House Speaker Shap Smith. VTD/Josh Larkin
Speaker of the House Shap Smith says fundamental changes to the tax code proposed in the last legislative session may not be ready for prime time when lawmakers return to Montpelier. Smith said no final decision has been made, but he’s not sure if the House will take up reforms to the income and sales tax systems this year or in 2013 (after the next election cycle).
“I wouldn’t take anything off the table for 2012,” Smith said, including property tax reform.
The Blue Ribbon Tax Structure Commission issued a comprehensive report to the Legislature last session that proposed significant changes to the income and sales tax systems. The panel advised the Legislature to levy income taxes based on adjusted gross income instead of taxable income. Commission members argued that the existing tax structure is to blame for Vermont’s bad rap as a high tax state.
Vermont is one of 10 states that assesses individuals on taxable income, or the reduced income taxpayers claim after they have taken itemized deductions. Thirty-three states, including the New England contingent, all apply tax rates to adjusted gross income, or income before deductions. In addition, Vermont has a “wedding cake” tax structure, in which five graduated rates, from low to high, are applied to tiered layers of income. If you make $500,000 a year, for example, you pay five different rates on that income — highest rate, 8.95 percent, applies only to the highest bracket of income.
The effective rate, or the amount paid by Vermont taxpayers, on average is about 3 percent. The wealthiest Vermonters pay about 5.4 percent on average.
The commission proposed to lower all the rates, compress the five current tax brackets into three and offer a modest residential tax credit for Vermonters in lieu of a mortgage deduction. It also recommended lowering the sales tax and applying the levy across the board on all goods and services, except medical treatment and prescription drugs.
Last year, newly installed Gov. Peter Shumlin, a Democrat, disparaged the commission’s recommendations and revived former Republican Gov. Jim Douglas’ anecdotes about wealthy residents leaving the state.
Not long after, the proposals were shelved.
Smith says he wants to take action on the commission’s recommendations once Congress has presented changes to the federal tax code. The Speaker pointed to the Super Committee’s discussions and the Bowles-Simpson recommendations as signs that the federal government may be moving forward with tax reform. Smith said the Bowles-Simpson report wasn’t “that much different from what the Blue Ribbon Tax Commission was talking about.”
To embark on a wholesale change to the income and sales tax systems would require a great deal of taxpayer education, particularly around the impact of the elimination of charitable donation and mortgage and interest rate deductions.
“There is a question whether the groundwork has been laid for transition that would happen for income tax reform and that is reduction for deductions,” Smith said.
Charitable and mortgage and interest deductions are a wash for most taxpayers, Smith said, “but I’m not sure whether those people who have interest in mortgage deductions or charitable donations will see it that way.”
Smith, who was one of the House Ways and “Meanies” before he became Speaker, said he has a personal interest in tax reform. The biggest hurdle, he says, is helping people, especially charitable organizations and real estate professions, understand what a change in the tax code would look like.
“I think Vermonters, once they’re presented information about how they would do under the current and the new system, I think would agree a change would make sense, but that takes education,” Smith said.
The Legislature recently hired a consultant to review the state’s Education Finance System this year. As for whether the Legislature will take a look at property taxes in the coming session? Smith says, “Stay tuned.”
Read VTDigger.org’s previous reports on the Tax Commission findings:
http://vtdigger.org/2011/02/15/tax-reform-part-4-solving-the-pr-problem/
http://vtdigger.org/2011/02/03/tax-reform-part-1-where-policy-meets-politics/
http://vtdigger.org/2011/02/07/tax-reform-2-broaden-the-base-lessen-the-rate/
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Be on the look out in January 2013 for the VT income tax change from fed taxable to AGI, with the finacing package for Green Mountain Care.
This will bring some of the addiitonal money needed to fund the state’s structural deficits and Green Mountain Care’s shortfall over the necessary payroll tax receipts. Of course it’s being scrapped for now–it will be terribly unpopular in an election year, 2012.
The Blue Ribbon Tax Commission’s work was to be “revenue neutral”. Perhaps their concept was, but the state can ramp up the rate after the design change and institute a hefty tax increase.
The state’s structural budget deficits, cost of Irene and future cost of the public health care plan indicate higher taxes in the future for the 56%+ of Vermonters who pay taxes!
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The assertion that 44% of working Vermonters do not pay taxes is not true and a disservice to our low-income neighbors.
Everyone that works pays federal payroll taxes. Everyone that lives in Vermont pays sales taxes. Everyone that drives in Vermont pays gas taxes and related fees. Everyone that eats a meal out or buys a beer pays meals and alcohol taxes. Everyone that owns a home in Vermont pays education and municipal property taxes. And everyone that rents pays property taxes as a part of their rent.
Indeed, I have no doubt that some low-income Vermonters pay a higher percentage of income in taxes than some of our wealthy neighbors.
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Wendy Wilton wrote: “The state’s structural budget deficits, cost of Irene and future cost of the public health care plan indicate higher taxes in the future for the 56%+ of Vermonters who pay taxes!”
Doug Hoffer responded: “The assertion that 44% of working Vermonters do not pay taxes is not true and a disservice to our low-income neighbors.”
I agree with Doug, except I believe that many non-working Vermonters also pay taxes. That is a small nit compared to Wendy Wilton’s division of Vermont into the 56% who pay taxes and the implication that the other 44% do not.
I have read Ms. Wilton’s point of view regarding the potential costs of Green Mountain Care. Obviously, her analysis is speculative … but there is nothing wrong with speculation when so much is undecided. Yet, by regurgitating the myth of the national right-wing deception machine that so many Americans do not pay taxes, she certainly undermines her own credibility and forfeits any benefit of the doubt folks might have been inclined to give her.
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I did not say that 44% of working Vermonters do not pay taxes. What I said is that 56% of Vermonters DO pay taxes (property and/or income)–whether they work or not.
Of the 44% who do not pay taxes, some work, some don’t. Some are retired and paid a lifetime of taxes already.
My point is that costs are going to increase due to these fiscal issues and therefore, without a change to the tax code, this will mean an increase for those who are already footing the bill. Just sayin’.
Pay attention to the words guys. Thanks!
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According to the Census Bureau, 80% of Vermonters are 18 years or older. Except for those who are institutionalized, it’s nearly impossible to live in Vermont (or any other state) without paying taxes of one kind or another. So how can it be that only 56% of Vermonters pay taxes? What is the source of your 56% figure?
As for paying attention to the words, I note that you first said “taxes” but now say “property and/or income” taxes. Are you excluding sales taxes? Gas taxes? Meals and alcohol taxes? Which is it?
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“I did not say that 44% of working Vermonters do not pay taxes.”
and then
“Of the 44% who do not pay taxes, some work, some don’t.”
How can this person’s analysis be taken seriously?