Category Archives: Taxation

Shumlin Gets Ass Handed To Him

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Smile, though your heart is breaking...

Smile, though your heart is breaking…

The three top Democratic leaders stood shoulder-to-shoulder, smiled, and proclaimed their unity behind an agreement on taxes and health care. They praised each other and the Legislature for working hard and working together. “Everyone has given a little,” Governor Shumlin said.

Well, almost.

After a week of harsh rhetoric about how “Montpelier” (meaning his own party) had produced a tax plan that he “hated,” he accepted a slightly modified version with nothing more than a fig leaf of additional spending cuts.

After days of harsh rhetoric about how capping income tax deductions would be “a big mistake,” Shumlin accepted a deal with a slightly less restrictive cap than the Legislature had been poised to enact.

The legislature “has given a little.” Shumlin gave a LOT.

Which belies his extreme rhetoric about a plan that was very similar to the one he accepted today, and characterized as “fiscally responsible” and “ensur[ing] that we continue to grow this economy.”

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Well, there won’t be a veto.

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Lots of standing around and waiting at the Statehouse today. I just finished standing outside the Governor’s ceremonial office for about an hour, and my reward was to see the Big Three — Gov. Shumlin, House Speaker Shap Smith, and Senate President Pro Tem John Campbell come out and announce they’d reached a deal on the tax bill. And the Governor added that “There will be a health care bill.”

They wouldn’t release any details yet, but they did manage to close the remaining gap. And they all looked happy standing shoulder-to-shoulder, less than 24 hours after Shumlin’s tough talk on taxes seemed to portend a veto of his own party’s tax plan.

Well, that won’t happen. And I guess we shouldn’t be surprised. Rhetoric notwithstanding, there’s always a great deal of momentum toward deal-making at this stage. The unusual thing, really, was that the Governor’s plumage displays were aimed at fellow Democrats.

It’ll still be many hours before adjournment; the bills have to be drawn up, they have to clear the House and Senate, and there’ll need to be some suspending of the rules.

But at this point, it seems inevitable that the key bills will move and the Legislature will adjourn today.

Although the definition of “today” might get stretched a little.

Shummy’s Choice

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Oh, Anne Galloway, stop making me love you.

Shumlin has repeatedly objected to any changes to the state income tax code that could result in wealthy Vermonters paying more in taxes.

Hehehehe. Sounds like something I’d write, but it’s actually a fair summation of the Governor’s stand on taxes throughout his tenure in office. Which continued, big time, last night:

Late Friday night the House and Senate agreed to a tax package that Gov. Peter Shumlin has already said he doesn’t like and may in fact veto.

… The $30 million legislative tax package includes a cap on itemized income tax deductions. Under the plan, taxpayers can claim up to two times the standard deduction, or $25,000 for a household, for itemized deductions. Medical expenses and charitable donations are exempted. The change limits deductions for mortgage interest, property taxes, moving costs and other Schedule A itemized categories.

The plan includes a 3 percent alternative minimum tax for taxpayers who earn $150,000 or more.

Look, this isn’t a radical tax plan. It’d raise about $11 million a year, and it’s in line with what many states do. Vermont has very generous tax laws that provide plenty of breaks for top earners; the Legislature’s plan would take away some of those benefits.

I can almost hear the Governor talking about how this will hurt “hard-working Vermonters.”

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Shumlin amps up the rhetoric

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This is the kind of thing that inspires Harlan Sylvester conspiracy theories.

The narrative goes like this: Sometime back in 2009, Peter Shumlin tells “the most powerful man in Vermont politics” (h/t Shay Totten) he’ll keep a lid on taxes if Harlan paves his path to the corner office.

I can tell you lies, you can't get enough.

I can tell you lies, you can’t get enough.

It’s one explanation for the volume and desperation of Shumlin’s anti-tax rhetoric — aimed, need I remind you, at fellow Democrats.

Yesterday, the Governor slammed a House-passed plan to cap itemized deductions. And to put it plainly, he lied about it.

Ell. Eye. Eee. Dee. Lied.

“Removing charitable deductions, the ability of Vermonters to deduct home interest from their mortgages, which promotes home buying, and removing the health care deduction when you’ve had catastrophic health care costs is a big mistake,” Shumlin says.

Now, that’s bullshit. Ain’t nobody “removing” nothing, and the Governor knows it.

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Shumlin doubles down on bashing fellow Democrats

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If you thought there was a chance that Governor Shumlin would tone down his insistence on last-minute spending cuts, well, think again. Earlier, he’d called two key Senate committee chairs on the ceremonial carpet to argue for tax reductions and spending cuts — in a spending bill that had already passed the Senate Appropriations Committee. This didn’t go over well with Democxratic lawmakers, per Paul Heintz:

Gov. Peter Shumlin’s erstwhile allies in the Democratic legislature lashed out at him Thursday for pushing new cuts after the Senate Appropriations Committee signed off on the budget.

“It’s insulting to the process,” complained one top Dem.

… “It’s been pretty lonely in there all winter,” Sen. Bobby Starr (D-Essex/Orleans) said, referring to the Appropriations Committee, on which he serves. “I woulda thought they would’ve been in at least a month ago, if not five, six weeks ago, offering some suggestions.”

House Majority Leader Sarah Copeland Hanzas noted that the House-passed tax and spending bills actually called for less spending than the Governor’s original budget plan. She called the gubernatorial disconnect “perplexing.”

Welp, the Governor is unbowed by all the pushback.

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A new path forward for Peter Shumlin?

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Maybe he’s pulling a Tom Salmon, and planning to run as a Republican next year.

Nah, I doubt it. But it’d explain the sudden, aggressive, and decisively centrist re-insertion of himself into legislative debates. At the very last minute. After months of serenely floating above it all, and letting lawmakers shred his proposals to pieces.

The latest comes from VTDigger’s Anne Galloway, who tells us that the top Senators on taxes and spending were yanked into the Governor’s office yesterday afternoon to get an earful of his displeasure with the current budget and tax bills. According to Galloway, he “hates the tax bills from the House and Senate and would prefer to cut more from the budget.”

And:

While it’s the governor’s prerogative to influence the legislative process and ultimately sign or veto the legislation, Shumlin’s down-to-the-wire timing perplexed insiders who say the governor has had four months to influence the budget and tax bills, and has not made a concerted effort to do so until now.

… “Disrespectful” was a word several people used to described Shumlin’s late-game tactics.

He certainly seems to have adopted a scorched-earth approach toward his relationship with the Legislature — after promising, after the 2014 election, an open and collaborative approach. You know. that listening and learning stuff.

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Surgery with hammers

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So the House passed a tax bill including a measure that will make Vermont’s income tax system more progressive by capping itemized deductions at 2.5 times the standard deduction. Since affluent taxpayers benefit from deductions far more than low earners, the deduction cap will (modestly) increase their taxes.

That’s a good thing. And of course the Senate can’t leave it alone.

Sen. Tim Ashe, D/P-Chittenden, chair of the Senate Finance Committee, wants to take a more “surgical” approach [to tax deductions].

… In a Senate Finance Committee bill he introduced on Tuesday, Ashe proposes three changes: A cap on mortgage deductions (to be determined, but between $12,000 and $15,000); a 3 percent minimum income tax; the elimination of charitable deductions and the creation of a 5 percent income tax credit for donations of over $5,000 made in Vermont.

Tim Ashe is a very smart man. He should consider developing a personality if he wants to run for higher office, but he’s got a lot of good ideas — such as wanting to take a comprehensive look at how our tax structure works and doesn’t work.

But “surgical” is a misnomer in this case. Using tax deductions and tax credits to influence public behavior is inherently inefficient.  Those tax breaks are almost always marginal and have little to no effect on most financial decision-making by individuals and businesses. This is especially true of state tax policy: Vermont’s deductions are worth far less than the federal ones, and their impact is feebler and harder to measure.

Don’t believe me? Well, when was the last time “tax implications” were a decisive factor in a purchasing decision?

Sure, it’s a factor, but the benefits are dwarfed by the costs. We’d be far better off if we stopped trying to micromanage how people use their money and created a much simpler tax system.

Still don’t believe me? Okay, let’s take a popular and very direct tax incentive: the sales tax holiday. Yes, it encourages people to buy goods on a given day — but most of those goods would have been purchased anyway, sooner rather than later. The tax holiday concentrates that purchasing in a single day, but it creates little or no additional demand. The state foregoes sales tax revenue for very little real effect on the economy.

Still don’t believe me? How about this: even when a tax incentive has an effect, it has even greater side effects. Take, for example, the mortgage interest deduction: it has encouraged home ownership — which may or may not actually be a good thing, especially in an age of greater mobility — but it gives the biggest tax breaks to those who need them least. A rich guy owning a million-dollar home and a country estate will get a whole lot more benefit than a median-income family scratching out a mortgage.

The mortgage interest deduction’s unintended consequence: We are all subsidizing the mansions and playgrounds of the wealthy.

Ashe’s ideas for a “surgical” approach seem okay, I guess, but I’d much rather take the House’s approach of a simple deduction cap. Let’s stop pretending we can steer our economy through the tax code. Let’s have a bias for simplicity when considering changes to our tax code.

Stupid Tax and Budget Tricks

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The Republicans often (constantly) accuse Gov. Shumlin and the Democrats of irresponsible governance — of taxing and spending without regard for the long term.

Well, pot, meet kettle.

Consideration of the tax and budget bills in the House has been marked by Republican gimmickry and short-term thinking. And it looks like we’re in for more next week.

A few examples.

First, House Minority Leader Don Turner’s deal with Speaker Shap Smith, delivering ten Republican votes in exchange for more money for Emergency 911 call centers and the Vermont Veterans’ Home. Thus ensuring the passage of a budget he claims to oppose, and fattening it by more than a million dollars.

Second, Rep. Paul Dame’s unaccountable vote for restoring full LIHEAP funding, in spite of the fact that he opposes all tax increases and wants even deeper spending cuts  — conveniently unspecified — than the Democrats proposed. Which means if we restored LIHEAP, we’d have to cut the money somewhere else — almost certainly in other human-services programs, since that’s the lion’s share of General Fund spending.

Third, Rep. Job Tate, a House freshman who was previously noted for handing out Life-Savers in honor of the Emergency 911 call center staffers whose positions he sought to maintain even while insisting on No New Taxes and More Cuts Elsewhere. Today he resorted to an old chestnut of Budget Theater: proposing a pay cut for lawmakers.

Who, as it is, make a mere pittance for their work. And because their pay is so minimal, the cut would have been minuscule compared to the budget gap. But hey, it would have sent a message, right? Share the pain, right? Yeah, thanks for participating, Mr. Tate.

And then we have Paul Dame, he of the pandering and hypocritical LIHEAP vote, proposing another cynical amendment. The tax bill includes a cap on itemized deductions equal to 2.5 times the standard deduction. Well, Mr. Dame touted an amendment to allow unlimited itemizations for people with incomes under $60,000 a year.

Never mind that pretty much everyone who earns less than $60,000 is taking the standard deduction. It’s virtually impossible to have an income that low and rack up enough deductions to make itemizing worthwhile. It’s an empty gesture aimed at positioning Dame as a friend of the little guy, even as he would force massive cuts in human services programs if he had his way on taxation and budget-writing.

As for next week, one of the big items on the House agenda is the water bill, aimed at sparking cleanup efforts in Lake Champlain and other Vermont waters. The Republicans, natch, oppose any new taxes even while paying lip service to clean water. Indeed, they apparently favor new programs (not that they have any choice, since the EPA would come down on us hard like a criminal if we didn’t act), but want to get the funding from existing sources. Like, oh, maybe scraping the gold off the Statehouse dome and selling it to Cash4Gold.com, or searching the seat cushions for spare change.

Or, in Don Turner’s case, scrounging a little money from existing sources and using it “to leverage bonds.”

Bonds?

Oh, you mean debt?

I see. So Mr. Fiscal Responsibility wants Vermont to assume a pile of new debt — adding to our long-term fiscal issues — for the sake of avoiding any new taxes right now.

You know, during the House debate we’d occasionally hear a blast of honest, hard-core conservatism. One Representative basically said all those poors should get off their asses and go to work. At least that’s honest, if it’s also ignorant and mean-spirited. But Republicans trying to have it both ways? That’s just sickening.

The budget gap: an alternative story

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A simple narrative has emerged to explain Vermont’s budget gap of roughly $113 million. Oddly, tragically, it’s pretty much the same narrative whether you’re Republican or Democrat.

The Republicans’ version goes like this: The Democrats are out of control! They’re taxing and spending like drunken sailors!

Some liberals raise a fundamental objection to this — but not Gov. Shumlin. Now, he couches it differently; his version is that Vermont’s economic growth has failed to meet expectations and that state spending has overreached. But his underlying assumption — the state has spent beyond its means — is very similar to the Republicans’.

Gee, no wonder he had trouble developing a clear narrative in the 2014 campaign.

It’s true that the economy has underperformed expectations — but that’s not a phenomenon unique to Vermont. Nor is it attributable to our alleged “tax, spend and regulate” ways. By many measures we’re doing better than our northeastern neighbors. And we’re doing a hell of a lot better than states with hard-core free-market governments like Wisconsin, Michigan and Kansas.

(The states where free-market ideology is credited for booming economies enjoy unrelated economic advantages: Texas and North Dakota’s fossil fuel wealth, Arizona and Florida’s retirement havens and influx of immigrants.)

(Yes, immigrants. Most of them are hardworking people who came here in search of a better life. They add energy and ambition as well as cultural spice to our melting pot. We could use more of them here in Vermont.)

There’s an alternate story to tell about how we got into this fix. Strangely enough, it actually shows the Shumlin administration in a positive light. If only the Governor was willing to tell it.

Part of our problem is the structure of our tax system, as previously discussed in this space. ur income tax system has an extremely narrow base because of how we calculate taxable income and allow itemized deductions.  We’re losing tens of millions in potential revenue because our sales tax system has more holes than Swiss cheese. (Sen. Tim Ashe, chair of the Senate Finance Committee, estimates that we’re losing $50 million a year because of Internet sales. That’s not new tax money; it’s money we used to collect and aren’t anymore.)

The rest of the problem is that the Democrats have been responsible stewards, even if it means short-term trouble. They’ve tried to manage state finances in difficult times while maintaining state programs that have a beneficial impact on our present and future well-being.

Programs like Reach Up and expanded health care access and substance abuse treatment aren’t giveaways; they’re aimed at giving Vermonters a way out of systemic poverty. There’s also an immediate benefit: money spent in programs like food stamps and LIHEAP and the Earned Income Tax Credit go directly back into the economy, creating much more positive impact than capital gains tax cuts or corporate tax breaks.

And here’s a great big item that, sadly, I didn’t even realize until Saturday when House Speaker Shap Smith addressed the State Democratic Committee. The Democrats have spent millions to restore full funding to public sector pension plans. Smith mentioned $60 million, and called it a significant reason for our budget troubles.

Which is true. But it’s also the responsible — nay, the legally required — thing to do. The pension gap was created through years of mismanagement under previous administrations. (You know, those administrations that featured budget hawk Tom Pelham in prominent roles.) They took the easy way out of budget predicaments: putting off the day or reckoning. As Smith said, “we’re making up for the sins of the past.”

Really, it’s the Republicans who are bad managers. They are so single-mindedly focused on cutting that they fail to develop any sort of vision for governing. And they undercut the good things that government can, and should, do.

Two more overdue investments. First, the current administration has instituted health care reforms that have produced some waste and a bug-riddled website, but have also cut our uninsured population to 3.7%, compared to a national average of 12%.

And second, it’s making a long-overdue attempt to clean up Lake Champlain. That’s another legacy of the short-sighted practices of past administrations: they ignored the problem and let it get worse. And more expensive to fix.

These are noteworthy accomplishments. They are the right things to do. They are not wild or radical or thoughtless. And they are big reasons why we’re in our current budgetary difficulties.

And that’s it. It’s not a narrative of spendthrift liberals bankrupting the state. It’s a narrative of careful investment in Vermont’s future weighed down by a legacy of bad management and an outdated, creaky tax system.

This is not to say that I agree with everything the Democrats do. They’ve been too careful for my taste. But they do have a compelling story to tell.

Too bad nobody’s telling it.

Flynn Center Presents: Serenade for Tiny Violins

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A state tax reform measure that would cap itemized deductions at 2.5 times the standard deduction has picked up quite a bit of steam in the Legislature. And right on cue, here comes the Flynn Center’s John Killacky to sound the alarm: limiting itemized deductions “could have dire… consequences for Vermont’s nonprofits.”

tiny violinAwwwwwwwwwwwwww.

Pardon me if my heart doesn’t bleed. What he’s saying is that we have to let our wealthiest keep a whole lot of their money in hopes that they’ll give bits of it to charity. It’s a very inefficient way to encourage philanthropy, especially in a day when our regulation of “nonprofits” is so lax, it’s laughable.

Just one example. The Koch Brothers, and many of their fellow megawealthy conservatives, don’t actually donate much to political parties or candidates. No, they set up networks of nonprofit organizations with “educational” missions and — wowee! — promote their ideology while simultaneously pocketing huge tax savings. Yeah, we’re subsidizing conservative propaganda. Feels good, doesn’t it?

(We’re also subsidizing a fair bit of liberal propaganda. The Vermont Workers’ Center has become a very well-funded organization thanks to dozens of annual gifts from nonprofit foundations, many of them set up by wealthy individuals. Its biggest donor is the Ben & Jerry Foundation. I’m not equating the Vermont Workers’ Center with the Koch Brothers, but they both sail along on a rising tide of tax-deductible contributions.)

Back to Vermont. Killacky cites a survey that shows “67 percent of people interviewed confirmed that a decrease in income tax deductions would cause them to contribute less.”

Perhaps. I’d like to see how the study was conducted and how the questions were worded. But even if it’s legit, it should have little to no impact on Vermont’s debate over itemized deductions.

That’s because the big kahuna is the federal deduction. A change in Vermont law would have no effect on that far larger tax benefit. There would still be abundant incentive to contribute.

Killacky also fails to mention that Vermont’s current tax rules for the wealthy are among the most generous in the nation. If we put a cap on deductions, we’d no longer be an outlier in our generosity to our wealthiest citizens, but we’d still be plenty generous.

The scare tactics are entirely out of proportion to the real situation. I can understand why Killacky feels obligated to scurry to the defense of his fat-cat donors, but his arguments are unconvincing.