The Vermont Senate has approved a bill that will raise $9.49 million in new taxes.
The miscellaneous tax bill, H.528, passed 24-5, in a largely party line vote after four and a half hours of debate. Centrist Democrats and Republicans carried the day; four Republicans and one Democrat/Progressive voted against the bill.
The legislation requires Vermonters with adjusted gross incomes of $125,000 per year or more to pay a minimum tax of 3 percent, puts a $12,000 cap on mortgage deductions, extends the sales tax to bottled water and changes the estate tax. It also puts a tax on satellite TV.
Amendments that would have eliminated proposed taxes on satellite television bills and bottled water failed. A proposal to link the $12,000 cap on mortgage deductions to the prime lending rate was withdrawn. Another measure that would have changed an estate tax proposal in the bill failed.
The Senate passed an amendment that extends a $75,000 tax credit to the wood products industry and approved another measure that continues to allow well-heeled Vermonters to take a $500 tax credit for investing in the Vermont Higher Education Investment Plan. The proposed $150,000 cap would have raised $500,000 in revenues for the state.
The upshot? The Senate is $575,000 short of its $10 million revenue goal. It’s not clear at this point how that gap will be filled.
Meanwhile, a half a million dollars short or not, Gov. Peter Shumlin says the Legislature shouldn’t be raising any new “broad-based taxes.”
“Now is not the time to raise more taxes on hard-working Vermonters,” the governor said in a statement. “Lawmakers this session have now voted to raise taxes on Vermonters’ income, clothing, meals, vending machine purchases, water, soft drinks, candy, satellite television and cigarettes. It was hard enough to ask Vermonters to pay more at the pump to maintain our crumbling roads and bridges and safeguard $56 million in federal transportation dollars. I feel strongly that there is no need to raise these additional taxes to close a budget gap of less than 1 percent. Vermonters expect us to control spending by using existing tax dollars more efficiently. We must protect our fragile economic recovery.”
A philosophical debate
The debate began with a peroration by Sen. Anthony Pollina, and as if on cue, about 500 Vermont Workers’ Center activists, gathered on the Statehouse lawn. The drumbeats and rallying cry for a “people’s budget,” seeped into the Green Room as senators embarked on a debate over just how $10 million increases in the budget would be paid for.
Pollina, a Washington County Democrat who also ran on the Progressive ticket, appealed to his colleagues to address the issue of growing income inequality in Vermont. The top 1 percent of Vermonters, he said, have seen their incomes triple over the last 10 years, and the income of residents in the upper middle class (those who make $125,000 or more) have doubled. Meanwhile, the wages of Vermonters who make $50,000 or less have declined or stagnated.
He urged senators to raise $21 million in income taxes on the state’s wealthiest residents in order to set aside money for anticipated federal cuts in fiscal year 2014 and to cover costs associated with proposed weatherization services and support for developmentally disabled Vermonters, among other human services needs.
“The people who have gained the most are going to be asked to do the least,” Pollina said.
Pollina said the state’s growing income disparity is hurting Vermont’s economy, and he urged senators to support an increase in the top marginal income tax rate from 8.95 percent to 10.45 percent (which he says is a 1 percent increase in the average effective rate from 6 percent to 7 percent) and an increase in the second highest marginal income tax rate from 8.8 percent to 9.8 percent, with an average effective rate increase of 0.1 percent.
“When we talk about taxes and the economy we talk about job creators and how we shouldn’t do anything to upset them because they are the foundation of the economy,” Pollina said. “The real job creators are middle class people. For businesses to grow they need customers, they need people to come in and buy their goods.”
Low-income workers and middle class Vermonters, Pollina said, pay more of a percentage of their income in regressive sales and gross receipts taxes than Vermont’s wealthiest residents do. On average, the middle class pays 4 percent to 5 percent; higher income Vermonters pay about 2 percent.
“When lower and middle incomes go down further, they don’t have any money to spend and they’re not generating tax revenue,” the senator continued. “That is one of the major reasons why the economy is so weak and why the economy is not going to get better.”
Ironically, it was another Democrat/Progressive, Sen. Tim Ashe, chair of the Senate Finance Committee, who rebuffed Pollina’s charge that the tax bill didn’t go far enough to raise money to pay for programs.
“We could raise an additional $21 million, but that doesn’t mean we should,” Ashe said.
The Chittenden County senator defended the process for determining the dollar figure for the revenue bill. The $10 million sum came from a “needs” estimate developed by Senate Appropriations.
“Unless and until Senate Appropriations identifies $21 million in new appropriations needs, I would urge the body to reject the [Pollina’s] amendment,” Ashe said.
Ashe has repeatedly said his committee worked to create a fair and equitable tax bill that raised no more and no less than was absolutely needed.
Sen. Peter Galbraith said he agreed with Pollina’s assessment of the state’s economic situation, and he suggested that the best way for Vermont to deal with inequality is to close loopholes for wealthy residents. Tax breaks and deductions are the state’s biggest problem, in his view. (The state gives away more than $1 billion a year in so-called “tax expenditures.”) “This bill makes some effort toward greater fairness,” Galbraith said.
Pollina’s amendment was rejected in a 7-22 vote.
Sparks fly over estate tax change
A proposal to make the estate tax more equitable was attacked by Sen. Ann Cummings.
The provisions, which are billed as “revenue neutral,” she said, creates a new “gift tax” on inheritance gifts to children that she said could make Vermont “a less desirable place to retire,” and lead to an exodus of wealthy people from the state.
Cummings, the former chair of Senate Finance, proposed a study of the estate tax options.
In a recess, committee members reviewed the amendment on the floor, and most were leaning toward the study when Galbraith insisted he would vote against the entire bill if the amendment was approved. Ashe acquiesced and said he would vote down the amendment; Sen. Bob Hartwell followed suit.
Galbraith explained on the floor that under current law, smaller estates are hit with a 35 percent tax while large estates pay 16 percent. “If we don’t fix it, families who might have small businesses who die in this year will find themselves facing a tax burden in which there is no fairness,” Galbraith said.
Cummings’ amendment passed, 17-12.
Sen. John Rodgers, D-Orleans, proposed a swap of the $1.3 million in satellite TV tax revenues and a lower mortgage interest cap ($10,000 instead of $12,000). The amendment failed.
Sen. Richie Westman, R-Lamoille, however, scored a major victory. The former tax commissioner gave a discourse on the value of 529 plans, in Vermont known as the Vermont Higher Education Investment Plan, which are designed to encourage Vermonters to save money for their children’s post-secondary education. Senate Finance wanted to eliminate a tax credit worth $500 and generate $500,000 in revenue as a result of capping the income earnings of participants to those who make less than $150,000.
The credit is vital, Westman said, to maintain the health of the fund. Without it, there is little incentive for wealthy Vermonters to invest in VHEIP. Management fees for the fund are high by regional standards.
Correction: The Cummings amendment passed; it was not voted down as originally reported.