Conference committee weighs change to tax code

On Tuesday, Gov. Peter Shumlin and legislative leaders agreed to eliminate any new General Fund taxes this year, effectively killing a number of provisions in the miscellaneous tax bill, H.528.

A day later, however, lawmakers found a way to give the bill some heft. They are considering a “net neutral” proposal that would take the state a few steps closer toward eliminating deductions, and in the view of the committee, making the tax code fairer for middle class Vermonters.

Most states tax residents based on adjusted gross income: only eight states, including Vermont, tax residents based on taxable income, or the amount taxpayers report  after they have claimed deductions.

The tax conference committee is taking a middle of the road route. Instead of going straight to AGI, and eliminating all deductions, they are looking at a cap on itemized deductions (2.5 times the standard deduction, or $29,750 total for a married couple), offering only the standard deduction and capping mortgage deductions at $12,000 (with a 3 percent minimum effective rate for Vermonters who earn more than $125,000). In the first two aforementioned proposals, the tax rates would be compressed to four and the top marginal rate would drop from 8.95 percent to 8.7 percent.

In all three models, there is no effective change in the total amount of revenues generated. That’s why the lawmaker say it is a “net neutral” proposal.

The basic idea isn’t new: It is an extrapolation of the Vermont Blue Ribbon Tax Structure Commission’s proposal from three years ago.

Rep. Janet Ancel, chair of House Ways and Means and a former tax commissioner, has been working with her committee on drawing up proposals of this sort ever since. Sen. Tim Ashe, chair of Senate Finance, is interested in making the tax code more equitable.

Though the proposals raise no new taxes in the aggregate, in the particulars there are winners and losers. The winners are middle class Vermonters who see a slight decrease in their tax burden; the losers are upper income Vermonters who would pay a bit more.

Sue Allen, the governor’s press secretary, said the proposed income tax changes are not within the parameters of the “no new tax” deal.

When Shumlin was asked about details of the deal at his weekly news conference, he wouldn’t talk about specifics and whether net neutral policy changes would be subject to his veto pen. “I’m encouraged that legislative leadership has come to consensus with me that we not raise taxes beyond the gas tax this year, and my view is that while there’s been some great work done on both sides … our job now is to complete the business of the session and come back next year ready to continue conversations,” Shumlin said.

Follow Anne on Twitter @GallowayVTD

Anne GallowayAnne Galloway

Comments

  1. Wendy Wilton :

    While unlikley for this year, this might be a glimpse of things to come next year when the state will need to grapple (again) with shortfalls and budget challenges. Such income tax code changes provide the platform for funding health care reform. Converting to taxing on AGI sets up that pathway to the big dollars needed for those plans.

    A reduction in the income tax rate for middle income Vermonters will be temporary. The income tax rate will increase as the state seeks more revenue to support the Exchange in 2014-2016 and Green Mountain Care thereafter.

  2. John Greenberg :

    I urge legislators to approach tax law changes with more attention to detail.

    Consider the difference in two of the plans discussed. In the case of the mortgage deduction, legislators clearly looked at a specific item, and presumably received testimony which allowed them to feel comfortable with setting the cap at the level they did.

    In the other instance, simply capping all itemized deductions, no such caution was involved. Taxpayers itemize for a variety of reasons, some completely voluntary, some quite a bit less so. Do we really want to cap the deductions of a taxpayer who incurs extraordinary medical expenses in a given year? If so, why? Do we really want to impose a limit on the amount a taxpayer can deduct for gifts to charities? Again, if so, why?

    Tax law is a complex subject, requiring considerable attention to detail. We should make changes to existing law only after carefully scrutinizing the implications. From where I sit at least, the Senate committee appears to have done just that; the House committee, a good deal less so.

    • Karen McCauliffe :

      John, good point…”Do we really want to cap the deductions of a taxpayer who incurs extraordinary medical expenses in a given year? If so, why?”

      Particularly,I might add that these medical deductions have already been capped by Obamacare starting in this current tax year 2013.

      “Beginning January 1, ObamaCare also tightens the screws on Itemized Medical Deductions. The law raises the threshold for allowed deductions from 7.5% of adjusted gross income to 10%, further burdening those with the largest medical expenses by limiting how much of these costs they can deduct on their taxes. Hit to these taxpayers: $19 billion.”

      http://www.forbes.com/sites/gracemarieturner/2013/01/02/as-2013-begins-get-ready-for-an-obamacare-tax-onslaught/

  3. Jim Barrett :

    The legislature just can’t get away from raising more taxes on the already over taxed Vermonter. Vermont is ranked among the highest in taxes on the citizens now but your representatives just keep on plowing ahead with still more taxes. Don’t forget to keep on voting them into office!

    • Tom Cecere :

      What a funny comment…we knew what they would do before we elected them, in a veto-proof majority, after $1,000,000 of negative spending from the Koch-brother crowd. Vermont is getting exactly what we voted for; no one pulled the wool over anyone’s eyes. And the reason they’ll be re-elected is that they did what we wanted. You’re just in the minority that disagreed with those policies.

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