[T]axpayers with high health costs complained to lawmakers and the Tax Department this year after they discovered their 2018 tax bills would be higher than expected — in some cases thousands of dollars higher — because the health expense tax deduction had been removed.
Before 2018, when taxpayers could deduct medical expenses that were more than 7.5 percent of their adjusted gross income, that deduction applied to the Vermont return as well.
But last year, adjusting to federal tax changes, Vermont lawmakers decided to alter that state deduction and many others, creating a class of taxpayers who did not qualify for the deductions anymore. Vermonters still receive the health expense deduction at the federal level.
The House Ways and Means Committee took up the matter this winter, and discussed a bill that would restore the health expense tax deduction at a cost to the state of about $5 million. But those lawmakers decided not to act on the measure, which means it didn’t get a hearing in the full House.
Sen. Ann Cummings, chair of the Senate Finance Committee, also took testimony on the matter, and said she wanted to find a way to help taxpayers — many of them elderly — who saw their bills rise sharply this year because the health expense deduction was gone. The Washington Democrat would like to restore the deduction in some form as part of H.541, the revenue bill that Senate Finance is working on this week.
“It would be a good idea to see if we can’t solve the problem” of the health expense deductions, Cummings said Monday.
“It was mostly the Wake Robin folks who hit us with a flurry early on,” said Cummings of complaints about the 2018 tax change. Wake Robin is a continuing care retirement community in Shelburne. “And then as other folks started to do their tax forms, it started to hit home, and we had a couple folks come in and talk about having huge medical or nursing home expenses.”
The Legislature’s Joint Fiscal Office, or JFO, has created several variations for restoring the deduction, and members of the Senate Finance Committee mulled the options Monday, choosing one that would cost the state $2.3 million in lost tax revenue. Under that scenario, any health expense deductible at the federal level would be deductible at the state level if it exceeds the taxpayer’s standard deduction and personal exemptions.
Committee member Sen. Chris Pearson, P-Chittenden, said he felt the solution agreed upon Monday would go the furthest toward helping families who have health crises.
“You have people that have cancer or some kind of event like that, and they are cashing in a chunk of their retirement, so all of a sudden their income goes up, and the tax burden from that kicks in, and they have to pay for the medical thing,” he said. “Then they’re also not finding this deduction. It’s sort of a three-part hit, and we’re trying to focus more on them.”
It’s not yet clear how many taxpayers the change discussed Monday this would affect; JFO was due to return to the committee room Tuesday with that number and answers to other questions from lawmakers. Kaj Samsom, the state’s tax commissioner, estimated the number at about 4,000 taxpayers.
There has been criticism over the last few months that removing the health expense tax deduction would mainly benefit the wealthy.
“My own observation is that the value of the deduction is skewed towards higher income,” Samsom said, adding that this would be the case even if the deduction were partly restored as discussed by Senate Finance Monday.
However, Samsom added that some taxpayers inaccurately appear to have a high income after they withdraw money from their retirement accounts to pay for medical expenses.
“Some of these folks are in the upper income bracket solely because they had to withdraw from an IRA solely to pay for the care,” he said. “This does skew our view of the progressivity of it.”
For many people who have voiced their concerns about the removal of the deduction, an enormous health expense is entry to a continuing care community like Wake Robin, which says on its website that entrance fees range from $163,000 to $642,000.
State Rep. Sam Young, D-Greensboro, said he would be more comfortable if the deduction went to help people who had an unexpected and acute medical condition.
“Where people pay these large entrance fees into high end long-term care facilities, and then they get to spread it out so they don’t have any tax liability for a while … if you have an acute medical condition, and had to have surgery that year and it took up most of your income to pay for it, I’d have a lot more sympathy for that than for someone who is very wealthy and this is where they want to live the rest of their life,” said Young, who is on the House Ways and Means Committee. “Is that truly a medical deduction?”
Senate Finance planned to come up with ways of paying for the $2.3 million shortfall on Tuesday afternoon as it talks about the $19 million already at issue in the revenue bill. JFO has also come up with some ideas for replacing the lost health care tax money. Among them are creating a new property transfer tax rate on property transfers worth more than $500,000, raising corporate income tax rates, raising the highest income tax rate, and reducing or eliminating a planned increase in the estate tax exemption.
Pearson said he supports JFO’s ideas for making up the $2.3 million.
“Many of JFO’s ideas are progressive, in terms of getting after upper income Vermonters who have seen, after all, a benefit from the Trump tax cuts,” Pearson said. “I’m comfortable with that as a way to go forward — to tweak very minorly the upper bracket, or possibly have a phase-in of the upper tier on the property transfer tax, and to treat people who are buying a million-dollar home differently from people who are buying a $200,000 home.”
