Senate tax bill closes loopholes, sets property tax at 87 cents

Senate Pro Tem Peter Shumlin

The Vermont Senate passed a bill Friday that will increase taxes for some Vermonters by $22 million.

The miscellaneous tax bill, which must still be reconciled with the House’s version, raises the statewide property tax rate a penny above last year’s to 87 cents; limits property tax relief for some by requiring additional means testing for those with investment income; and reduces a tax break on production for corporations.

“What we’re trying to do is find the balance between protecting the most vulnerable Vermonters, creating jobs and stimulating the economy,” Shumlin said in an interview. “Everybody’s giving a little.”

The bill, H.783, which originated in the Vermont House, had included a controversial sales tax on dietary supplements and vitamins, which would have generated $1.3 million. However, Senate Finance Committee Chair Sen. Ann Cummings, D-Montpelier, said her panel rejected the tax because it would have penalized Vermonters who wanted to improve their health.

The Senate also passed an enhanced version of a House proposal, granting an $8 million equipment tax credit to a St. Johnsbury company; the House had set the tax break at $4 million.

The company, EHV Weidmann, employs about 200 workers and has threatened to move to China or Mexico if it doesn’t receive a credit toward the purchase of $50 million in machinery to upgrade its Northeast Kingdom operation.

Senate President Pro Tem Peter Shumlin, a Democratic candidate for governor, defended the tax changes as necessary to avoid raising broad-based taxes and to balance the budget, which this year included a $154 million deficit that has grown to $167 million in the last few months.

“What we’re trying to do is find the balance between protecting the most vulnerable Vermonters, creating jobs and stimulating the economy,” Shumlin said in an interview. “Everybody’s giving a little.”

Gov. Jim Douglas continued to take a conciliatory stance toward the House and Senate negotiations in a statement Friday. However, he also made it clear he is strongly opposed to the Senate’s action on the corporate tax.

Douglas, in a statement, criticized the Senate for capping the corporate tax break, known as a production deduction. Gov. Jim Douglas’ letter to Senate Pro Tem Peter Shumlin calling for tax cuts, Douglas also made clear where his priorities lie on the continuing House-Senate negotiations on the budget and tax bills.

“With revenues not expected to rebound to pre-recession levels for several years,” he wrote Shumlin on April 21, “the Legislature must not revert to the easy answers of using reserve funds for ongoing expenses, banking on rosy revenue forecasts, or worse: raising taxes even higher when Vermonters have no tax capacity left.

Douglas added: “While I appreciate the difficult work of House members in crafting a fiscal 2011 budget, the Senate must take a different path than the House in crafting a spending plan for the state, as well as advance serious reforms to education spending and the UI (unemployment) trust fund. To foster an environment of economic growth in Vermont, state government must ensure stable budgets that do not threaten to increase taxes or require deep cuts to programs in the future.”

“Unfortunately,” Douglas wrote Shumlin, “the House passed budget does not accomplish this, but instead guarantees higher taxes now and in the future, which will stifle our nascent recovery. It does so in three ways: it relies on taxes passed last year; it explicitly raises taxes this year; and it promises tax increases next year.”

Property tax changes

The statewide homestead property tax rate for fiscal year 2010 (the current year) is 86 cents; the tax commissioner set the rate at 88 cents in December, anticipating 2 percent growth in education spending. But local school boards this spring kept education spending flat, saving the state $22 million in school spending overall. In response, the House bill kept the property tax at 86 cents for every $100 of appraised value. (The nonresidential rate is $1.35.)

The Senate approved a one-cent increase, to 87 cents. This change adds $10 million in revenues, which the Senate bill would transfer to the General Fund.

Rep. Ann Manwaring’s letter to Sen. Peter Shumlin

Instead, the Senate approved a one-cent increase, to 87 cents. This change adds $10 million in revenues, which the Senate bill would transfer to the General Fund.

Sen. Doug Racine, D-Chittenden, a Democratic candidate for governor, vehemently opposed the change in floor debate. He said it was wrong for the Senate to use money from the property tax, which is used to support the Education Fund, to shore up the General Fund. He voted against the provision and instead advocated using the rainy day funds – the state’s savings account – to pay for essential General Fund expenses.

“This has been the slippery slope, and it’s been going on for several years,” Racine said on the Senate floor. “We do have alternatives. They’re a whole lot more painful than this one.”

Supporters of the Senate bill walked a fine line on the politically sensitive issue of raising taxes in a recession.

Sen. Cummings insisted her committee’s property tax rate change was a “reduced property tax” based on the education commissioner’s property tax rate recommendation of 88 cents. The change would raise $10 million through a new means testing system for Vermonters with investment income.

Shumlin also described the Senate’s 87-cent tax rate as a deduction. “I was pleased we’re able to reduce property taxes by a penny, the House reduced it by two pennies,” Shumlin said in an interview. “We’ll see what happens in conference committee. Judge us by the final bill.”

Asset test for property owners who receive investment income

The Senate’s asset test would limit homestead tax breaks for property owners who earn more than $5,000 a year in interest and dividend income.

The expansion of the asset test would affect about 3,000 property owners in the state, Cummings said, and generate about $10 million in revenue.

The House had proposed instead to limit tax relief to homeowners with property valued below $425,000. There is currently no limit on house value for deciding eligibility under the property tax relief program.

The expansion of the asset test would affect about 3,000 property owners in the state, Cummings said, and generate about $10 million in revenue.

“For years we have heard about people who report low incomes and have very nice cars and houses are able to get a tax rebate,” Cummings said. “Income doesn’t necessarily reflect wealth. We have come up with a simple and doable method suggested to us by a CPA. If you are reporting interest and dividends on your tax forms, that indicates there is some wealth behind it.”

Shumlin said he will introduce an amendment during the third reading of the bill on Monday that will make anyone who has $500,000 or more in investment income ineligible for any property tax break.

The production deduction for corporations

The production deduction is a federal income tax break that some states pass on to corporations. Nationwide, about 21 states have blocked the “pass through”; 25 offer the deduction. Vermont and Rhode Island are the only states in New England that provide the exemption to corporations.

Vermont’s current rate for the exemption is 6 percent, and it costs the state $8 million to $9 million a year; it was slated to increase to 9 percent in fiscal year 2011.

Both the House and Senate versions of H.783 level-funded the tax exemption. The House estimated it would regain about $4.3 million in revenues by keeping the deduction flat; Cummings said new figures show it would recoup about $2 million for the state.

An amendment to allow the 3 percent increase to the tax deduction was defeated 17-12.

Lt. Gov. Brian Dubie, the Republican candidate for governor, says keeping the tax exemption at 6 percent will “hit small Vermont manufacturers hardest.”

“Vermont’s employers have built their long-term business plans around this,” Dubie wrote in a statement. “Taking it away now leaves a gaping hole that our employers will be hard put to fill. In this depressed economy, Vermont’s small businesses need every advantage we can muster, to keep them in Vermont and keep Vermonters working. This isn’t a tax on business. It’s a tax on Vermonters.”

Shumlin said the Legislature really doesn’t have a choice.

“Obviously we don’t want to do this; we don’t want to do a lot of the things we’re doing. But our job is to strike the balance and put Vermont on a strong fiscal path to recovery. And I think we’re doing it.”

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Anne Galloway

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  • Whit Blauvelt

    The means testing proposed for property tax relief is a formula where interest and dividend income over $5,000 would be counted three times. The shortcoming of this: Dividend income is from stocks. But not all stocks pay dividends. So anyone seeking a property tax deduction will simply move investments from dividend-paying stocks to other stocks, of equal value, whose returns come in the form of capital gains as they are sold. For this first year, this new test will raise some taxes for the state, both on dividend income and on realized capital gains on the dividend-paying stocks investors in Vermont will be moving out of. In subsequent years it won’t gain much if anything. You might think this could be fixed by also considering capital gains at some multiple for the means test – except that capital gains occur in many instances where they are not a sign of retained wealth, in the way dividends are.

    All in all, this is a political game that will gain the state little, while being a temporary inconvenience for those with stock investments. It’s a lot of trouble to go to, and to put people to as they shift their investments, to accomplish not much.

  • Connie Godin

    Whimps. Whine about the millions needed then whimp out on any real reform of the sensitivity piece. No limit on house value and under $500,000 INVESTMENT income deduction. Laughable. Whimps.