Supporters of lowering the estate tax burden say Vermont’s taxes are discouraging people from moving to the state, or even driving them away.
Vermont senators don’t subscribe to that theory. On Thursday, they voted to remove any reform to the estate tax. The tax now applies to individuals who die with estates worth more than $2.75 million, but Gov. Phil Scott sought to raise that floor to $5.75 million, which would put Vermont more in line with neighboring states like Maine and New York.
The House had approved a proposal to increase the exclusion to $5 million, but Senate Finance Committee recommended to remove any change to the state tax, leaving it $2.75 million. The full Senate supported that proposal when it gave preliminary approval to the state’s revenue bill, H. 541,Thursday.
“Why people leave or stay in Vermont is like another one of those things, like TIFs or religious dogma: You believe it or you don’t,” said Sen. Ann Cummings, chair of the Senate Finance Committee, which zeroed in on estate tax cuts last week as it was looking for revenue sources. By TIFs, Cummings was referring to tax increment financing. Vermont lawmakers disagree on the efficacy of using tax increment financing to promote economic development.
Cummings, D-Washington, said her committee doesn’t believe people leave Vermont because of the estate tax.
“We understand other people may feel differently,” she said.
The estate tax reduction came up for review as part of a complex juggling act Senate Finance undertook this week and last as it sought to tackle another priority: restoring a tax deduction for health care expenses. That deduction was removed last year, and some taxpayers protested loudly when they learned their tax bills would rise sharply this year as a result.
After many of those taxpayers testified in Senate Finance, that panel decided to restore at least some of the deduction. But they needed to find $2.3 million more than expected in order to do that. Cummings and other committee members sought to distance the estate tax from the health expense tax deduction, saying they were just two pieces of a complex puzzle of tax sources that make up the revenue bill. Lawmakers are considering more than $30 million in tax changes this session, as part of several bills.
The health expense tax deduction has garnered attention throughout the session. The House Ways and Means Committee this winter considered a bill that would restore the deduction, before deciding not to send the bill on for review by the full House. But the issue took hold in the Senate Finance Committee in the spring.
“The way in which we have positioned ourselves differently from the House is one of our top priorities is the medical exemption,” said Sen. Becca Balint, D-Windham, who is on the Senate Finance Committee. “There might be several levers that we need to move to make that possible, but we’re just hearing devastating stories from Vermonters who are facing catastrophic medical expenses that they can’t deduct.”
The health expense tax deduction prompted wide debate in part because it is seen by some as a tax cut for the wealthy. Residents of the Wake Robin retirement care community first lobbied House Ways and Means to restore the deduction this winter, and not until the matter emerged in Senate Finance later did advocates also testify that the deduction would help middle-income families, for example those with sick children.
It’s difficult to analyze whether the deduction disproportionately helps the wealthy in part because some people cash in a retirement fund such as an IRA in order to pay for a spouse’s care, and then that withdrawal is taxed as income.
The Joint Fiscal Office provided lawmakers some detail on how the deduction was used. Stephanie Yu, deputy director of the nonprofit Montpelier think tank Public Assets, also analyzed the use of the tax and said the medical expense deduction went to taxpayers across the income spectrum.
“Higher-income people did see larger benefits on average however,” she said this week.
Another change that won preliminary support in the revenue bill Thursday will definitely affect the wealthy: lawmakers approved a proposal to raise income taxes on the very highest earners – a measure that would largely affect those making more than $450,000 annually. H.541 would also raise the capital gains tax on larger transactions, for example on those netting the seller more than $625,000. It would also increase the number of transactions subject to the property transfer tax and expand the definition of who is liable for the fuel tax. It would reduce the land gains tax.
The estate tax exemption provoked the most debate on the Senate floor Thursday. Some of the senators who ultimately voted to approve the measure expressed some hesitation because it would lower the exclusion.
“I think $2.75 million, while I know it’s a huge amount to some people, when you think of the wealth in the country and state probably isn’t an extremely high number,” said Sen. Debbie Ingram, D-Chittenden. “I think of myself as a good Democrat. But I start to think maybe we’re going a little too far.”
The bill is scheduled to come up for another vote Friday in the Senate. If it passes, it will also go before a conference committee of House and Senate members before reaching the governor’s desk for signature. Several lawmakers said Wednesday they expect elements of the far-ranging bill to change in that process.
“I hate parts of this bill,” said Sen. Randy Brock, R-Franklin and a member of the Senate Finance Committee, singling out its capital gains tax increases in particular. But before the vote, he said he’d approve it, “in the simple hope that we still may find ways to mitigate some of the damage this bill does, in the likely committee on conference.”
