In the annual dance to balance the state budget, zero is the magic number. This year, the budget and revenue committees in the House got as close to nada as possible.
They reduced spending without cutting programs, and managed to fill a $14 million hole with less than $1 million in new taxes on tobacco products.
Both the budget and the miscellaneous tax bill passed out of committees on Monday afternoon, preparing the way for debate on the House floor later this week. (The property tax rate bill, meanwhile, will be finalized on Tuesday.)
The Big Bill can’t be closed until lawmakers figure out whether there are enough revenues to cover any gaps. And this year, as in years past, state receipts have not been robust enough for lawmakers to assume that there will be a surplus. Tax revenues have grown since the Great Recession, but not enough to cover expenditures. Usually, the balance is struck with one-time money — rather than a steady surplus of funds based on economic growth.
The state began the budgeting process this year with a $70 million gap in revenues and expenditures. But by the time Gov. Peter Shumlin introduced his budget in January, he found $30 million in one-time monies, and he pursued new revenues — a $14 million claims assessment that would put a fee on every insurance transaction. The governor’s fiscal year 2015 budget proposal increased government spending by 5.1 percent over last year.
The House rejected the claims assessment and instead opted to reduce spending and raise as little money as possible through new taxes.
In the end, House Appropriations and House Ways and Means, working in tandem, found all but $3.3 million of the $14 million in savings, and reduced the overall spending increase for fiscal year 2015 to 3.8 percent. The General Fund budget, that passed the budget-writing panel on Monday 7-4 (the four Republicans on the committee cast the dissenting votes), is $1.44 billion.
On Monday morning the gap was $4.4 million, and by late afternoon, after huddles with the Joint Fiscal Office and the Department of Finance and Management, the appropriations committee had decided to tap $1.1 million from a sequestration setaside for possible federal cuts to programs that did not materialize this year. That brought the total in new money needed to close the budget to $3.3 million.
Rep. Martha Heath, D-Westford, and chair of House Appropriations, said she was excited that the two committees were “able to create a responsible budget without asking for new revenues.”
“We made important investments in opiate addiction treatment, addressed poverty and developed a strategy that will reduce homelessness in children,” Heath said after the vote.
Republicans on the committee opposed the Big Bill because it didn’t go far enough to reduce spending.
Rep. Peter Fagan, R-Rutland, said he thought it was a good budget, “but because of its reliance on one-time issues and because of the growth rate that needs to be lower to better reflect Vermont’s revenues, I’m not capable of supporting it at this time.” Fagan has suggested that the committee use a “little different process” for reviewing the budget next year.
Miscellaneous tax changes
Meanwhile, the tax writing committee, House Ways and Means, found money here and there — from unexpected compliance funds, sequestration setasides and small decreases in tax exemptions for renter rebates and a cap on income sensitized rebates — to bring the need for more revenues almost down to nil. In the end, the committee needed to raise $1.2 million, and it did so through an increase in the tax on snuff and a first-time wholesale tax on electronic cigarettes.
The miscellaneous tax bill passed 9-2 Monday afternoon, with Rep. Adam Greshin, I-Warren, and Rep. Patti Komline, R-Dorset, dissenting.
Rep. Janet Ancel, D-Calais, chair of House Ways and Means, shared the credit for keeping new taxes in check with her colleagues in House Appropriations. “The good work upstairs allowed us to get there without raising taxes,” Ancel said.
“I think it was really pretty impressive to have a budget with a $14 million increase and come together with a budget and so-called revenue bill that doesn’t have any revenue,” Ancel said.
Greshin supported the bill overall, but voted against it because he was unhappy with a disclosure requirement for businesses that receive tax credits for research and development. “It achieves nothing and it leads to petty discussions about who is taking what with no context,” Greshin said. “We don’t ask people who take a property tax adjustment to drive around with a bumper sticker.”
Lawmakers wrestled for several hours on the tobacco taxes. It was clear from the beginning of the discussion that raising taxes on cigarettes was not going to go far. The recommended increase from anti-smoking advocates was $1.25 per pack, which would have raised $14 million, and the committee no longer needed to raise that much money.
Passing a slight increase on snuff — going from $2.24, the current level, and bringing the tax up level with cigarette taxes, $2.62, was not a big deal for the committee and was a surefire way to raise $700,000 in new revenues — but a new wholesale tax on electronic cigarettes led to a long discussion on whether it was appropriate to put a new assessment on a product they didn’t really understand. They didn’t have conclusive testimony or evidence regarding the prevalence of ecigs, who used the product, how addictive it was, or whether it was in fact a smoking cessation product.
But in the end, committee members rejected a proposal to raise cigarette taxes by 6 cents, and voted instead for a 92 percent wholesale tax on ecigs that is likely to bring the total cost of the product up to about $14. The new tax will raise about $500,000 a year for the state.
The changes outlined in the miscellaneous tax bill that affect General Fund revenues include $1.2 million in unexpected monies from a percentage of Tax Department compliance collections for the state.
Education Fund changes also contribute a total of $900,000 to the General Fund bottom line. A reduction in property tax breaks for renters raises $600,000 and a downward adjustment in the cap on the maximum property tax refund from $8,000 to $6,000 (the bill includes an adjustment for households with a single member who is more than 65 years of age) brings up state revenues by $300,000 for the Education Fund and $300,000 for the General Fund.
Other changes include an increase in the cap from $1.7 million to $2.2 million for tax credits to developers who pursue downtown projects (overall cost of $250,000); a $150,000 tax credit for the wood products industry; and a new voice over Internet phone tax that raises $82,000.
The solar capacity tax
The miscellaneous tax bill also includes incentives for small-scale renewable energy projects.
Representatives from the Department of Taxes, towns and solar industry this year ironed out a compromise to expand tax exemptions for small solar projects. The changes include:
• An exemption for solar net-metered projects less than 50 kilowatts in size from the state’s annual capacity tax, which is used to support the Education Fund. Projects over this size would be taxed at 70 percent their value for 25 years, at which point the project is unlikely to continue generating electricity. Net metering is a program that allows ratepayers to generate their own electricity.
• A municipal tax exemption for the first 50 kilowatts of any renewable energy project. Every additional kilowatt will be taxed at $4 – the current capacity tax rate. The previous exemption threshold was set at 10 kilowatts.
The solar industry wanted to see the tax policy updated to account for the recent boom in small-scale, distributed energy generation projects. This included exempting net metering projects from taxation altogether.
Nonetheless, the industry supports the predictable 25-year tax rate, a model that replaces the so-called Sandia tax valuation formula.
“It doesn’t include an exemption for net metering systems that we had hoped and that we thought was fair, but it does provide a level of stability and predictability to the industry to allow the industry to grow in Vermont,” said Andrew Savage, a spokesman for AllEarth Renewables, a Williston-based solar manufacturer.
Towns would see a small decline in municipal tax revenue, according to Steve Jeffrey, executive director of the Vermont League of Cities and Towns. He said the bill was a “good compromise” between the towns and solar industry.
“It’s pretty close to a wash. I mean it looks like it’s going to come out to be about 70 percent of what we would have gotten otherwise,” Jeffrey said. “But the fact that the valuation is stabilized for 25 years is going to help us make sure we can budget as opposed to seeing a declining valuation happening.”
Editor’s note: This story was updated at 5:23 a.m. on March 25. Johnny Herrick contributed to this report.
Correction: March 25, 11:40 p.m. The 50 kilowatt exemption figures for the solar tax were incorrectly described. Fifty killowatts or less is exempt from state tax and the first 50 kilowatts is exempt from municipal tax.