Vt. Senate backs $9.49 million in new taxes, leaves $575,000 hole

Gov. Peter Shumlin unveiled his budget on Thursday (01/24/13) to the General Assembly in Montpelier Vermont. Photo by Roger Crowley
Gov. Peter Shumlin unveiled his budget on Jan. 24 to the General Assembly. Photo by Roger Crowley

The Vermont Senate has approved a bill that will raise $9.49 million in new taxes.

The miscellaneous tax bill, H.528, passed 24-5, in a largely party line vote after four and a half hours of debate. Centrist Democrats and Republicans carried the day; four Republicans and one Democrat/Progressive voted against the bill.

The legislation requires Vermonters with adjusted gross incomes of $125,000 per year or more to pay a minimum tax of 3 percent, puts a $12,000 cap on mortgage deductions, extends the sales tax to bottled water and changes the estate tax. It also puts a tax on satellite TV.

Amendments that would have eliminated proposed taxes on satellite television bills and bottled water failed. A proposal to link the $12,000 cap on mortgage deductions to the prime lending rate was withdrawn. Another measure that would have changed an estate tax proposal in the bill failed.

The Senate passed an amendment that extends a $75,000 tax credit to the wood products industry and approved another measure that continues to allow well-heeled Vermonters to take a $500 tax credit for investing in the Vermont Higher Education Investment Plan. The proposed $150,000 cap would have raised $500,000 in revenues for the state.

The upshot? The Senate is $575,000 short of its $10 million revenue goal. It’s not clear at this point how that gap will be filled.

Meanwhile, a half a million dollars short or not, Gov. Peter Shumlin says the Legislature shouldn’t be raising any new “broad-based taxes.”

“Now is not the time to raise more taxes on hard-working Vermonters,” the governor said in a statement. “Lawmakers this session have now voted to raise taxes on Vermonters’ income, clothing, meals, vending machine purchases, water, soft drinks, candy, satellite television and cigarettes. It was hard enough to ask Vermonters to pay more at the pump to maintain our crumbling roads and bridges and safeguard $56 million in federal transportation dollars. I feel strongly that there is no need to raise these additional taxes to close a budget gap of less than 1 percent. Vermonters expect us to control spending by using existing tax dollars more efficiently. We must protect our fragile economic recovery.”

A philosophical debate

The debate began with a peroration by Sen. Anthony Pollina, and as if on cue, about 500 Vermont Workers’ Center activists, gathered on the Statehouse lawn. The drumbeats and rallying cry for a “people’s budget,” seeped into the Green Room as senators embarked on a debate over just how $10 million increases in the budget would be paid for.

Sen. Anthony Pollina. VTD/Josh Larkin
Sen. Anthony Pollina, D/P-Washington. Photo by Josh Larkin

Pollina, a Washington County Democrat who also ran on the Progressive ticket, appealed to his colleagues to address the issue of growing income inequality in Vermont. The top 1 percent of Vermonters, he said, have seen their incomes triple over the last 10 years, and the income of residents in the upper middle class (those who make $125,000 or more) have doubled. Meanwhile, the wages of Vermonters who make $50,000 or less have declined or stagnated.

He urged senators to raise $21 million in income taxes on the state’s wealthiest residents in order to set aside money for anticipated federal cuts in fiscal year 2014 and to cover costs associated with proposed weatherization services and support for developmentally disabled Vermonters, among other human services needs.

“The people who have gained the most are going to be asked to do the least,” Pollina said.

Pollina said the state’s growing income disparity is hurting Vermont’s economy, and he urged senators to support an increase in the top marginal income tax rate from 8.95 percent to 10.45 percent (which he says is a 1 percent increase in the average effective rate from 6 percent to 7 percent) and an increase in the second highest marginal income tax rate from 8.8 percent to 9.8 percent, with an average effective rate increase of 0.1 percent.

“When we talk about taxes and the economy we talk about job creators and how we shouldn’t do anything to upset them because they are the foundation of the economy,” Pollina said. “The real job creators are middle class people. For businesses to grow they need customers, they need people to come in and buy their goods.”

Low-income workers and middle class Vermonters, Pollina said, pay more of a percentage of their income in regressive sales and gross receipts taxes than Vermont’s wealthiest residents do. On average, the middle class pays 4 percent to 5 percent; higher income Vermonters pay about 2 percent.

“When lower and middle incomes go down further, they don’t have any money to spend and they’re not generating tax revenue,” the senator continued. “That is one of the major reasons why the economy is so weak and why the economy is not going to get better.”

Ironically, it was another Democrat/Progressive, Sen. Tim Ashe, chair of the Senate Finance Committee, who rebuffed Pollina’s charge that the tax bill didn’t go far enough to raise money to pay for programs.

“We could raise an additional $21 million, but that doesn’t mean we should,” Ashe said.

The Chittenden County senator defended the process for determining the dollar figure for the revenue bill. The $10 million sum came from a “needs” estimate developed by Senate Appropriations.

“Unless and until Senate Appropriations identifies $21 million in new appropriations needs, I would urge the body to reject the [Pollina’s] amendment,” Ashe said.

Ashe has repeatedly said his committee worked to create a fair and equitable tax bill that raised no more and no less than was absolutely needed.

Sen. Peter Galbraith said he agreed with Pollina’s assessment of the state’s economic situation, and he suggested that the best way for Vermont to deal with inequality is to close loopholes for wealthy residents. Tax breaks and deductions are the state’s biggest problem, in his view. (The state gives away more than $1 billion a year in so-called “tax expenditures.”) “This bill makes some effort toward greater fairness,” Galbraith said.

Pollina’s amendment was rejected in a 7-22 vote.

Sparks fly over estate tax change

A proposal to make the estate tax more equitable was attacked by Sen. Ann Cummings.

The provisions, which are billed as “revenue neutral,” she said, creates a new “gift tax” on inheritance gifts to children that she said could make Vermont “a less desirable place to retire,” and lead to an exodus of wealthy people from the state.

Cummings, the former chair of Senate Finance, proposed a study of the estate tax options.

Sen. Ann Cummings, D-Washington. Photo by Anne Galloway
Sen. Ann Cummings, D-Washington. Photo by Anne Galloway

In a recess, committee members reviewed the amendment on the floor, and most were leaning toward the study when Galbraith insisted he would vote against the entire bill if the amendment was approved. Ashe acquiesced and said he would vote down the amendment; Sen. Bob Hartwell followed suit.

Galbraith explained on the floor that under current law, smaller estates are hit with a 35 percent tax while large estates pay 16 percent. “If we don’t fix it, families who might have small businesses who die in this year will find themselves facing a tax burden in which there is no fairness,” Galbraith said.

Cummings’ amendment passed, 17-12.

Sen. John Rodgers, D-Orleans, proposed a swap of the $1.3 million in satellite TV tax revenues and a lower mortgage interest cap ($10,000 instead of $12,000). The amendment failed.

Sen. Richie Westman, R-Lamoille, however, scored a major victory. The former tax commissioner gave a discourse on the value of 529 plans, in Vermont known as the Vermont Higher Education Investment Plan, which are designed to encourage Vermonters to save money for their children’s post-secondary education. Senate Finance wanted to eliminate a tax credit worth $500 and generate $500,000 in revenue as a result of capping the income earnings of participants to those who make less than $150,000.

The credit is vital, Westman said, to maintain the health of the fund. Without it, there is little incentive for wealthy Vermonters to invest in VHEIP. Management fees for the fund are high by regional standards.

Correction: The Cummings amendment passed; it was not voted down as originally reported.

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Anne Galloway

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  • MJ Farmer

    How about spending less $? A 4.5% increase over last yr, really. In 2007, there were 531 $1 million and over filers and 1,040 $500,000 to $ 1 million filers in VT. In 2011, there were only 360, $1 million and over filers and 857 $500,000 to $1 million filers. 2012 data is not available yet. Mistakenly, our legislature believes there is no exodus of high income taxpayers based on our tax policy. Higher income people can move (and will move), as demonstrated by the published numbers from VT DEPT OF TAXES website. Middle income and lower icome people will not have $ to spend, thus producing less tax revenue (according to Pollina). I feel we need to lower the VT state income tax and encourage higher income people to stay here for 6 months and a day, so they can spend their xtra money here.

    • Arthur Hamlin

      The decrease in high income filers is almost certainly due to the fact that we just had the worst economic downturn since the great depression and their wealth and income went down, and not due to any exodus. The idea of reducing taxes to increase revenue is a debunked theory.

  • Craig Powers

    I echo MJ Farmer’s comments above. There is an exodus, and there is continued talk from wealthier folks about leaving VT for tax friendlier states. (Maybe our legislators are not listening closely enough?) I actually spoke to a gentleman a few days ago, who has a house in Upstate NY and here in VT. He declares residency in NY State on the advice of his accountant. Think about it…NY State is more tax friendly than VT??? Who would have ever thought.

  • Ellen Oxfeld

    Senator Ashe stated that Pollina’s suggestion to raise the marginal rate on people in the highest income bracket would actually raise too much money. But, what about the people on Catamount and VHAP who will be paying more in out of pocket health care costs than they do now? How about the Governor’s proposals on child care? Many people criticized the financing mechanism for this, but not the idea. So, aren’t there many unmet needs?

    By the way, higher income people would not move out of the state if Senator Pollina’s proposal was implemented. the reason is that higher income people are here because they have wonderful jobs and careers here. They are not going to throw these away because of a 1% increase in the marginal rate of everything they earn above a certain already high amount. Also, the Blue Ribbon Commission studied this issue and also concluded there would not be such tax flight with an increase in the marginal rate for wealthy Vermonters. We can’t keep asking the poor and middle class to pay more than the wealthy. It will create a sense of unfairness. And, in fact, it is not fair.

  • John Greenberg

    MJ Farmer offers a stunning example of how to mislead readers using perfectly accurate statistics.

    In choosing tax years to compare, one is obvious: namely, 2011, the last year for which statistics are available. But the other year, 2007, is offered without explanation.

    As it turns out, 2007 just happened to be a anomalously good year. How good? Well, in 2007, there were, as Farmer reports 1047 returns reporting income between $500,000 and $999,999. Since 2002, the next highest year was, wait for it, 2011 @857. All of the years above 600 occurred after 2005, and the median of the last 10 years was 689.2. In sum, 2011 was the second highest year of the last 10, and well above the average of the last 10 years.

    The same applies to those earning more than $1 million. 2007, the year Farmer just happened to choose, was a banner year, with FAR more filers in this category than any other of the last 10 years. This time, 2011 ranked only 5th, but it was only a little behind all of the other years and still above the median of 326.1. (531, 401,400, 370, 360 = 2011 …)

    Simply put, the only way Farmer’s argument works at all is to have cherry-picked the one year – 2007, which makes it APPEAR, falsely as it turns out, that there has been an out-migration of high income earners in Vermont. In fact, there were more than twice as many filers in both categories in 2011 as in 2002, a fact which suggests precisely the opposite conclusion.

    In fact, all that Farmer’s statistics really show is that Vermont’s taxpayers have suffered through the worst depression in 80 years, with its high income earners’ tax forms reflecting the fact that the bubble inflated to the maximum in 2007 finally ended up breaking. By last year, the recovery had made considerable progress. That, however, is hardly headline-making news.

  • MJ Farmer

    OK, 2007 had 531 over $1 million filers and 2008 -2011, 401,400,370 then 360 respectively. There are still 40 to 100 LESS. At 9% VT INCOME TAX, that’s $90,000, so for every one of those $1 million and over filers that disappearred, that’s $90,000. If 40 have dissappeared thats $3,600,000 GONE.

    In 2007, there was $20 million EIC State dollars. In 2011, there was $25.5 million state EIC dollars. See a pattern.

    • Douglas Hutchinson

      As appealing as it seems, using the figures from the Dept of Taxes http://www.state.vt.us/tax/statisticsincome.shtml is not useful in determining the effect taxes have on high earners. First, your analysis assumes the principle variable altering the number of 1M filers is they decide to leave the state because of taxes. In fact many fall out of the bracket because of the nature of their income. A lot of high earners have variable income from sales of equities etc. You’ll notice that numbers of 1M filers were high in good markets and low after the dot.com bubble burst in the early 2000s and in 2009 after the recent financial crisis
      If you do a statistical analysis on 1M filers in the 9 years from 2003 to 2011 you’ll see there is a tremendous variation in the number of 1M filers year to year (High 531 in 2007, low 228 in 2003). Even though the mean (add each year’s number together and divide the sum by 9) is 371 because of the variability, the standard deviation is 96.5. Since you have to include + or – 2 standard deviations to be sure you are excluding the possibility of random variation (95% confidence level), that means that 1M filers have to number greater than 564 or less than 178 (+ or- 2x 96.5 added or subtracted from 371) for the difference to be statistically significant. Numbers below 564 and above 178 could just as likely be caused by chance. Note that in none of the years between 2003 and 2011 was the actual number statistically significantly different. The data needed from the VT Tax Site to answer your question is how many people above 1M don’t file any tax return in VT the year after they file a 1M + return. The Tax Dept may have that number but it is not on the Tax Site.

    • John Greenberg

      Yes, there IS a pattern. I pointed to it above. Incomes at the top and the bottom have declined since the pinnacle of the bubble. Both phenomena are easily explained by the state of the national (and world) economy.

      It’s worth noting that federal income tax revenues have followed this pattern. In 2007, revenues were $1.16 trillion. In 2011, $956 billion. http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist.pdf Similarly, IRS statistics show a rise in the EITC from 2007 to 2010, the last year for which I have statistics: http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-Statistics

      In short, the simple explanation of all these numbers is that Vermont’s economy has followed national and world trends, which is hardly a surprising result.

      By contrast, there is no evidence to support your suggestion that mass migrations of either rich (and I gather you’re now suggesting poor) people have anything to do with it, especially given that there has been very little change in Vermont’s population.

      As to the figure of $3.6M in lost revenues, you prove only that the highest income earners have large disposable incomes indeed, and that with relatively small sacrifices, even though there are few of them, they can still afford to contribute major sums to the common good, especially because other economic evidence shows that their incomes have recovered substantially more (and faster) than those of everyone else since the crash.

  • Ron Pulcer

    Regarding the “exodus” of wealthy Vermont residents, don’t forget that Richard Tarrant was a Florida resident, before he decided to run against Bernie Sanders. Then Mr. Tarrant became a Vermont resident, yet again (he was for Vermont, but that was after he was against it, and before that he was for it, ala John Kerry in 2004).

    For those who have 2nd, 3rd, 4th, 5th, etc. homes, that’s wonderful. You have a choice which state you want to “officially” belong to (in any given year). I only own one home in VT. I sold my Michigan home when I moved here.

    If taxes in Mississippi were suddenly advantageous to Florida, maybe these same folks would buy yet another home and suddenly root for Ole Miss.

    I have been fortunate to be middle class my entire life, not to poor, and not too rich. The middle class pays more in effective rate of taxes because Congress and the Legislature have created all kinds of loopholes and tax dodges over the years (often for large donors and corporate personhoods). When I fill out my Fed. 1040 and Vermont IN-111, I have to either refer to other forms that are “non-applicable” to my situation and read through line by line, or read through many lines on IN-111 that have no bearing on my situation.

    The Federal and Vermont tax systems have become so complicated and bloated. Now the Legislature is yet again trying to “patch” the bloated tax code with yet more targeted taxes.

    Kudos to Sen. Pollina and Sen. Galbraith for trying to address the overall inequity in the tax code.

    When is the Legislature going to tax political advertising and campaign ads (TV, radio, Internet, sides of The BUS, palm cards, mailings, post cards, robocalls)? Negative ads should be taxed 10X more!

    Besides limiting SuperPAC contributions, how about also taxing SuperPAC contributions?