Editor’s note: This commentary is by Vermont Secretary of Administration Susanne Young.
[G]ov. Phil Scott recently released the details of a Vermont personal income tax reform plan, the Working Family Taxpayer Protection Act, which protects Vermonters from unintended impacts of recent federal changes. The administration is taking action because, if we do nothing, Vermonters – mostly working families with children – will pay more in state tax on their 2018 income.
It seems counterintuitive, but while many Vermonters will see their federal taxes go down, about half will see their state taxes increase. Why? Because the Federal Tax Cuts and Jobs Act changed the way federal taxes are calculated, which means the way Vermont taxes are calculated will change – increasing taxable income at the state level.
The result is that the state of Vermont would collect about $42 million in additional taxes on Vermont families (a net total of $30 million in increased revenue to the state), simply because of these federal changes. In other words, this is an accidental tax hike that the governor’s plan will prevent. And we must act now to keep this money in the pockets of working families, rather than being collected and spent by the state.
This increase has the greatest impact on Vermont’s families, particularly tax filers with two or more dependents, because federal reforms eliminated personal exemptions, including for dependents. We think it’s safe to say, if policymakers in Montpelier sought to raise an additional $30 million in tax revenues, we would not target working families – the very demographic we are working hard to retain and recruit.
Gov. Scott believes this inadvertent tax increase is unacceptable. So, his plan protects Vermont families without reducing state revenues or cutting spending. It is not designed to raise more tax revenue and it doesn’t shift the burden among different taxpayers or different taxes. Instead, the intent is to ensure that Vermonters receive the full benefit of the change in federal policy. Additionally, this plan greatly simplifies Vermont’s tax calculation, lowers rates, encourages charitable giving and increases the stability and resiliency of our state revenues and tax system.
Specifically, the proposed changes define Vermont-specific deductions from the adjusted gross income line from the IRS 1040. Currently, Vermont is one of fewer than 10 states that doesn’t already define these deductions. Those states that define their own calculation are feeling little impact from the federal reforms. Making this change will give Vermont more of a competitive edge with other states as we work to attract a labor force and businesses to move to Vermont – as long as we don’t undermine this improvement by creating new or higher income taxes.
In response to the elimination of the federal personal exemption, the governor’s proposal allows for a state personal exemption of $4,000. This will stabilize withholding amounts and total tax liabilities while recognizing and reducing the financial burden on Vermonters with dependents.
Further, the proposed Vermont income deduction will allow a deduction of $6,000 for single filers, $12,000 for joint filers, and $9,000 for heads of households. This measure keeps the deduction at roughly the 2017 standard deduction level with a goal of ensuring Vermonters state tax burden is as close to 2017 levels as possible.
With these changes, the governor’s plan will also lower tax rates – again, without reducing state revenues – to make Vermont more competitive with other states. And, it does so while maintaining Vermont’s very progressive system – meaning higher rates for higher incomes.
Importantly, the governor proposes to increase the Vermont Earned Income Tax Credit to 35 percent of the federal amount. This will continue to encourage employment among Vermonters, while protecting those with lower incomes – particularly those with children. And he recommends, a new 5 percent tax credit for charitable contributions because the federal reform could result in far fewer Vermonters making charitable contributions. This will help continue Vermont’s culture of generosity and the connection between charitable organizations and the communities they serve.
Gov. Scott’s proposal will be discussed in the Legislature over the next few weeks. It is a plan that achieves every goal he has set for his administration: To grow the economy by expanding the workforce, make Vermont more affordable for families and businesses and to protect the most vulnerable. For more information on the governor’s proposal, and the federal changes that make it necessary visit this website.
