Jon Margolis is VTDigger’s political columnist.
The song is over. The melody may linger on.
The 2013 session of the state Legislature ended last night, leaving income and general sales taxes untouched, another victory for Gov. Peter Shumlin, another surrender by legislative leaders who almost to the end continued to talk about fiddling with the tax code. They had to let the final curtain fall before they finished their song.
But they plan to keep humming that tune for the rest of the year, hoping to graft a revised set of lyrics onto it in January. Whether they succeed depends in part on how well they perform over the next several months, but they do have one advantage. The refrain of the song is: “We want to lower your income tax rate,” music to the average voter’s ears.
The potential disharmony is that the only way to lower income tax rates is to make more income taxable, which means some people would have to pay higher taxes. Under the revision proposed before the leaders agreed to delay it, only about 14,000 households would have paid higher taxes while some 220,000 would have paid less.
Most of those 14,000, though, are wealthy, meaning they are influential, and could put up a spirited fight. And constantly looming over any effort to make the tax code more progressive is Shumlin, who has always been wary of increasing taxes on upper-income households.
Still, legislative leaders and key committee chairs left little doubt as the session ended that they remain committed to their version of tax reform, and will persist in trying to build support for it in the coming months.
“I’m very serious about it,” said House Speaker Shap Smith.
In a sense, Smith and Senate President Pro Tem John Campbell had little choice but to be serious about the tax changes in the final days of the session. Legislative leaders thrive not by bossing their members around but by listening to them and taking their concerns seriously. And in both houses, many members of the dominant Democratic majorities – including finance chairs Rep. Janet Ancel of Calais and Sen. Tim Ashe of Burlington – had put too much work into adjusting the tax code to give up their plans without making at least one more effort to put them into effect.
Under the circumstances, Smith and Campbell really had no choice but to agree to abandon the plan, at least for now. By supporting it for a few days, they backed up their chairs and their rank-and-file members.
Call it the “What are we, chopped liver?” response. Faced with proposals from Shumlin to increase spending on early childhood education and other programs, the lawmakers spent four months trying to figure out where they could raise the money. One of their plans was to limit some tax deductions benefiting upper-income earners. Another was to impose a minimum income tax on those same wealthier households regardless of how many deductions were available to them.
When the leaders agreed with Shumlin to drop most of the new spending proposals and any tax increase, the finance chairs and others thought they would use the revenue those steps would provide not to raise more revenue, but to lower the taxes on lower and middle income earners. The combination satisfied both their economic populist outlook and their disinclination to consider those four months of work a waste.
The governor didn’t buy it. He still called it a tax increase, rejecting the analysis that the changes would be “revenue neutral.” He also assailed “changing tax policy on the fly,” because the new proposal had not gone through the usual committee process.
Under the circumstances, Smith and Campbell really had no choice but to agree to abandon the plan, at least for now. By supporting it for a few days, they backed up their chairs and their rank-and-file members. But both houses probably lacked the votes to override a Shumlin veto, and whatever the final outcome, challenging a governor of their own party to veto a tax bill risked making that party appear incompetent, if not ludicrous.
Besides, as they conceded, they couldn’t win the procedural argument. Shumlin was right. Whatever its merits or flaws, the tax shift proposed in the final days had not been vetted by the experts or undergone the tumult of debate by interest groups and editorialists.
Furthermore, the plan as it stands probably isn’t good enough. For one thing, those middle-income tax cuts are pretty small, only about $80 a year, which as Smith noted doesn’t add up to enough per pay period to be noticeable. It should probably be “more aggressive,” Smith said.
Needless to say, that would require even higher taxes on the wealthy, strengthening opposition from them, and perhaps from Shumlin, who in his closing remarks to the Senate last night pointed out that holding the line on taxes “helps keep our economic recovery going.”
But Administration Secretary Jeb Spaulding said that from the governor’s point of view, “the case is not closed” on some tinkering with tax rates, and Smith said the administration has shown some interest in at least the general concept.
So Democrats have not given up on lowering income tax rates for most Vermonters, even at the cost of raising them for some. They’re ready to start that broader discussion now, in hopes of enacting some changes next year.
Not that it will be easy. Raising taxes on anyone, even just the wealthy, is never easy in an election year. In his closing speech to the Senate, Campbell noted that “Vermonters are already taxed very heavily.”
But not, it turns out, all Vermonters. Tax Department statistics show that in 2011, 58 households that earned more than $300,000 paid no state income taxes at all. No doubt many more who earned that kind of money paid only a pittance. Fiddling with the tax code to make sure they pay roughly the same percentage as a $50,000-a-year household is not likely to arouse much opposition.
But tinkering with it so that middle-income payers aren’t also hit by the changes can be complicated. One proposal, for instance, is to limit how much any taxpayer can deduct for mortgage interest. Real estate lobbyists insist that such a limit could end up raising taxes for many homeowners who are not wealthy.
The challenge, Smith said, is to come up with a plan that ends up “treating everybody the same.” Finding that plan won’t be easy. But as Tony Bennett, Nat King Cole, Ella Fitzgerald or the others who sang that Irving Berlin song about how the melody lingers on could have told the legislators, being a really good musician ain’t easy.
