The House Ways and Means Committee approved a bill on Friday that would increase taxes by $23.3 million next year and an additional $25 million in fiscal year 2015 (for a combined total of $48 million in new revenues for 2015).
The legislation increases the meal tax by 0.5 percent (from 9 percent to 9.5 percent) for one year. It also removes a sales tax exemption on soda, candy, bottled water, dietary supplements, vitamins, vending machine food and clothing purchases of $110 or more. Cigarette taxes go up by 50 cents a pack under the plan. The proposals, if enacted, would go into effect immediately.
Of the $23.3 million generated, $3.3 million will go into a reserve fund, as requested by the House Appropriations Committee, according to Rep. Janet Ancel, chair of House Ways and Means.
Lawmakers also approved a three-pronged change to the income tax for fiscal year 2015. The bill puts a cap on itemized deductions, reduces the number of tax brackets from five to four and introduces a “pull up” for upper income taxpayers.
The total increases of $48 million in 2015 are counterbalanced by a repeal of the employer health care assessment of $15 million and a potential repeal of a 0.5 percent meals tax, totaling $4.2 million. These overall reduction in 2015 total $19.2 million. The net new revenue that year would be $6 million.
Ancel said the committee’s tax proposal “raises less revenue than the governor recommended in his budget.”
“His budget included more than $34 million, and we are recommending new FY14 revenue of $23 million,” she said. “We also had discussions with the Appropriations Committee about the need to put anything over the $20 million we had targeted into reserves, and we are pleased to see that’s what happened. No one wants to pay additional taxes but we focused on those most able to pay and on things that are discretionary such as candy, soda and cigarettes. We didn’t raise tax rates and we didn’t take money from low income working families. Every member of the committee had to make compromises and as a result our tax package is balanced and I believe it maintains equity and fairness.”
The proposal raises an additional $20 million next year as part of an attempt to eliminate a persistent $50 million gap between state spending and tax revenues. During the Great Recession, that gap was much wider, in the hundreds of millions of dollars, and federal stimulus funds were used to close the hole. In 2011, those federal dollars began to dwindle. Simultaneously, state tax revenues slowly rebounded. But over the last several years, tax receipts haven’t come back to projected levels, and year after year, the executive and legislative branches have used “one-time money,” that is temporary funding from a variety of sources to cover the gap. This year the Shumlin administration is using about $50 million in one-time funds to pay for base budget spending. That means next year will begin with a $50 million shortfall unless the economy recovers more quickly than expected.
The legislative tax proposals will be voted on in the full House next week. The package is designed to replace Gov. Peter Shumlin’s revenue package, which included a $17 million cut to the Earned Income Tax Credit program and another $17 million from a 10 percent tax on “break open” tickets, a form of charity raffle. The new revenue streams were designed to pay for $46 million in new expenditures on subsidies for childcare, a 3 percent reduction in the Medicaid cost shift to providers, funding for higher education, premium subsidies for Catamount Health and VHAP patients and a new thermal efficiency program.
The Legislature rejected both of the governor’s primary funding sources — EITC and break open tickets — for the new programs.
The governor returned the favor on Friday when he issued a statement bashing the committee’s tax proposals.
“I know that the House is working hard on the FY14 budget, and while I appreciate that they support funding many of my priorities, I disagree strongly with the manner in which the Ways and Means Committee has chosen to raise revenue,” Shumlin said. “I have repeatedly opposed increases to income, meals, and sales taxes, and yet this proposal hits all three. Rather than reallocating existing funds more efficiently to achieve better outcomes as my budget recommends, the committee proposal increases Vermont’s already high tax burden. Luckily, we are only part way through this legislative session and I look forward to working with the legislature to ensure that we end up with a responsible budget acceptable to all of us.”
Lawmakers at one point on Friday morning contemplated a provision that would have tapped about $8.4 million in EITC money instead of the 0.5 percent meals tax. Rep. Bill Johnson, R-Canaan, pitched the idea, and it failed 5-6 in a straw poll vote. Several committee members, including Rep. Jeff Wilson, D-Manchester, said they could support taking $1 million to $2 million from the EITC program. The chair of the committee, Rep. Janet Ancel is adamantly opposed to any EITC cuts because she says it would hurt families that are already struggling financially.
The final proposal, which includes a one year sunset of the meals tax increase, passed 8-3. Reps. Johnson, Adam Greshin, I-Warren, and Patti Komline, R-Dorset, voted against the sales, meals and income tax package.
CLARIFICATION: The tax bill also includes a repeal of the employer health care assessment in 2015. The original story did not include this information. The amount raised in 2014 was also corrected; original estimates were $26 million, but by late Friday the total had been adjusted downward to $23.3 million.
Editor’s note: This story was updated at 4:45 p.m. March 23 with a quote from Janet Ancel.
