Legislative leaders back modification to income tax

Sen. John Campbell, file photo by Josh Larkin.

Sen. John Campbell, file photo by Josh Larkin.

The legislative Democratic leadership has given the two tax-writing committees the go ahead to pursue a change to the income tax code in the waning days of the session.

In evening negotiations on Thursday, Senate President Pro Tem John Campbell and House Speaker Shap Smith endorsed an adjusted gross income policy proposal.

Details of the plan were being worked out by the chairs of Senate Finance and House Ways and Means last night, and the Senate and House tax conferees are meeting first thing Friday morning to work out the details of the plan, which will likely include the 3 percent minimum tax proposal favored by Sen. Tim Ashe, chair of Senate Finance, and an itemized deduction cap, based on plans developed by Rep. Janet Ancel, chair of House Ways and Means.

Most states tax residents based on adjusted gross income. Vermont is one of eight that taxes individuals on taxable income, or the income that’s left after itemized deductions. Both the House and Senate have considered a variety of modified AGI policy changes over the last several years, based on information from the Vermont Blue Ribbon Tax Structure Commission research released in 2011.

The plan is revenue neutral, Campbell and Smith said, that is to say, it would not result in a tax increase, though roughly 15,000 Vermonters would pay a little more in taxes and more than 200,000 residents would pay less. Both leaders say the modified adjusted gross income plan will benefit middle class taxpayers.

“If we can put in a plan that gives 200,000 Vermonters a tax cut, I don’t think we have the right to dismiss that out of hand,” Smith said. “If it’s done in a revenue neutral way it’s incumbent on us to take this opportunity to give middle class Vermonters a tax cut.”

Smith and Campbell said the plan would not violate the agreement with the governor they made on Monday, in which legislative leaders said they would not increase taxes to fill a $10 million budget gap. Instead, they agreed to “find” that amount in budget reductions.

“When we talked with the governor, we talked about what we had to have to balance the General Fund budget and what money we needed to close the gap,” Smith said. “He’s made it clear he doesn’t want to raise broad-based taxes.”

Sue Allen, spokeswoman for the governor, has said Shumlin views the policy change as a tax increase.

Lawmakers, however, have a veto-proof provision in the miscellaneous tax bill. The Legislature must pass a mechanism to fund the health care exchange this session in order to meet federal requirements. That language, which uses $14.4 million from the employer assessment and a 1 percent tax on premiums to pay for the exchange, is in the current tax bill. If the governor vetoes the tax bill, he would have to reject the exchange funding plan and risk losing federal approval.

Follow Anne on Twitter @GallowayVTD

Comments

  1. Edward Deegan :

    Bad, Bad Policy. Under the current tax process we have an income sensitive property tax that pays substantial benefits to, in some cases, millionaires. This cost is reflected in both the school statewide property tax and general fund (circuit breaker) and I’m not sure of the totals but the school portion alone topped $170,000,000. two years ago. We are talking about a couple of hundred million dollars. We then add a state earned income credit policy that pays 24% of the federal benefit and may be the highest in the nation. The legislators do not want to admit that there are problems with the system we have. We have people who do not understand tax policy and economics designing our system. Fix the system we have. What they are proposing is going to have the effect of biting the hand that feeds them. Why would we want to limit mortgage interest deductions that help keep and improve the tax base that is actually paying the property tax bills. Stop screwing around with tax policy you don’t understand and look at reducing spending. That is the real answer to reforming our taxes.

    • Eric Benson :

      You are totally incorrect – the Vermont property tax income sensitivity does not provide “substantial benefits” to anyone with an income even close to a million dollars.

      In fact, absolutely no property tax income sensitivity rebates are provided to folks with even $100k in income.

      • Nate J :

        The term millionaire refers to net wealth, not income. Stock vs. flow.

        • Eric Benson :

          You are totally mistaken. Income taxes are based on income, not “wealth” or the value of your bank account or the possessions you own.

          The exception is with property taxes – if a farmer’s land was worth $1 million, but he had zero income, the farmer would still pay essentially full property tax on his land(less a small break on $500k of it.)

          • Nate J :

            Good lord.

            Edward Deegan wrote, “Under the current tax process we have an income sensitive property tax that pays substantial benefits to, in some cases, millionaires.”

            to which you replied, “the Vermont property tax income sensitivity does not provide “substantial benefits” to anyone with an income even close to a million dollars.”

            Please note your jump to “million dollar incomes”.

            Now, I refer to the definition of “millionaire” from Merriam-Webster, “a person whose wealth is estimated at a million or more.”

            Edward was clearly referring to instances in which households that have substantial WEALTH, but relatively lower INCOME, receive property tax relief. This isn’t that complicated.

  2. John Greenberg :

    This was written as a comment on a previous article, but bears repeating:

    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.

  3. Tony Redington :

    Thanks for recognizing that subsidizing one form of housing over another–ownership over rental–makes no sense and allowing high incomes to deduct interest on mortgages even less. Never owned property which enabled our family now–or in the past–ever go a cent of mortgage benefit and probably never will. Ironic that the federal rax subsidy of homeownership is about four times the amount spent to support mostly rental subsidy for the poor. Canada has no property tax or mortgage interest tax benefit…..

  4. Steven Farnham :

    Here is what I wrote to my legislators. Feel free to copy and paste it into an email to yours.

    Dear Reps. Smith and Ancel and Sens. Ashe and Campbell:

    Just read about the possible 11th hour change in tax policy to the AGI in Vermont Digger. Then talked to someone more knowledgeable about it than I am.

    The way it is done now – allowing standard deduction and exemptions from income before taxing the remainder (taxable income) makes a big difference at the low end of the income scale, whereas it makes little or no difference at the upper end.

    From this quick discussion, it is difficult for me to ascertain the complete affect of such a change, but it appears that this will shift more tax burden down the income scale.

    Whether or not this is true, switching to the AGI is a colossal change in tax policy, and attaching it as a rider to the miscellaneous tax bill looks to me like a fast and loose, devious and underhanded method to skirt due legislative process.

    Such important legislation must be given appropriate lengthy and careful consideration. There needs to be time for both discussion and input from the public, and there is not time for that in the waning days before adjournment. I strongly urge that the proposal to shift to AGI-based income tax be defeated until the public can better understand its affect, and give testimony accordingly.

    Regards,

    • Steven Farnham :

      Just received this reply from Rep. Janet Ancel:

      Hi Steven,

      The proposal that’s under consideration retains the personal exemptions and itemized deductions up to a cap of 2.5X the standard deduction (about $30,000 for joint filers). Low and middle income filers tend to have lower deductions so they would benefit from this change which also reduces rates.
      Overall this would make our income tax system more progressive. It has been discussed all session and is similar to a proposal that was approved in the House in March.
      Unfortunately the governor strongly opposes the idea and it looks like it will be abandoned.

      Janet

      Maybe a better idea than I thought.

      One thing is for certain. If it’s abanoned, it probably was a good idea.

    • Edward Deegan :

      Excellent comment, Big changes that once they are made will be very hard to fix should be taken very slow. We have major problems with our existing system that the legislature seems unwilling to fix. Progressive policy is good if it works our current progressive system does not. One simple point we allow double dipping policy which is unheard of at the federal level. You deduct your property tax from business income and then claim the entire tax for reimbursements on lowered income. Bad policy Insane

  5. Andrew Fischer :

    Does anyone know if the charitable deductions line would be exempt from this $30,000 cap? While it may be almost impossible for Tim Ashe, who has no kids, to imagine, raising kids in Chittenden County and the rest of Vermont actually costs real money these days. (Especially including college tuition). So $30K in deductions gets used up pretty fast for an average family and charitable deductions end up above the $30K limit.

    So not only is this cap extremely family unfriendly (in the only state in the union whose population shrank last year), it means a lot of families are going to cut back on charitable giving because that will all be taxable now. There are a lot of good studies that show this.

    If the charitable line item is not exempt, it’s a huge tax on non-profits, churches, etc. The legislature is trying to jam through at the 11th hour so no one has time to study it.

    Please respond in the comments if you know anything about this charitable contributions issue.

    Andrew

    • Charitable deductions would not be exempt.

      • Edward Deegan :

        Charitable deductions are already capped based on income at the federal level but are allowed to carry forward unused benefits. What is being proposed here is very complicated and not understood by the people proposing it.

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