Lawmakers change tax structure with cap on deductions

Janet Ancel

Rep. Janet Ancel, D-Calais, is chair of the House Ways and Means Committee. Photo by Amy Ash Nixon/VTDigger

In recent years, the miscellaneous tax bill has largely been a laundry list of technical corrections to Vermont’s tax code.

Changes in sales and income tax rates haven’t been approved since 2006 and 2009, respectively, and upticks in the property tax rate have been made in the past two years with great reluctance.

There is good reason. Sensitive to the notion, in the words of Gov. Peter Shumlin, that Vermont is “taxed out,” members of the General Assembly’s powerful tax writing committee, House Ways and Means, don’t like to raise “revenues” unless they are necessary.

Over the past six years, lawmakers have studied a wide range of taxes — from changing the income tax base to taxing soda and closing loopholes in the $1 billion in tax exemptions the state allows. But in recent years, none of those big ideas have made it through House Ways and Means or Senate Finance, which vets House proposals.

This year is different.

The majority of the members of the House committee believe the state needs to raise $35 million in taxes as part of a plan to close a $113 million budget gap. Eight of 11 members of House Ways and Means supported the miscellaneous tax bill Friday. The dissenting votes came from two Republicans, Reps. Bill Canfield and Patti Komline, and independent Adam Greshin.

The bill, which the House will take up Thursday in tandem with the budget bill, makes several changes to the income tax and the current use property tax break program. It also prohibits the sale of lottery products in bars and restaurants that sell alcohol and includes a study of corporate tax havens.

The miscellaneous tax bill also incorporates Gov. Peter Shumlin’s proposal to eliminate an income tax deduction for state and local taxes, which raises $15.5 million in new revenue. The Shumlin administration says 30 percent of Vermonters itemize deductions on their income tax returns. The average cost per taxpayer would be $175 per year, according to Jim Reardon, commissioner of the Department of Finance and Management.

The most controversial provision in the bill is a cap on itemized deductions that would raise $20 million in new revenues. The cap is 2.5 times the standard deduction, which is $15,500 for an individual and $31,000 for couples filing jointly.

There are roughly 93,000 filers who itemize deductions on their returns. About 20,000, or 21 percent, would be affected by the cap, according to figures from the legislative Joint Fiscal Office.

Nonprofit groups oppose the cap because they say it will lead to a decline in donations from wealthy Vermonters; real estate agents dislike it because they fear it will hurt an already fragile property sales market in Vermont.

Rep. Janet Ancel, D-Calais, chair of House Ways and Means, says the cap on itemized deductions will make the tax system fairer.

“It’s good tax policy and it raises the necessary revenue for programs most of us want to support,” Ancel said in an interview.

Ancel, like her counterpart in House Appropriations, Rep. Mitzi Johnson, said the goal was to close the $113 million gap with a balance of budget cuts, one-time monies and more tax receipts. The hole was filled with $53 million in reductions, $35 million from income tax changes and $24 million in funding that is only available this year. Last year’s budget was balanced with $53 million in one-time funds.

“It’s clear to most of us that we don’t want to solve this with cuts alone or revenues alone,” Ancel said. “We’ve gotten to a place of balance where cuts are one-half of the total.”

Greshin, I-Warren, says broadening the tax base by capping deductions is better than creating new taxes, but he says “raising revenue for unsustainable spending that will necessitate yet more future revenue is bad public policy.”

“I can’t support new revenue until I’m convinced we’re on a sustainable budget path,” Greshin says.

House Republicans have said they will not vote for a budget bill that includes any tax increases. The budget, they say, should have been level-funded.

The state has seen a growing gap between tax receipts and state spending over the past seven years. Economists, the governor and lawmakers have said the state has a structural gap between revenues and expenditures that is now running at about 2 percent.

Next year’s gap is projected to be $48 million, even with proposed cuts this year to the state workforce and a wide range of programs and human services.

While many in the Statehouse believe the state has a structural spending problem, others say the state has a structural economic development and revenue issue. Personal income and corporate tax rates have been running lower than projections for more than a year.

Ancel says tax receipts have not kept pace with state spending because the state’s tax system is not designed to capture revenues from the new economy. That’s one of the reasons why she believes it’s important to cap itemized deductions.

“We should be taxing parts of the economy that are growing, and we are consistently failing to do that,” Ancel said.

The sales tax is another example of a revenue source that is declining as more Vermonters buy products and services online. The state has passed an Amazon tax for online goods, but it would only go into effect if a number of other states adopt similar legislation.

Anne Galloway

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