To tax or not to tax is not the question lawmakers must address this week. The question isn’t even how much: The amount is a predetermined $20 million. The quandary legislators face is what to tax, and in turn, what constituency and/or stakeholder group to offend the most (or the least), in the process.
The members of the Legislature’s powerful tax-writing committee have four days to figure out how they will raise new taxes next year to cover a gap in next year’s state spending.
House Speaker Shap Smith and the Democratic leadership last week openly rejected the Shumlin administration’s $34 million in new revenue proposals for the General Fund, including the elimination of $17 million in Earned Income Tax Credit refunds to low-income working Vermonters and $17 million from a 10 percent tax on break-open tickets. The governor’s tax proposals are tied to $46 million in new spending on programs.
At the moment, the House Ways and Means Committee is looking at a wide array of options that add up to more than $130 million in sales, business, income and other taxes. None of the revenue sources are broad-based tax increases, per se, like the proposed 7 cent per gallon gas tax increase to pay for highway infrastructure improvements that the House will vote on this week in order to preserve access to a federal match of $56 million.
A few of the big items on the House committee’s list could solve the state’s problem in one fell swoop, but most of the options are too insignificant to fill the $20 million gap. Though everything is up for grabs, lawmakers appear to be inclined, at this point, to put together a package of small changes that add up to the magic $20 million number.
On one thing seems certain, however: The governor’s 10 percent tax on break-open tickets sold at local Elks Clubs and American Legion bars won’t generate $17 million. The Joint Fiscal Office, the nonpartisan research arm for the Legislature, puts the figure at $6 million. Last week, Rep. Jim Condon, a Democrat, proposed that the 10 percent break-open ticket tax be applied only to tickets sold at for-profit bars and clubs. That brings the total revenue down to about $600,000. Other lawmakers have suggested that the $6 million figure could be tied to helping to shore up the finances of the Vermont Veterans Home in Bennington, which needs a $3.5 million bailout from the state in fiscal year 2014.
The governor’s biggest revenue-generating proposal would transfer $17 million from the EITC (what Tax Commissioner Mary Petersen and many others have called the state’s biggest anti-poverty program) to subsidies for child care. Legislators say this plan, along with a $6 million budget cut to the state’s welfare program and a $1 million reduction in support for people with disabilities hurts poor Vermonters the most; the governor says the subsidies for child care will help low-income women go back to work.
The potential options House representatives will consider include the elimination of existing sales tax deductions and exemptions Vermonters now enjoy on certain purchases. In all, $44 million worth of consumption taxes are on the table, ranging from the elimination of the 6 percent sales tax exemption on clothing and shoes (totaling $24.9 million) to car washes ($800,000).
Between now and Friday, lawmakers will decide which, if any, sales tax breaks to drop. Should they put a $50 cap on the sales tax exemption for clothing (totaling $5.2 million) and/or the exemption on sodas ($3.5 million)? Tax vitamins ($800,000), or dietary supplements ($2.4 million)? Or bottled water ($1.2 million)?
Average Vermonters aren’t the only taxpayers who could be affected by the committee’s decisions. A reduction in capital gains tax breaks for well-heeled residents (that would particularly hit those who make $1 million or more in a given year) are in the mix (totaling $10.7 million). Mortgage interest deductions that exceed $10,000 or $15,000 a year are on the hit list ($7.3 million and $3.2 million, respectively). The committee is also looking at the elimination of the highest income tax rate bracket, which would generate $2.6 million, and an increase in the top marginal rate for the state’s wealthiest residents to 9.4 percent ($5.4 million).
Corporations could lose an income tax break known as the “production deduction” ($4.5 million) and businesses could lose $5.2 million in savings on capital gains.
Lawmakers are also weighing whether to pursue a tax on sugar-sweetened beverages, which would generate about $26.3 million. Smith has said he favors the elimination of the 6 percent sales tax exemption on sodas ($3.5 million) and candy ($2.5 million) instead because it is easier to apply; advocates for the American Heart Association say the penny per ounce sugar-sweetened beverage tax would impact Vermonters buying habits more directly and have an effect on obesity rates. Representatives from retail groups say their constituents would apply the sugar-sweetened beverage tax across all products anyway.
Speaker Smith told reporters at a press conference on Monday that he thinks it’s appropriate to have a sales tax on soft drinks and candy. In addition, he said he has “never been clear about why we exempt clothing as opposed to other items subject to the sales tax.”
“It’s clear to me we need to have a sales tax on clothing, but I do know that it’s an issue that gets mixed reviews in Ways and Means and the House in general,” Smith said.
The Vermont Grocers Association inveighed against the proposed sales tax on candy and soda last week. Jim Harrison, executive director of the organization, took issue with definitions the state is using, based on information from Minnesota, for candy. Anything with flour in it isn’t taxable, such as Kit Kats, Twix, and licorice. Candy that can be taxed, on the other hand, include chocolate chips, honey roasted nuts and breakfast bars without flour.
The Speaker also supports a cap on mortgage deductions. “I think that people must wonder why we give a mortgage interest deduction to second home owners,” Smith said. “It seems to me that that doesn’t make a whole lot of sense. I am pleased that Ways and Means is taking a look at this issue. I don’t want to hurt average Vermonters paying mortgage interest on homes right now and that they bought with expectations of deductions. It does go to the broader notion of whether we should take a look at our deductions in general and actually close them. I have been a supporter of moving from tax income to adjustable gross income and that would actually mean the elimination of most of the deductions. It would be like many states.”
Smith said moving from a taxable income to adjustable gross income structure does not have broad support in the Senate. When asked about the elimination of the capital gains tax, he said “that would be getting into the weeds and although I once was a tax geek, I’ve lost my affinity for it.”
About 20 Vermont Realtors made an appearance in the House Ways and Means Committee on Friday morning to express their disapproval of the mortgage deduction proposal, just hours after news spread about the committee’s deliberations on the subject.
Chris MacDonald, a lobbyist for the Vermont Realtors, says the mortgage deduction is the “holy grail” for realtors. He says they believe the cap could hurt Vermonters with mortgages own homes valued at more than $200,000.
“Our association looks at this as taxing homeowners another $8 million on top of an additional increase on proper taxes this year,” MacDonald said. “We don’t know all the families this would hit if this went through. This is an extreme concern for us as it goes with real estate sales and protecting home ownership.”
Not everyone in the Golden Bubble opposes tax increases. Statehouse Progressives introduced a proposal last month that includes an estimated $20 million in revenue from an increase in income taxes for those earning $500,000 or more, $11 million from fully taxing capital gains (investment) income, and $5 million via a corporate income or franchise tax on banks.
Sen. Anthony Pollina, P/D-Washington, argued that the state’s richest residents have seen significant income gains over the course of the recession and have tax capacity. It’s the only way, he said, the state can address the growing disparity between the wealthy and the poor.
Gov. Peter Shumlin has opposed any increase in the income tax for wealthy Vermonters.
Editor’s note: This story was updated at 5:30 a.m. and again at 6:02 a.m. Quotes from Chris MacDonald were added at 10 a.m. on March 19.
