If the Governor is worried about the wealth gap, he could maybe do something about it

Gov. Shumlin’s budget address began with a bit of boilerplate that’s been a recurring feature in his recent public remarks: bemoaning the wealth gap in America.

At a time when the wealth gap between the people at the top and everyone else is more extreme than since before the Great Depression, Vermonters hear about the recovery both in Vermont and nationally; they hear about our state’s low unemployment numbers; and they wonder: Why aren’t I seeing it? Why is my family being held back?

The bemoaning is appreciated, but when he does so little about the wealth gap, it comes across as an empty rhetorical gesture — the last ghostly trace of a progressive agenda.

Okay, I don’t expect Peter Shumlin to single-handedly fix our profoundly unbalanced economy. But there’s one big thing staring him in the face that would help the middle class and help close the state’s budget gap.

Raise the effective tax rate on top earners. Not the actual rate, but the effective rate.

Yes, I’ve said this before; and yes, Shumlin blocked a House proposal to do just that a couple years ago. But our tax system has gotten worse since then, and our budget shortfall has grown.

Just look at this chart.

ITEP 2014 tax chart

Sorry, I should have warned you: seeing that chart may result in nausea and vomiting.

According to figures released this week by the Institute on Taxation and Economic Policy (ITEP), Vermont’s tax system hits the working and middle classes the hardest, while top earners pay the least of all (as a percentage of their incomes).

In the past, the Governor has praised the fairness of our tax system. He should never, ever do that again until he fixes it.

Not only has he failed to do so… not only has he blocked efforts to do so… but during the last two years, Vermont’s tax system has actually gotten worse. Here’s the ITEP chart from two years ago.

ITEP 2012 tax chart

Compare the two charts: Higher shares of family income for the bottom 60%, and lower shares for the very top. No relief for the middle class, despite the Governor’s rhetoric.

In many ways, our state tax system is relatively progressive, but there are problems. The sales tax is extremely regressive; the property tax hits the working and middle classes the hardest. And as Paul Cillo of the Public Assets Institute points out: 

“The regressive property tax is Vermont’s largest single revenue source supporting state and local public services, and the Legislature has been shifting more and more public costs onto the property tax.”

And while income tax rates are very progressive, the actual taxes paid are much less so. Vermont’s tax rate for top earners is 8.95% — but because of generous rules on taxable income and deductions, those top earners pay an effective rate of only 5.1%. 

In addition to the fairness issue, the disparity puts pressure on Vermont’s budget, as PAI points out:

If the nation fails to address its growing income inequality problem, states will have difficulty raising the revenue they need over time. The more income that goes to the wealthy (and the lower a state’s tax rate on the wealthy), the slower a state’s revenue grows over time.

What have we seen throughout the past several months? Income tax receipts coming in lower than expected, forcing cuts in the budget. Hmmm.

There was one modestly progressive tax proposal in the Governor’s speech: he wants to end a tax deduction for state and local taxes paid in the preceding year, a tax break that mostly benefits upper tiers.

Otherwise, he left our unfair, broken, and inadequate tax system untouched.

Just about every time he opens his mouth, he talks about how Vermonters are taxed to the limit of their ability to pay. This is clearly true for most Vermonters, but clearly untrue for the most fortunate among us.

There is a glimmer of hope. Shumlin yesterday took a tiny step away from his past opposition to raising income, sales, or rooms and meals taxes:

You have heard many times over the past four years my opposition to raising income, sales, and rooms & meals tax rates to fund state government.

When he delivered this line, he gave the word “rates” some extra oomph. And making the income tax fairer wouldn’t require a change in rates; it’d just mean closing loopholes and limiting deductions.

Reasonably. I’m not calling for confiscatory taxes on the rich; I’m just calling for them to pay their fair share in an economy that has bestowed most of its benefits on them.

How about it, Shap?

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