Searching for revenue in all the right places

Warning: This post is full of public-policy geekery. You should not operate heavy machinery during or immediately after reading. Still, I hope you’ll stick around; you’ll learn some useful stuff.

I spent Tuesday morning at a hearing of the House Ways and Means Committee, as it conducted an item-by-item overview of tax expenditures and tax deductions. The subtext is the state budget situation, with its projected $100-million-plus gap. Committee members engaged in a lot of poking and prodding, in search of ways to goose income or reduce outgo.

“Tax expenditure,” for those not in the know, is the technical term for a tax exemption. “Expenditure” is a nice insightful term; in granting an exemption, the state is forgoing tax revenue. In essence, it is spending that money without ever receiving it. In granting a sales tax exemption on food, for example, we are “spending” the uncollected revenue for a social purpose — making food more affordable, and limiting the regressive impact of the sales tax. The Earned Income Tax Credit, given to the working poor, is a tax expenditure. It’s the largest one, in fact, accounting for 49% of the foregone revenue from expenditures. (The second-highest, at 32%, is the Capital Gains Exclusion, which almost entirely benefits top earners.)

As for the sales tax exemption on major equipment at ski resorts… Well, you tell me what social purpose that serves. Beefing up resort owners’ profits, is my guess.

I learned a lot of interesting stuff about expenditures and deductions. The most crucial stuff is about deductions, and I will write about them in a subsequent post. For now, some notes on expenditures.

(For those interested in a whole lot of detail, the Joint Fiscal Office’s 91-page report on state tax expenditures is available online.

Sen. Tim Ashe, chair of the Senate Finance Committee, has his eyes set on the ski-equipment exemption as part of a broader reconsideration of the financial arrangements between the state and resort operators. Auditor Doug Hoffer recently reported that Vermont’s leases of public land to the resorts are outdated and don’t generate as much revenue as they could.

Ashe agrees. “Circumstances have changed dramatically in the industry,” he told me. “The lease conditions haven’t kept pace.” He sees an opportunity to reopen the leases as part of a “recalibration” of the state/resort relationship. On the government side, that might include more lucrative leases and an end to the equipment exemption. On the resort side, it might include changes in state regulation.

The door seems to be open. But as Sen. Ashe puts it, “Is the legislature interested in recalibrating the relationship?” This, and many other taxation issues, may not be settled until the session’s closing days, when the House, Senate, and Governor try to agree on a balanced budget acceptable to all parties.

Ashe also told me that his committee “went through every tax expenditure in the tax code” last year. Some were eliminated, all others were more clearly defined. This year, Ashe has introduced a bill that would require a determination that each tax expenditure is achieving its intended purpose. That might touch on some of the corporate tax breaks, such as the exemption for research and development. At the Ways and Means hearing, it was said that large corporations can simply assign a portion of their entire R&D expense to Vermont, whether or not the work was actually done here. There was some sentiment on the committee to rein in that exemption — define it more narrowly, or tie it more directly to job growth in Vermont.

Most tax expenditures are relatively uncontroversial. Purchases of home heating supplies — oil, gas, propane, wood — are exempt from sales tax. This is a big item, but who’d want to repeal it?

There was surprise around the table that the sales tax exemption on food is very broadly defined. It includes soda, candy, and nutritional supplements. That’s a lot of foregone revenue for stuff that is either harmful to health, or whose benefits are questionable. And it’s ironic, at a time when we’re considering a tax on sugar-sweetened beverages. But it’s difficult to draw a hard and fast line. Is a CLIF Bar “candy”? Pop-Tarts? Yogurt-covered almonds? Kettle corn? Vermont Maple Syrup?

So that’s a can of worms that no one will likely want to open.

One item that might be revisited is the exemption on clothing sales. Vermont used to cap the exemption at purchases of $110 or less. That cap went out the window when the state adopted something called the Streamlined Sales and Use Tax Agreement, a mutually agreed-upon standard for rules on sales taxes that includes 44 states and the District of Columbia.

At the time Vermont adopted the SSUTA, it did not include limits on clothing purchses. It has since been amended, and Vermont could reimpose a limit so that, say, fur coats would be subject to sales tax.

However, Sara Teachout of the Joint Fiscal Office warned the committee that much of the potential revenue would be unrealized because so many clothing purchases are conducted online. And I’m sure brick-and-mortar retailers would scream if lawmakers considered limits on the clothing exemption.

The terms of some tax expenditures are outdated, or in imminent danger of becoming so. For example, there’s a sales tax exemption for newspapers. But does it apply to digital subscriptions? No one in the hearing room had a clue.

There’s an exemption for movie theaters’ purchases of films — on the grounds that ticket sales are taxed, so taxing the film purchases would be a form of double taxation. But these days, virtually all theaters are showing digital movies. They don’t get cans of film; they get a “black box” that contains a playable (but not reproducible) digital copy of the movie. That copy is set to expire and become unplayable at the end of a movie’s run. Can it be said that the theater is actually buying anything?

Mobile and modular homes have a partial tax exemption. But these days, almost all home building includes modular elements, pre-constructed at a factory. Has the tax code kept pace with the industry?

Those were the most interesting tidbits about tax expenditures, at least to my eyes. The JFO’s report includes a wealth of information; for each expenditure, there are figures for the total estimated cost, the number of taxpayers who take advantage, and a short explanation of the reasons for the expenditure.

Coming in the near future: tax deductions — the #1 creator of unfairness in Vermont’s income tax system.  This may become the battleground over how, or whether, to raise additional revenue and limit the scope of necessary budget cuts.

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