[H]ouse education finance reforms have been jettisoned by the Senate.
The plan, which creates a new school income tax and would have reduced property taxes by 10 percent, didn’t stand a chance in the Senate Finance Committee. Lawmakers came to the conclusion Monday that the proposal wasn’t fully baked. The bill, H.911, will be taken up by the Senate Friday.
Sen. Ann Cummings, D-Washington, chair of Finance, said the panel rewrote the Vermont income tax code to decouple the state system from the federal and didn’t “come in planning to rewrite the property tax code” as well.
“As we went through it, we weren’t sure [the House education finance reforms] accomplished very much,” Cummings said in an interview. “We didn’t have time to give it full consideration. We know there will be ongoing discussions.”
Instead, the legislation increases property taxes by 5 percent for homesteads and 7 percent for non-residential property to pay for a $58 million gap in the statewide education fund that pays for K-12 education.
Kaj Samsom, the commissioner of the Department of Taxes, says eliminating the $60 million income “surcharge” is a positive step, but unfortunately the Senate didn’t find savings to nix the property tax increase.
Rep. Janet Ancel, D-Calais, who chairs the House Ways and Means Committee, said the House sought to shift the burden of paying for education onto income “as a better reflection of ability to pay.” With an “infusion” of money from the surcharge, property tax rates would be flat or below their projected fiscal year 2019 levels, Ancel said.
With the school finance reforms stripped out, the Senate version of H.911 closely tracks the Scott administration’s proposal and focuses solely on changes to the Vermont tax code that deflect an inadvertent $30 million income tax hike on middle income families under new federal changes.
The bill slightly reduces Vermont tax rates for all five income brackets, creates a Vermont standard deduction and Vermont personal exemptions. The changes proposed by the Senate avert a $25 million income tax hike.
Social Security beneficiaries get an immediate tax break totaling about $6 million in both the Senate and House versions of the bill. The money comes from taxes collected from high income earners, and reduces total collections by $25 million.
The governor wanted to give all $30 million in tax increases back this year. To do that, he phased in the tax break for seniors over three years, and the money would have to come out of the budget — not tax collections.
The Senate proposal also lifts a $10,000 cap on donations to nonprofits imposed by the House that advocates said would deter wealthy people from making large contributions. The House, Senate and the Scott administration proposals create a 5 percent tax credit for charitable donations as a way of counteracting higher standard deductions for federal taxes that experts say will discourage middle income Americans from itemizing deductions and giving to nonprofits.
“The big swing was in the charitable deduction,” Cummings said. “The Senate didn’t put a cap on that. We were concerned about making sure that not just cultural charities, but also the ones providing a significant state service like the Visiting Nurses Association stayed fully funded.”
To help fund the charitable deduction, Cummings said rates in the top two brackets were reduced by 0.1 percent instead of 0.2 percent, as proposed by the governor. The House collapsed the two top rates.
“We are going to cost upper income people some more, but they will be the primary beneficiaries of that uncapped [deduction] so we’re trying to find some balance,” Cummings said.
Only about 30 percent of Vermont taxpayers itemize deductions.
Ancel said that capping the tax credit allowed the committee to design an income tax system that benefits to low- and middle-income Vermonters.
“The concern I have is of course to maintain that favorable treatment for low- and middle-income families,” she said.
Samsom applauds the Senate’s elimination of the cap on charitable donations, but he says the Scott administration is committed to returning all $30 million of the averted tax revenue to taxpayers. The governor also is insistent on lowering all rates by 0.2 percent.
CORRECTION: A previous version of this article said H.911 was taken up by the Senate on Thursday. That action was suspended until Friday. The tax increase proposed by the Senate is 5 percent for homeowners and 7 percent for nonresidential property owners.
