On Monday, legislative leaders capitulated to Gov. Peter Shumlin’s wishes for the second time in a week.
Democratic House Speaker Shap Smith and President Pro Tem of the Senate John Campbell decided to scuttle a plan to change the income tax code and give modest tax breaks to more than 200,000 Vermonters this year. Instead, Campbell and Smith say they will hold the conference committee open for H.528, the miscellaneous tax bill, until the beginning of January, paving the way for adoption of the modified adjusted gross income plan next session.
The two leaders say in the intervening seven months they will build political and public support for the proposal.
The decision to drop the controversial legislation along with an agreement between the House and Senate on $10 million in budget cuts paves the way for adjournment Tuesday.
Leading Democrats OK’d a deal with the governor last Tuesday to cut $10 million from the budget instead of raising an array of small increases on a range of sales, satellite, meals and income taxes. The agreement was struck shortly after the Shumlin administration announced a $16 million anticipated surplus for fiscal year 2013, thanks to an April uptick in personal income receipts.
Campbell, the pro tem, told reporters that if he and Smith, the speaker, had fought the governor on the tax bill, the session would have dragged on for two more weeks. As it was, both legislative leaders said they needed more time to build support for the proposal in the Democratic caucus. To that end, Smith organized a closed-door meeting in a board room on the 4th floor of 133 State St. with 64 Democrats from the House on Monday presumably to explain the decision to wait on the modified adjusted gross income tax. Lawmakers who attended the secret caucus refused to disclose what was discussed. Caucuses are typically held at the Statehouse and are open to the public.
“The governor could have vetoed the budget and jeopardize things we all agree with. But then what do you do with that? You can take hostages, but the challenge is, what if that doesn’t work?”
House Speaker Shap Smith
Shumlin strenuously objected to the modified adjusted gross income plan at an impromptu news conference on Friday. The Democratic governor opposes “changing tax policy on the fly,” especially in light of an agreement made earlier last week between the administration and Democratic leaders to refrain from raising taxes this session. According to 2007 data, the modified adjusted gross income plan would raise about $10 million in new taxes.
Because the bill contained a funding mechanism for the health care exchange, it would have been difficult for the governor to veto.
Smith said a veto of the tax bill would have been lose-lose for the Legislature. He questioned what Democrats would have gained by engaging in a knock-down drag out fight with a governor of their own party.
“The governor could have vetoed the budget and jeopardize things we all agree with,” Smith said. “But then what do you do with that? You can take hostages, but the challenge is what if that doesn’t work.”
Despite the governor’s negative remarks about the tax proposal last week, Jeb Spaulding, secretary of the Agency of Administration, said Shumlin isn’t necessarily opposed to the tax code change in concept. The governor wants to lower rates to improve the state’s economic competitiveness, he said.
“The case is not closed,” Spaulding said. “The governor has been supportive right along of some elements of the Vermont Blue Ribbon Tax Structure Commission. We have said several times we want to lower tax rates for all Vermonters.”
Smith said the modified adjusted gross income proposal is simply “good policy and good politics” and he said the disagreement was more about process than policy. It makes sense, he said, to move ahead with the change next year since the changes wouldn’t have gone into effect until 2015.
“If we get to a place, and I believe we will, with lower tax rates and a fairer and more equitable system, and it’s going to be in 2015 anyway, then, you know, why have that fight about process when we can just do it on the substance,” Smith said.
The House and Senate’s “net neutral” plan would raise taxes on about 14,000 Vermonters and lower taxes for more than 200,000, according to 2010 data. The legislation was billed as a way for officials to give middle class Vermonters a tax cut.
All of the revenue-raising elements of H.528 were struck as part of the budget-cutting agreement with Shumlin, and the Senate effectively abandoned the bill this session. The employer assessment portion of the legislation was shifted onto S.152. A flurry of last-minute amendments derived from the original version of H.528 were tacked onto the technical tax bill.
H.528 will survive in a form of legislative limbo until January. The proposal would limit the amount of tax deductions Vermonters can claim. The modified adjusted gross income proposal would cap deductions at 2.5 times the standard deduction and require a minimum 3 percent tax on annual incomes over $125,000.
Another bill that may not see the light of day this session is H.538, the House property tax reform legislation. The House would have set lower thresholds for so-called “excess” spending. Schools that spend more than 125 percent of the average per pupil rate currently pay a penalty. Under the House proposal, the threshold would gradually drop to 123 percent and 121 percent. Rep. Dave Sharpe said the excess spending cap would be an effective way to keep school budgets in check.
Another reform proposal proposed by Sens. Peter Galbraith, Bob Hartwell and Kevin Mullin would have used $60 million gained through a straight adjusted gross income plan to buy down 6 cents of the property tax rate. Only towns that kept school spending below 3.5 percent would qualify for the lower rate. The plan didn’t emerge from committee; it would have been amendment on H.265, the property tax rate bill.
The Senate did, however, pass a 5 cent property tax rate increase, in a 17-10 vote. Dissenters warned that if the state doesn’t address spiraling school spending rates will increase another 6 cents next year. Another factor driving rates up is the declining Grand List. As the property market has dropped, a penny per $100 of real estate value raises less than it did in 2007, before the Great Recession.
CORRECTION: The Galbraith, Mullin and Hartwell amendment did not kill H.538; that bill still has a chance of passing, the senators say.
