (1/13/11) Montpelier’s environment could become irascible.
The commission’s report, which was done under the auspices of Act 1, Section H.56 of the 2009 Special Legislative session, contains multiple “minefields” within its 185 pages (including the minority report).
While much of the press coverage has dwelt with the suggested changes on how the state calculates income for income tax purposes as well as sweeping changes to the base that sales taxes will be assessed, there are other radical proposals.
Buried deep within the report, specifically, on page 55, under the heading ‚’Property Tax’ there is this comment:
“It is not clear to the commission why property tax exemptions function like a light switch, turning either on or off. The ability to pay property taxes is typically not an all or nothing proposition. Yet, large non-profits and wealthy colleges are exempted the same as clapboard churches and community non-profits. Therefore, the Legislature ought to consider sliding scale property taxes for various classes of exempt properties.”
It is well known that the Sixth Estate, Vermont’s tax-exempt organizations, are a major force to be reckoned with. They number over 8,000 and have a significant impact on Vermont’s employment and economy. Furthermore, with tens of thousands of acres under their control, along with hundreds of millions of dollars in buildings, it is not surprising the Commission is suggesting that they be taxed on their real estate holdings.
Many nonprofits are real estate rich — they are also “cash poor.” Their donations, whether from the public or the state are down as well as visitors. This comes at a time for many NFP’s where there is a significant increase in demand for their services.
It will be unfortunate if Vermont’s NFP organizations will have to redirect their already scarce financial and human resources to defend against this potential minefield, but they will have no choice.
The report also contains one of the most disingenuous statements on taxes I have ever read — and I go back to 1963, when I first became a student of tax law.
The report notes that the state’s individual income tax rate should be reduced — from 9 percent to 7 percent. Well that’s fine, but read on — “And also we need to have the tax rate apply to adjusted gross income and not taxable income.” A simple analysis demonstrates the duplicity of the committee’s proposal:
| Current Law | Proposed | |
|---|---|---|
| Adjusted Gross Income | $100,000 | $100,000 |
| Federal adjustments for exemptions, standard or itemized deductions | ($30,000) | none to be allowed |
| Taxable Income | $70,000 | $100,000 |
| Tax Rate for State | 9% | 7% |
| Taxes due to Vermont | $6,300 | $7,000 |
Nice try!
Now for a few words on that portion of the commission’s report that will have a broader and far reaching impact‚Äîsales tax. The commission is suggesting that the sales tax be lowered from 6 percent to 4.5 percent. But wait! The commission recommends a watershed of products and services that should be taxed. These range from legal services to haircuts — to use the commission’s words “Levy the general sales tax on all consumer-purchased services with limited exceptions for food, certain health and education services….”
Take for example the closing costs for a $150,000 house.
| Costs: | |
|---|---|
| Lawyer’s Fee | $700 |
| Surveyor | $300 |
| Engineer | $300 |
| Repairs (labor) | $5,000 |
| Broker (buyer) | $5,000 |
| Inspection | $200 |
| Title insurance | $500 |
| Fill fuel tank | $875 |
| House cleaning | $200 |
| Total costs | $13,075 |
| Tax rate | 4.5 percent |
| Taxes Due | $588.37 (additional cost to acquire a home) |
The above is an illustration of the application of the proposed sales tax. Just how long the base rate will stay at 4.5 percent is anyone’s guess? Will house cleaners, snow removal and grass cutting firms be capable (or willing) to collect and report sales taxes? I don’t think so.
The only winners that I can foresee if in fact the Legislature takes up the Blue Ribbon’s Tax Structure Commission report will be the lobbyists. The associations that represent the professions, the NFPs, the construction trades, the fuel dealers and others will be out in force — unlike anything Montpelier has ever witnessed.
Montpelier is working on closing a $176 million budget deficit (FY2012) and the atmosphere is becoming contentious. Maybe it would be a wise move for the commission’s report to be placed on a shelf for the time being?
