Study committee goes back to square one on sales tax on services

Study committee goes back to square one on sales tax on services

Tom Kavet, economist for the Vermont Legislature, speaks at an Emergency Board meeting on July 20, 2012. Photo by Taylor Dobbs

Tom Kavet, economist for the Vermont Legislature, speaks at an Emergency Board meeting on July 20, 2012. VTD File Photo/Taylor Dobbs

Should the state expand the sales tax to include services? That’s the $300 million question before a legislative tax study committee this fall.

The idea was originally floated by the Blue Ribbon Tax Study Committee in 2011, but quickly sank when Gov. Peter Shumlin declined to support it. (As the governor is fond of saying, he can see New Hampshire from his house, i.e., he is all too aware of how the Granite State’s no-tax policy affects businesses on the Vermont border.)

The notion was exhaustively explored in House Ways and Means that year, but it never saw the light of day on the House floor. The subject was not discussed with any vigor last session.

So why bother with another study when the idea of extending the sales tax to services is universally unpopular among pols in Montpelier?

Lawmakers appear to recognize Vermont has a long-term structural problem: The state has a growing service economy and a declining goods-based economy. Retail sales have fallen over the last 35 years, and consequently, the sales tax base has shrunk.

Tom Kavet, the state Legislature’s economist, says the state has also further eroded the sales tax by creating a number of exemptions. In addition, the state has not been able to make taxation of online goods and services compulsary because of loopholes in the federal law and resistance from local Internet purveyors.

As a result, the sales and use tax as a percentage of gross state product has fallen from nearly 2 percent to 1.2 percent over the last 35 years.

Kavet’s trend data show the state has had to raise rates to keep sales tax revenues constant. If the rate had remained at 3 cents (the original sales tax rate through 1978), the amount of revenues raised by the sales tax would be about $150 million, or half of the total the state brings in now.

The sales and use tax, which has been pegged at 6 cents for nearly 10 years (it went up a penny in 2003), raises about $300 million to $340 million a year.

The Blue Ribbon Tax Study Commission attempted to address that structural problem two years ago. The commission proposed cutting the sales tax from 6 cents to 4.5 cents. The lower tax, in this scenario, would be extended to all consumer-purchased services with limited exceptions for certain health and education services and business-to-business transactions. Sales tax exemptions for goods would be eliminated with the exception of food and prescription drugs. (The state now has exemptions for clothing and shoes.) The commission also pushed for aggressive tax collection on Internet purchases (in coordination with other states), which would raise about $40 million to $50 million.

Read the Blue Ribbon Tax Study Commission report.

The sales tax rate could go even lower (below 2 percent), some experts say, if the state taxed all goods, including food and medicine. The commission also put taxation of natural resource extraction (water, sand and rock) on the table.

Last week’s Sales Tax Study Committee meeting was deja vu all over again, as lawmakers heard from economists, experts and a former member of the commission — many of whom spoke two years ago. The experts testified about the technical and political complications facing reform.

Rep. Janet Ancel, the chair of House Ways and Means and the study committee, said it was premature to say anything definitive about the study committee’s pending recommendations or future tax reform legislation. The study committee will submit a final report to the Legislature in January.

“What we were looking at are ways of defining the sales tax base,” said Ancel. “I think the main takeaway is that we have a fairly narrow base. If we are able to broaden it, we may be able to lower rates … but we can see that it’s not easy to do. But I think it’s a discussion we ought to have. I think lowering the rate would be worth doing.”

Ancel said it would be difficult to find the political will to broaden the base while at the same time keeping Vermont’s economy competitive.

“None of this discussion has been about raising revenue,” Ancel said. “It’s about making things more fair and preserving revenue. It’s really whether the [tax] code is the best it can be, and I’m sure it can be improved.”

Bill Schubart, a retired businessman and member of the Blue Ribbon Tax Commission, said the slow pace of reform was reasonable under the circumstances. Lawmakers have had more pressing issues to address, such as health care reform and rebuilding the state in the aftermath of Tropical Storm Irene.

“It feels to me like what they’re trying to do is: What can we realistically bring to the Legislature that has some chance of passage, in amending the tax code?” said Schubart. “I think everybody knows that it needs amending. It’s way too complicated.”

Schubart argued for increased legislative oversight of tax expenditures, or exemptions for certain taxes that are counted as a loss against state revenue. He proposed sunsetting the exemptions every three years, subject to legislative review.

Jill Sudhoff-Guerin, a lobbyist at KSE Partners, said sunsetting tax expenditures could potentially be very controversial. “Everyone is going to have a personal opinion on why they should not have to pay tax and why their expenditure has value,” said Sudhoff-Guerin. “It’s going to be a very political process … but if you listen to Schubart and Kavet, really, they’re saying that this is where we lose all our money.”

Examples of tax expenditures include property tax exemptions for public, religious and charitable buildings.

Read the Vermont Tax Expenditures Report, 2011.

Sudhoff-Guerin said lawmakers hadn’t yet studied tax expenditures in sufficient detail and she doubted the Legislature would take up the issue in the coming session.

The committee heard from Kavet, a state fiscal policy analyst from the Center on Budget and Policy Priorities, a state tax representative from Washington state, and a Canadian professor. The study committee, which is tasked with considering sales taxes, Internet sales and service taxes and cloud computing taxes, will meet twice more in October.

Two years ago, the commission also recommended shifting the income tax base from Taxable Income to Adjusted Gross Income. That suggestion is not under discussion in this fall’s legislative study.

Editor’s note: Nat Rudarakanchana contributed to this report.

Anne Galloway

Leave a Reply

18 Comments on "Study committee goes back to square one on sales tax on services"


Comment Policy requires that all commenters identify themselves by their authentic first and last names. Initials, pseudonyms or screen names are not permissible.

No personal harassment, abuse, or hate speech is permitted. Be succinct and to the point. If your comment is over 500 words, consider sending a commentary instead.

We personally review and moderate every comment that is posted here. This takes a lot of time; please consider donating to keep the conversation productive and informative.

The purpose of this policy is to encourage a civil discourse among readers who are willing to stand behind their identities and their comments. VTDigger has created a safe zone for readers who wish to engage in a thoughtful discussion on a range of subjects. We hope you join the conversation.

Privacy policy
Sort by:   newest | oldest | most voted
David Usher
4 years 3 months ago

Understandably, Ways and Means reviews how to raise revenue and certainly the tax code bears review, but Vermont’s funadamental problem is risiing expenditures with a population that is not increasing at anywhere near the rate of spending.
Any proposal to tax the large base of public, religious and charitable buildings will meet with massive opposition, as will taxing services. Tackling the expenditure side of the fiscal equation may be the simpler approach.

Doug Hoffer
4 years 3 months ago

Where do you suggest the cuts be made?

Jim Christiansen
4 years 3 months ago


As an Auditor candidate, do you believe that all current state spending is wise and efficient?

I’d be interested to have you identify the areas where you believe there could be savings in the State budget, and where you feel there should be additional spending on services.

Cheryl Pariseau
4 years 3 months ago
First of all I would suggest that Vermont pass a balance budget requirement. Currenlty we are the only state that does not have that requirement. Second, we need to look at the two largest expendatures our state has, human services and general education. Our state spends approximately $2,085,498,165 and $1,637,469,778 respectively on these two items, which is about 73% of our states expenses (2013 enacted budget is 5.1 billion or $8,141.36 per man, women and child). The cost of education in this state has increased at unsustainable rates for years due in part to rising salaries and staffing levels all… Read more »
Doug Hoffer
4 years 3 months ago

The legislature does not control education spending. That is done at the local level with the approval of the voters.

Doug Hoffer
4 years 3 months ago

Mr. Christiansen

While I have personal opinions about the wisdom of certain state expenditures, it is not the job of the State Auditor to make such judgments. The legislature (in its wisdom) is responsible for creating programs and funding them.

On the other hand, it is definitely within the purview of the State Auditor to determine if state programs are operating efficiently and if they are achieving the goals intended by the legislature.

You can be sure that I will work hard to answer those questions if elected.

Cheryl Pariseau
4 years 3 months ago

Mr. Hoffer: You are correct that education spending is decided on a local level, but divvied out on a state level. Nevertheless, the legislature (if they had the cojones) could change that and start to control the out of control education spending. Perhaps a good first step would be removing the ability for teachers to strike.

4 years 3 months ago
Tax services? An appliance repair man charges up to $90 for a first visit and half an hour of service. Then a part is ordered and he comes back at a slightly lower price. The end result was my refrigerator, which did not cool, cost just under $500 to fix and still doesn’t work. Now it is a freezer and destroyed my vegetables. I have to get him back. Will he find another part to order? I just don’t have that sort of money and it puts me further in debt and the legislature wants to charge for services, and… Read more »
Cynthia Browning
4 years 3 months ago
A good tax code is simple, efficient, and fair. It has very few exemptions, credits, and deductions, and therefore it can have relatively low rates. If the tax base is broad enough, the rates can be low enough that they are not a burden on particular sectors or a distortion of economic activity. What if the sales tax rate could be 2%? What if property tax rates could come down by 30 cents? What if all income tax rates could come down a notch? I think that we should be exploring what could be possible. There are over $1 billion… Read more »
Tom Little
4 years 3 months ago

“If the rate had remained at 3 cents (the original sales tax rate in 1978), …”.

The sales tax went into effect June 1, 1969, at the 3.0% rate.

Bruce Post
4 years 3 months ago
Good catch, Tom. Deane Davis proposed the sales tax in his inaugural message to the Legislature in 1969. He felt that the state’s fiscal situation was such that, as he said, “I decided to take the bull by the horns and, and ask for the sales tax in my inaugual message which is, was unheard of in, in Vermont history before.” It was not necessarily popular at the time and was often called “giving three cents to the Governor” by many. Davis indeed took the bull by the horns and helped steer the fiscal boat through some very dangerous shoals.… Read more »
Eric Davis
4 years 3 months ago
The Legislature should take another look at the Blue Ribbon Commission’s recommendation to base the income tax on adjusted gross income rather than taxable income. As the commission noted in its January 2011 report, “Vermont is one of only nine states to define income as federal Taxable Income and shrink its tax base by adopting all federal deductions and exemptions. Twenty-seven states define income as Adjusted Gross Income, including all other New England states and New York. The choice to define income as Adjusted Gross Income by the majority of states, including Vermont’s nearest neighbors, means that these states create… Read more »
John Greenberg
4 years 3 months ago
Eric Davis — The proposal to use AGI eliminates some, but far from all, of the tax deductions, gimmicks and loopholes in the federal code. For example, the business income included in AGI (from Sch C and Sch E) is NET income, so there are plenty of “tax preferences, deductions, and exemptions” included in AGI as well. Just as the sales tax suggestion oversimplifies a complicated situation, so too this income tax suggestion is far less straightforward than it appears and there seems to be little driving it other than a general notion that rates should be lower. I would… Read more »
Renée Carpenter
4 years 3 months ago
Once more raising taxes on financial transactions (investments & trading rather than general banking), upper incomes, and corporate profit (yes, those dollars that otherwise leave the community & state) seem to be missing from this conversation. Yes, I know the governor doesn’t want to tax his buddies, but the very same tax commission cited here proved his reasons to be a myth–i.e. that they will change their residency status if state tax rates rise. If Vermont is considered to be a leader in the nation, we could lead in creating a more progressive income tax structure (Oregon did implement something… Read more »
Jeffrey Pascoe
4 years 3 months ago
And the beat goes on… 1779 State property tax established 1779 Poll tax initiated 1882 Corporate franchise tax levied on railroads 1896 Inheritance tax 1923 Gasoline tax 1925 Investment income tax 1931 State income tax established – state property taxes abolished (partly a response to the 1927 flood) 1932 Electricity tax 1934 Beer and wine tax 1935 Liquor tax 1938 Cigarette and tobacco tax 1947 Graduated income tax introduced 1959 Rooms & meals tax 1967 Property transfer tax 1969 State sales tax 1973 Land gains tax 1987 Solid waste tax (paid by facilities) 1997 State property tax reinstituted, along with… Read more »
Doug Hoffer
4 years 3 months ago

Ms. Pariseau

You said, “the legislature (if they had the cojones) could change that and start to control the out of control education spending.”

Are you suggesting the state legislature unilaterally take over decisions about local education spending? I wonder how the parents, voters, and school boards would feel about that?

Cheryl Pariseau
4 years 3 months ago

Mr. Hoffer: BTW I am a parent and a voter and if the legislature could truly control cost by consolidating education then I have no problem with them “taking it over”. If the income sensitivity provision for property taxes were repealed you would see a huge change in education cost. When you take away the financial ramifications of a vote, many vote differently than if they truly had “skin in the game”.

4 years 3 months ago
“Jill Sudhoff-Guerin, a lobbyist at KSE Partners, said sunsetting tax expenditures could potentially be very controversial. “Everyone is going to have a personal opinion on why they should not have to pay tax and why their expenditure has value,” said Sudhoff-Guerin. “It’s going to be a very political process … but if you listen to Schubart and Kavet, really, they’re saying that this is where we lose all our money.” To be clear, the tax commission argued that tax expenditures should be sunsetted, not eliminated. The point of the sunset recommendation was merely to ensure periodic legislative review of their… Read more »
Thanks for reporting an error with the story, "Study committee goes back to square one on sales tax on services"