UPDATE: House Ways and Means is now considering a 1 percent increase in the meals tax, which would generate $8.4 million in tax revenues in fiscal year 2014.
The Legislature’s tax writing committee is narrowing the menu of options for new revenues. The House Ways and Means Committee started out with a smorgasbord of proposals last week. Rep. Janet Ancel, chair of the committee, put the whole groaning board of $140 million worth of possible tax revenues on the table and lawmakers have been assiduously examining data and listening to constituents and businesses.
After a day and a half of testimony from business groups on Tuesday and Wednesday, and yet more detailed information from the Joint Fiscal Office, lawmakers are inclined to put the state on a diet of small changes to the tax code this year — just enough to cover an anticipated gap between state General Fund spending and state revenues for fiscal year 2014.
House Speaker Shap Smith has charged House Ways and Means with finding $20 million in new revenues this year to cover a gap between state spending and anticipated revenues. Lawmakers are devising a fairly dramatic rework of the Shumlin administration’s budget after panning the governor’s proposals to tap about $40 million from break-open tickets, the Earned Income Tax Credit and dropping $6 million from the state’s welfare program.
The $20 million, Smith says, would cover increased costs in the fiscal year 2014 budget associated with the low income heating assistance program (about $8 million), a buyback of the governor’s proposed $6 million cut to welfare, $3 million for the Clean Energy Development Fund (a proposal to charge 55 cents per month per electric meter to replenish the fund won’t see the light of day), and $3.5 million to shore up the finances of the Vermont Veterans’ Home in Bennington.
Income tax proposals for next year could be a different story. Lawmakers are looking at caps on the mortgage interest deduction and all itemized deductions, and the elimination of one of the five tax brackets. Any one of these proposals would generate a substantial amount of ongoing revenue, starting in 2015. The Legislature would need to put alterations in place now in order for the changes to go into effect by the 2014 tax year.
Though the committee is loath to tamper with income tax changes, the majority of members believe they have no choice.
Joint Fiscal Office estimates show that next year’s budget has a built-in $50 million gap because the Shumlin adminstration has heavily relied on one-time funding to balance the fiscal year 2014 budget. The governor also eliminated all of the state’s reserves — about $30 million worth. That leaves state coffers almost completely empty at a time when federal cuts will be $5 million to $10 million in the near term and further reductions to the state’s $1.8 billion in annual federal funding (out of a total budget of $5.15 billion) are unknown and likely. (The projected budget stabilization fund, which functions like a back-up cash pool for the state’s checking account, is $62.5 million.)
In addition, the state has large unfunded liabilities and programs, including about $23 million in annual health care costs for teacher retirees; $150 million in recommended annual information technology investments and $156 million a year in Lake Champlain cleanup efforts.
The state’s health care exchange under the Affordable Care Act is also adding a new burden to the base budget of $15 million to $18 million a year.
On and off the table
House Ways and Means will vote today to recommend tax increases for fiscal year 2014 and 2015. Two other major pieces of legislation are coming up against the “money bill” crossover deadline on Friday — the much-anticipated Big Bill (the budget) out of House Appropriations, and the capital bill, which will be advanced by the House Institutions and Corrections Committee.
Tax changes are tied to the budget-writing process, and the speaker and committee chairs of House Ways and Means and Appropriations have been meeting on a continual basis to hammer out options.
In a straw poll of Ways and Means members on Wednesday evening, the majority was interested in taking small bites of the tax apple for fiscal year 2014.
Sales tax exemptions on soda, candy and bottled water (a total of $8.2 million) have the support of the majority of the committee members. Most want to reinstate the “cloud tax” on software downloaded from the Internet, which would generate $1.5 million in tax revenues. There also appears to be broad agreement on increasing the cigarette tax by as little as 38 cents or as much as $1 (the latter would generate $7.4 million).
So far, however, the items on which lawmakers have reached a tentative, preliminary agreement do not add up to the magic number of $20 million. Together, the aforementioned items total $16 million. That means lawmakers on Friday will have to come to consensus regarding even less delectable options like taxing vending machine sales ($1.3 million), vitamins ($800,000), dietary supplements ($2.4 million) and adding a threshold for the sales tax exemption on clothing sales of $110 (purchases above that amount would be subject to the 6 percent assessment) that would generate $2.2 million.
Off the table for sure? A 25 percent a bank franchise tax (that would generate $2.6 million in revenues), the elimination of the 40 percent capital gains deduction ($10.7 million), increasing the top income tax rate from 8.9 percent to 9.4 percent ($5.4 million), a sales tax on car washes ($800,000) and a tax on all clothing and footwear sales ($24.9 million).
Lawmakers also have definitively ruled out a 5 percent tax on satellite TV services after they received a deluge of correspondence from constituents who were angry about the increase because it would have amounted to a $55 per year increase in rates. As Rep. Bill Johnson, R-Canaan, put it: “I received more mail today than in my 16 years in Legislature.”
Though the committee is expected to vote on a penny-per-ounce, sugar-sweetened beverage tax, support for the proposal from House Health Care is thin. Most of the lawmakers on House Ways and Means prefer a sales tax on sodas and candy instead.
Lawmakers will also vote on a 10 percent tax on “break-open tickets,” or charity raffles, proposed by the Shumlin administration. The proposal would generate $6 million in revenue, according to the Joint Fiscal Office; the governor has said the levy would create $17 million in new taxes.
House Speaker Shap Smith has said he could support the soda and candy tax; he is also amenable to the $110 sales tax threshold for clothing and a tax on downloaded software.
The income tax, and looking ahead to next year
Inside the Golden Bubble, lawmakers — left, right and center — universally acknowledge that if this year is bad budget-wise, next year will be worse.
That’s due to a variety of factors: The slow rebound from the Great Recession that has stymied tax revenue growth; ongoing and increasing demand for state services; the state’s reliance on a shrinking supply of federal funding; the state’s commitment to using the health care exchange as a means to an end, namely single payer medical care.
The upshot? There will continue to be an ongoing gap between state spending and tax collections for the foreseeable future unless the state can cut the budget or raise new revenues.
As for the governor’s $46 million in “new spends” this year? Most lawmakers say forget about it. Though philosophically the Democratic super majority supports putting more money into child care subsidies, thermal efficiency, renewable energy and reducing the Medicaid cost shift borne by medical providers, lawmakers say they are not willing to take money from the Earned Income Tax Credit program for low-income working Vermonters and the Reach Up program to pay for the base increases in budget expenditures.
Rep. Adam Greshin, an independent from Warren, questions whether the Legislature should approve any new spending this year. Greshin says if lawmakers simply approved last year’s budget with “steady state” estimated costs for existing programs (including Reach Up and developmental services), an inflationary increase in the Education Fund transfer, debt service, retirement costs and pay increases for state employees, the state would actually have a $5 million surplus this year — without raising income or sales taxes.
Democratic lawmakers on the House Ways and Means Committee worry that the state’s revenues could slip further; they also want to set aside more money in cash reserves to counter federal cuts. The six Democrats on the committee seem to agree that if they don’t raise taxes now, it will be difficult to do so next year when the budget could be even tighter.
Rep. Patti Komline, R-Dorset, says she has a hard time justifying income tax increase for 2015 without knowing what the money is for. “I find it a really depressing process that is arbitrary and subjective,” Komline said. “I feel we’re being asked to be thugs, picking out people to loot without even knowing what the money is used for.”
Ancel wants to eliminate the employer assessment for Catamount Health. The program, which is disappearing as a result of the exchange, relied on support from businesses. Ancel says repealing the assessment would cost $12.7 million in fiscal year 2014 and $15 million in 2015.
The difference between Greshin’s proposal and the speaker’s interest in funding LIHEAP, the veterans’ home and the Clean Energy Development Fund is $20 million. While removing the sales tax exemption for certain items (and a proposed increase in the tobacco tax) creates an ongoing revenue source, it does not completely resolve the $50 million gap that doesn’t seem to go away. Nor does it address $220 million in longterm funding issues for Lake Champlain, information technology investments and health care for retired teachers.
With all this in mind, the House Ways and Means Committee is looking at structural changes to the income tax code, including:
• A cap on mortgage deductions of $10,000 or $15,000 or $20,000; these three proposals would generate $7.3 million or $3.2 million or $1.78 million, respectively. The $10,000 cap would impact 21,618 in-state income tax filers out of 77,341 residents who claim the mortgage deduction on Vermont tax forms and 3,795 out-of-state income tax filers out of a total of 12,895. The $15,000 cap would affect 6,770 in-state income tax filers out of 77,341, and 1,685 of 12,895 out-of-state filers. The $20,000 cap would impact 2,581 in-state income tax filers out of 77,341 Vermont residents, and 855 out-of-state income tax filers out of 12,895.
• Reducing the capital gains exclusion from 40 percent to 20 percent, which would raise $5.2 million
• Eliminating the bottom tax bracket in the state’s five-tiered income tax system for upper income Vermonters, which would raise $2.6 million
• A reduction in the production deduction tax for manufacturers, $4.5 million
• Placing a cap on all itemized deductions at two times the standard deduction rate or three times the standard deduction rate. This proposal, which would affect charitable contributions, would generate $26.9 million or $13.2 million respectively. Rep. Ancel says the change would have an impact on less than one-fifth of the tax breaks for donations to charities; she says most of the tax benefit comes from the federal deduction.
Speaker Smith says he could support a mortgage deduction cap, a 20 percent reduction in the capital gains exclusion and a change to the bottom income tax rate for upper income taxpayers.
Rep. Heidi Scheuermann, R-Stowe, has created a PDF called “tax bracketology” that sets up all of the tax proposal options as seeds in a bracket. By the end of today, it should be clear, which ones make the cut.
Editor’s note: This story was updated at 5:15 a.m., 5:45 a.m. and 7 a.m. Correction: Rep. Adam Greshin is from Warren, not Waitsfield as originally reported.
