[T]he House gave preliminary approval to a $33.2 million tax package Thursday by a slim margin of nine votes.
The bill, H.489, raises revenue by making two changes to the state’s income tax code. One would eliminate the deduction for the previous year’s state and local taxes, and the second caps all itemized deductions at 2.5 times the standard deduction — $15,500 for an individual and $31,000 for a couple filing jointly.
Combined with $2.8 million raised by the House-passed fee bill, it provides $35 million in revenue to close the state’s budget gap.
The bill passed 76-67 on a roll call vote with six members absent (House Speaker Shap Smith does not vote). That’s the fewest number of “yes” votes needed to pass a bill when all 150 members are present.
Rep. Janet Ancel, D-Calais, chair of the House Ways and Means Committee, said H.489 is the largest infusion of new tax money into the general fund during her tenure, but she believes the committee crafted its bill responsibly, given the need for revenue to balance the budget.
“We’ve made structural changes that make our income tax system more fair,” she said, adding that the cap on itemized deductions brings greater progressivity to the tax code.
There are roughly 93,000 Vermont filers who itemize deductions on their returns, which is below 30 percent of the total. Of those who itemize, 88,000, or 95 percent, would be affected by the proposed changes.
The average value of state income tax deductions for people earning $1 million or more is more than $200,000; for people making $75,000 or less, the average value of deductions is just over $15,000 — right at the proposed individual cap and well below the mark for joint filers. Looked at another way, people making $1 million or more will see their tax bill increase by $17,575 and people making $75,000 or less would see an increase of between $67 and $143.
At the start of the day the miscellaneous tax bill’s passage appeared to be imperiled as the package was assailed from both ends of the political spectrum. Initially, House Republicans were largely committed to voting against the measure as a bloc because it raises taxes. For the members of the Working Vermonters Caucus, a group of Progressives, Independents and liberal Democrats, the bill raises too little, forcing cuts to safety net programs and reductions in the state workforce.
Had both groups remained resolute, the tax bill would have failed. That’s what the Working Vermonters Caucus members were hoping for, as Democratic leadership was more likely to make concessions to their agenda than Republicans.
House Minority Leader Rep. Don Turner, R-Milton, realizing that blocking the bill could mean a larger tax increase, said he decided it was in his party’s interest to “work with the majority” to ensure its passage.
“We have promised Vermonters we’re going to try to rein in spending and put Vermont on a better fiscal path,” Turner said just before the vote. “If this miscellaneous tax bill goes down, the alternative is higher taxes.”
Two amendments from Working Vermonters Caucus members aimed at doing just that were defeated before the vote. Both would have raised roughly $12 million in additional revenue to avoid laying off state workers and to restore money for low-income heating assistance, weatherization programs and the Reach Up public assistance program.
The first amendment, offered by Rep. Susan Davis, P-Topsham, would have implemented a $2 per night hotel occupancy fee.
Several Republicans voiced concern that the fee would put a damper on tourism and disproportionately impact small inns and lodging houses. Ancel said the proposal had not been properly vetted, and her committee voted not to endorse it. Ultimately, the measure failed 16-124.
The second Working Vermonters Caucus amendment raised the $12 million by increasing the rates for the top two marginal income tax brackets. That would raise rates for those making $500,000 or more annually, which account for 2.4 percent of Vermont residents.
“The argument is simple, those who have will help those in need,” said Rep. Jean O’Sullivan, D-Burlington. Rep. Chris Pearson, P-Burlington, called the underlying tax package “embarrassingly modest” and called on members to support the tax increase for top earners.
Pearson highlighted figures from the legislative Joint Fiscal Office showing that people in the top two tax brackets that would shoulder the proposed increase have seen their income grow between 52 percent and 73 percent during the period from 2009 to 2012.
Rep. Oliver Olsen, I-Londonderry, said those figures don’t tell the whole story as many people hit the top income tax brackets because of a one-time windfall, such as selling a business. Raising their taxes would be bad policy, Olsen said, and several Republicans spoke in agreement.
Ancel called the proposal “intriguing,” but again said her committee had not had time to look at it in depth. The amendment failed 43-98.
Rep. Topper McFaun, R-Barre Town, one of two Republicans to vote for the amendment, said he did so because the spending it would support would actually save the state money over time, he said.
Cutting Reach Up will make it more difficult for beneficiaries to find employment, and the cut to weatherization programs means low-income people will continue to face higher heating bills, increasing their need for public assistance, McFaun said.
State employee layoffs would disproportionately impact newer and younger workers, because of the union’s collective bargaining agreement, at a time when the state is struggling to attract and retain young people in middle income jobs, he said.
But for many in McFaun’s party, the $35 million tax increase was too much, especially because the House is still considering an $8 million clean water package and a potentially $52 million health care package — both of which would require new revenue.
The tax bill is expected to face a final vote Friday.
Correction: An earlier version of this story misstated the amount of the cap on itemized deductions.
