[F]acing budgetary pressures totaling $188.2 million between the governor’s budget proposal and the House-approved fee bill, lawmakers will consider bringing back a cap on itemized income tax deductions that stalled in 2013.
Most states tax residents based on adjusted gross income, but Vermont is among the few that tax residents based on taxable income, or the amount taxpayers report after they have claimed deductions.
The House and Senate have considered a variety of modified AGI policy changes over the past several years, based on information from the Vermont Blue Ribbon Tax Structure Commission research released in 2011.
In 2013, the House passed a measure as part of the miscellaneous tax bill that capped itemized deductions at 2.5 times the standard deduction. The cap would have been phased in over two years and would have raised $4.5 million in the first year and $27.4 million the next.
“I think it’s more equitable,” she said, and makes an already progressive income tax structure more so. People at all income levels itemize deductions, but they tend to be most valuable for high earners, Ancel said. As wages have stagnated for middle-income people, the deductions have further “skewed” toward high-income people, who have seen their wages grow, she said.
During a conference committee in 2013, when the Senate and House versions of the tax bill were reconciled, a deal was struck to lower rates across the board so that the deduction no longer raised revenue, but it still gave 200,000 low and middle income Vermonters a tax break, while raising taxes for 15,000 people at the top of the income scale.
The measure garnered support from House Speaker Shap Smith, D-Morristown, and Senate Pro Tempore John Campbell, D-Windsor, but they backed away from the revenue-neutral version of the cap as part of a compromise with Gov. Peter Shumlin — despite having a veto-proof majority in both chambers.
“I think it’s good tax policy whether we’re raising revenue or not,” Ancel said, but she added, “If we need to raise revenue, it’s a place we ought to look.”
When asked about the proposal Thursday, Shumlin, also a Democrat, said: “The answer to our problem is not to raise taxes on Vermonters.” He would not address whether there are Vermonters who could afford to pay more in taxes. Vermont needs to control spending first, or the state’s structural deficit will perpetuate, Shumlin said. Currently, state spending is growing at 5 percent annually while revenue is growing at roughly 3 percent.
Instead, Shumlin said he prefers a “balanced approach” to squaring the budget, which will require “real cuts, finding efficiencies,” and a “small amount of revenue.” The governor wants to levy a 0.7 percent payroll tax to pay for health care reform initiatives and the expanded Medicaid program. The tax would raise $41.4 million this year, and $90 million on an annualized basis going forward.
Asked by a reporter why it’s OK to raise taxes on businesses but not individuals, Shumlin responded, “Because we’re going to give it back to them.”
Under Shumlin’s payroll tax proposal, he has said commercial premiums will drop 5 percent, saving money for businesses that offer a health benefit to employees. Taxing businesses that don’t offer health benefits without an offset is appropriate, “because it’s all of our responsibility to pay for health insurance,” Shumlin said.
Additional revenue in the governor’s proposed budget, about $20 million, comes from eliminating the state income tax deduction, claimed by roughly 30 percent of filers. That deduction doesn’t make a whole lot of sense, according to Ancel, but eliminating it does more for high-income people than the middle class.
“Logically, it probably doesn’t make a whole lot of sense to allow people to deduct on this year’s taxes what they paid on last year’s taxes — that’s essentially what we do,” she said, but because it’s already capped. “If we take it away, the impact falls on middle-income taxpayers, not exclusively but sort of equally.”
Ancel said she’s willing to look at the proposal with her committee, but she’s “not sure it’s the best idea.”
Income inequality is a hot button issue, especially in Vermont where possible presidential candidate Sen. Bernie Sanders, I-Vt., has made it a hallmark of his political rhetoric, and groups including the the Vermont Workers Center and Vermont State Employees Association have called on state officials to raise taxes on the wealthy to avoid cutting government services.
The VSEA recently released a number of ways to avoid cuts by raising revenue. Among those ideas was creating a minimum 3 percent income on high earners, and capping the mortgage deduction at $15,000. Those were both part of a tax proposal from Sen. Tim Ashe, D/P-Chittenden, in 2013, though Ashe capped the mortgage deduction at $12,000.
Ashe said Thursday that with new members on his committee, he’s working to “reestablish where we think the tax code should go long-term,” and he will have more to say about what revenue options his committee prefers in the coming weeks.
Ancel said she’s asked the legislative Joint Fiscal Office to draw up some options for an income tax deduction cap, which could involve exclusions for certain deductions and revenue- or nonrevenue-generating versions of the proposal. Her committee will take them up in the coming weeks.
Campbell said nothing “is off the table” — an oft-repeated phrase from lawmakers these days — but added that, “revenue isn’t going to be the first place me and the Speaker look, but is it going to have to be part of the package? I think that looking at that size of the (budget) hole there’s going to have to be some revenue generated somewhere.”
