[V]ermont’s anticipated tax surplus from fiscal year 2018, which had been ballooning in recent months, came in at a total of $65 million, state officials reported this week.
The surplus was no surprise to fiscal analysts, or lawmakers, who earmarked the money in the budget they passed, and Gov. Phil Scott allowed to become law, last month.
But officials hadn’t been able determine just how large the surplus would be until after the close of the fiscal year on July 1.
The surge in tax revenue was driven mainly by changes in the federal tax system which led to what fiscal analysts have described as a series of “one-time” boosts.
Companies repatriating money — bringing funds held overseas back to the United States and paying a tax on that transfer — contributed to the surplus, experts say. The federal tax law, passed in December, temporarily offers a lower tax rate for corporations to move their money back home.
In total, a boost in corporate income taxes contributed to roughly $17 million of the total surplus, according to a revenue report released by the Agency of Administration Wednesday.
Personal income taxes accounted for more than $38 million of the surplus.
In May, Scott administration economist Jeff Carr said a good year for the stock market and taxpayers making significant payments related to mergers and acquisitions of companies — both inside and outside of the state — could be behind the boost.
Brad Ferland, deputy secretary of the Agency of Administration, echoed this analysis Thursday, noting many Vermonters saw increased capital gains in the last fiscal year.
“I think because of the federal tax reform, a lot of people had been making estimated payments in anticipations of their gains,” he said.
The state’s emergency board, a panel including lawmakers and the governor that adjusts the state’s revenue forecast, already recognized $44 million of this surplus during a meeting in May. That money has already been specifically allocated in the budget lawmakers passed last month.
The surplus allowed Scott to harness $20 million to buy down the residential property tax rate, and slightly lower the nonresidential property tax rate.
It also gave flexibility for the Democrat-controlled Legislature to invest more than $14 million to buy down unpaid teacher pension liabilities.
Paying off the teacher pension debt, which lawmakers have said could result in tens of millions of dollars in savings for taxpayers over time, was the Legislature’s defining financial priority of the legislative session.
And lawmakers, who knew that an even larger surplus could be expected, ensured that much of the tax revenue coming in above the already recognized $44 million surplus would be harnessed to pay off the debt.
In the budget, lawmakers mandated that the first additional $10 million in any surplus monies would be used to pay off additional corporate tax refunds the state may owe this year.
Any monies above the $10 million threshold would be put toward the teacher pension buy-down.
“I think we’re comfortable saying probably $25 million to $35 million will be going to the teachers pension fund,” Ferland said of the surplus.
Lawmakers and the governor will be determining how much of the surplus will actually be needed to pay off corporate refunds at a meeting of the emergency board next week.
While the federal tax changes inadvertently caused a state tax revenue windfall, they also led to an inadvertent $30 million tax hike which Vermonters would have seen if not for intervention from the governor and the Legislature.
Last session, lawmakers took up a proposal pitched by the governor to shield Vermonters from this tax hike by reforming the state’s tax income tax system.
The federal Tax Cuts and Jobs Act, which passed at the end of last year, doubled the standard deduction but eliminated personal exemptions.
Since the state’s tax code had been closely tied to federal standards, Vermont taxpayers wouldn’t have been able to claim personal exemptions on their state taxes, if not for the reform package.
The plan creates a Vermont standard deduction and Vermont personal exemptions. It also slightly reduces Vermont tax rates and collapses the top two tax brackets.
Under the new system, Vermonters will also be able to take advantage of a charitable tax credit capped at $20,000. Previously, only Vermonters who itemized their taxes — about 30 percent of state residents — could deduct charitable donations from their taxes.
At a press conference Thursday, Scott touted the reform package, noting that without it working families would have seen an increased tax burden.
“This proposal was revenue-neutral and ensured working families with children saw the full benefit of the federal tax reductions, without requiring cuts in state spending,” he said. “It greatly simplifies Vermont’s tax calculation, lowers rates, and encourages charitable giving by all taxpayers while adding stability in revenue collection.”
