The headline on Friday was: Senate approves tax bill, hits smokers with an additional 53 cent tax per pack.
How the Senate got there? That’s another story.
Thursday, Senate Democrats splintered over the issue in a floor vote to suspend the rules. Tempers flared, harsh words were uttered and lawmakers left the building fed up, exhausted or in a snit.
A chorus of Kumbaya was sung in a Democratic caucus on Friday morning, and by the time senators took up the miscellaneous tax bill, all sins were forgiven. The legislation passed 20-8 along party lines, with the Senate’s most liberal members, Dick McCormack and Anthony Pollina, who argued for an amendment that would have placed a surtax on the wealthy, joining the Republicans in the eight-vote dissent.
The Senate dropped the Finance Committee’s $1 per pack cigarette tax increase in favor of a 53 cent hike and an increase in the “provider” tax and health insurance claims assessments. It did not go along with the governor’s recommended $3.2 million tax on dentists. Gov. Peter Shumlin opposes the cigarette tax, and as of Thursday wouldn’t say whether he would sign a bill that included a 53-cent surcharge on tobacco.
“I am pleased that the Senate voted to reduce the increase in the cigarette tax from the initial proposal of $1 per pack to 53 cents per pack – a step in the right direction — and rejected a call to raise the income tax,” Shumlin said in a statement. “I continue to believe that Vermont’s problem isn’t that taxes are too low, but that taxes are too high.”
The miscellaneous bill, H.436, raises $24.48 million in new taxes. It increases the “provider” tax on hospitals, home health agencies and nursing homes ($5.78 million), places a 0.9 percent assessment on medical claims ($12.63 million) and hikes the cigarette by 53 cents ($5.9 million). The House proposed a 27 cent tax on cigarettes. The bill also sets aside $210,000 for a commission analysis and report on the state’s education financing system, gives caterers and auctioneers a tax break, and exempts hockey rinks associated with public schools from property taxes.
Most of the air time on Thursday and Friday was spent on the tax bill: Senators considered seven amendments on the floor and engaged in a protracted debate over the merits of the bill.
In contrast, the budget, which represented $4.68 billion in spending and resolved a $176 million budget gap, including $38 million in cuts to human services, passed without a hitch. There were only two amendments, one of which was technical in nature, and very little discussion. Only one senator, Pollina, cast a vote against it on third reading.
The debate on tax policy was the culmination of an entire session’s worth of philosophical arguments regarding the state’s tax code and business climate, the nature of economic development (a la the trickle=down theory writ large), and the moral dilemma of cutting programs to the needy and vulnerable versus increasing taxes on Vermont’s wealthy.
Tricky party-line politics
The politics on H.436 were more complicated than the policy. For one thing, the Senate is trifurcated between the GOP, lefty Dems/Progs and party-line Dems who are loyal to the new governor’s center-right take on taxes. In addition, there was infighting among party-liners.
The governor’s browbeating tactics on the cigarette tax may have lit the match that set the tinderbox of ego and emotion in the Senate aflame. Shumlin inserted himself into the political process at the bitter end, and insiders say had his staff spent more time in the Statehouse, the effect might have been different.
“There’s nothing wrong with the governor trying to lobby the Legislature, but sometimes it makes it a little harder when we’re trying to strategize,” Senate President Pro Tem John Campbell said.
The conflict began to surface on Thursday morning. Sen. Ann Cummings, chair of Senate Finance, and members of her committee supported the $1 per pack tax on cigarettes. After press reports on Thursday that Campbell and Gov. Peter Shumlin had worked out a possible 53 cent compromise, Finance committee meetings, in which pending amendments were to be discussed, were suddenly canceled.
More back and forth between the governor’s staff, Campbell, and individual senators ensued, but consensus proved elusive on the floor where the president pro tem lacked the votes to suspend the rules for a final debate on the miscellaneous tax bill. It was the first time in memory, according to Statehouse observers, that the Senate had become so openly fractured.
Campbell described the display of dissension as a “hiccup” — the result of new leaders in the governor’s office and the Senate sorting out their roles and relationship. (There are seven new members of the Senate, as well, out of a total of 30.)
Sen. Vince Illuzzi, R/D Essex-Orleans, defended Campbell.
“What happened last night (Thursday) was the result of conflicting views on tax policy,” Illuzzi said. “There was an odd coalition between those who opposed the $1 tax and those who supported it. They met on the backside of the moon and blocked rule suspension.”
Illuzzi said Cummings, chair of Finance, didn’t give senators time to vet amendments in committee, and that led, he said, to “hodgepodge decisionmaking” on the floor of the Senate that made Campbell look bad.
The surtax debate
No one in the Senate is happy about raising taxes. There was no stomach for a tax on dentists in the Senate (or the House). Nor were lawmakers particularly interested in raising income taxes.
The various cigarette tax increase proposal elicited debates about the merits and pitfalls of shaping behavior through tax policy. On the one hand, a hike in the tobacco tax results in more people kicking the habit. On the other hand, the state is “addicted” to the tax revenue associated with the carcinogenic products.
On Friday morning, senators reprised those arguments one last time for the edification of the public. The vehicle for the debate was Pollina’s proposal to raise $16.7 million through a surtax on the two highest income brackets. (The marginal rate increase would have been 1 percent for the fourth bracket, and 1.5 percent for the fifth bracket. Pollina said the effective rate, after tax filers account for itemized deductions, would have been 0.2 percent and 0.9 percent respectively.)
On average, he said, Vermonters in the top bracket would see a $157,000 tax break in 2010. His proposal would have cost the wealthiest tax filers $10,000. The tax changes would have had an impact on 4,000 taxpayers.
Pollina characterized the income tax increase on the state’s wealthiest residents as a “modest” step in a year when those tax filers will reap $190 million in tax breaks as a result of the extension of the Bush era tax cuts. The state also cut taxes for Vermonters at the top end of the bracket, he said, at the expense of poor, elderly and disabled Vermonters.
“I say to myself what has happened to us,” Pollina said. “This country, this state used to do the greatest good for the greatest number of people. What has happened to us to let the tax debate devolve to this point?”
Pollina pointed to the state’s congressional delegation which fought to end the Bush era tax cuts to the wealthiest Americans because they argued the tax burden shift to the middle class wasn’t inequitable and was bad for the economy. “Now the question is whether we will stand up today as well,” Pollina said.
He posed counterarguments for the critiques of his proposal.
“One of the arguments against the surtax is that a lot of people say we should wait until there is an emergency, until the problem gets worse,” Pollina said. “For a lot of people, the elderly, the developmentally disabled and the mentally ill, in fact, the emergency is now. If we wait until it gets worse it will be too late. We shouldn’t have waited this long.”
Pollina made light of the idea that the retroactive nature of the surtax would be a burden for taxpayers.
“I’m sorry we may have to inconvenience a few wealthy people and ask them while they’re in the Caribbean to call their accountants,” Pollina said.
Sen. Kevin Mullin, R-Rutland, described Pollina as the “moral voice for the Senate.” Mullin said, however, that he didn’t think Pollina’s proposal would achieve the end he sought. Accountants advise wealthy clients to change their residency in order to reap tax benefits, and increasing marginal rates would only exacerbate that problem.
While 4,000 people would pay more, and 50 people in the highest tax bracket have openly supported Pollina’s surtax, Mullin wondered about the remaining 3,950. If their number dropped to 3,425, so would the state’s income tax revenues.
“What we really want to do is maximize revenue in the most equitable manner possible,” Mullin said. He argued that the state needs to keep high wage-earners in the state in order to do that.
Cummings said she would “like nothing better than to vote for this amendment, and I think I will, but it will be next year.”
“Vermont has more cuts coming,” Cummings said. “These federal cuts are not going to be temporary, they’re going to be long-term cuts, and Vermont is not going to be able to make up the difference. We need to see how bad it is.”
In addition, Cummings said the Legislature must conduct a comprehensive review of the state’s tax policy. The Vermont Blue Ribbon Tax Commission report, she said, laid the initial groundwork for reforms, but the state needs to also look at education finance in the coming year.
“I don’t like targeting rich people; I don’t like targeting poor people; I don’t like targeting dentists,” Cummings said. “Our tax policy needs to be overhauled and that takes time. We don’t have the information to make a valid decision. We need to take the time to do a thorough job and do it once and do a complete job and not do it piecemeal.”
Sen. Dick McCormack, D-Windsor, said he supported Pollina’s amendment – not because it would punish the wealthy, but because it “puts the pain on those best in a position to deal with it.”
Small businesses, in the end, would feel the pain, according to Sen. Randy Brock, R-Grand Isle-Franklin, and that pain would spread. Most job creators in the top bracket run S-corporations and their profits are reported as personal income. Brock said if the tax rates were increased these companies would hire fewer employees.
The Senate voted 21-7 against Pollina’s amendment.