The House Ways and Means Committee passed an income tax plan Tuesday that would protect Vermonters from paying about $28 million in additional taxes. Gov. Phil Scott’s proposal would return $32 million to taxpayers.
The legislative income tax plan is focused on middle income Vermonters and does not provide as much tax relief to high income households as Scott’s proposal does.
Both plans return revenue to taxpayers that would otherwise fill state coffers in fiscal year 2019.
An inadvertent Vermont income tax hike is expected thanks to the Tax Cuts and Jobs Act. The federal law, passed at the end of December, doubles the standard deduction and eliminates personal exemptions. Since the state’s tax code is closely tied to federal standards, Vermont taxpayers now cannot claim personal exemptions on state taxes. That means about half of Vermont taxpayers will pay significantly more in taxes. The law goes into effect for the 2018 tax season.
The House proposal would provide slightly more tax relief for earners who make less than $100,000 in adjusted gross income, and give back less to high income earners, according to an analysis from the Joint Fiscal Office.
“The alternative proposal … raises a little bit more money from the groups above $125,000,” Graham Campbell, a senior fiscal analyst with the Joint Fiscal Office, told the committee on Tuesday.
The Joint Fiscal Office released figures Tuesday estimating the Ways and Means Committee proposal would give back $28.4 million to taxpayers, while the governor’s plan would redistribute $32.3 million.
A last minute amendment proposed by Rep. Kurt Wright, R-Burlington, and approved by the committee would give back an additional $1.8 million to taxpayers, particularly higher earners.
Both proposals would introduce a 5 percent credit for charitable contributions. The Ways and Means proposal initially capped eligible contributions at $5,000. Wright’s amendment will raise the cap to $10,000.
The committee’s income tax reform plan was rolled into a bill that also addresses education finance reform and the governor’s proposed tax breaks for Social Security beneficiaries.
The bill incorporates the governor’s Social Security plan as proposed: retirees with adjusted gross incomes of $45,000 or less would no longer be required to pay state income tax on Social Security benefits. The tax break would phase out with an increase in income from $45,000 to $55,000 and also apply to couples earning adjusted gross incomes of $65,000 or less.
However, instead of introducing Social Security tax breaks incrementally over three years as the administration proposed, under the Ways and Means proposal it would go into full effect next year.
The Social Security tax break would cost the state about $4.5 million.
Like the governor’s plan on income tax reform, the committee’s proposal would create a Vermont standard deduction and Vermont personal exemptions. The standard deductions would be the same as in the administration’s plan: $9,000 for heads of household, $6,000 for single filers and $12,000 for joint filers. But the committee proposal’s exemptions would be slightly higher at $4,150 versus $4,000 each.
The Ways and Means proposal and the governor’s plan would both lower income tax rates by 0.2 percent for each income bracket. A provision in the Ways and Means legislation collapses the two highest brackets.
Kaj Samsom, the commissioner of the Vermont Department of Taxes, raised concerns Wednesday about the increased tax burden on high income earners in the underlying Ways and Means bill.
“I haven’t heard consideration of the potential for net reduction in Vermont high earners and how that may impact revenues and economic growth going forward,” Samsom said in written testimony submitted to the committee.
“Our relative tax competitiveness took a hit … with the TCJA. We have lost ground in multi-state tax competitiveness even if we do nothing except the governor’s income tax reform,” he wrote.
Rep. George Till, D-Jericho, a member of the House and Means Committee, said that while high income earners would receive less under the proposal, they also benefit more from federal tax reform. Deductions under the new federal tax law, for example, allow for “pass through” income: Business income that can go straight to a personal tax return and avoid a corporate tax, he said.
“I still would anticipate significant benefits at the upper end,” Till said.
