Tag Archives: Senate Finance Committee

Surgery with hammers

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.

The hidden costs of Vermont’s outdated tax system

There was a bunch of stuff going on at the Statehouse on Friday. The gun bill was moving through the Senate Judiciary Committee; two House committees were mulling possible taxes to pay for an improved health care system; and all committees were rushing to meet the crossover deadline for non-financial legislation.

To me, the most important thing going on — well, the thing with the biggest potential long-term impact — happened before the Senate Finance Committee, which heard testimony about systemic problems with Vermont’s tax system, and how they contribute to our current fiscal mess.

In a nutshell, a major part of our budget trouble has to do with a narrow tax base for our income and sales taxes, and sales tax revenue lost to the rising tide of Internet retail. And we’re not talking a jot and a tittle; we’re talking tens of millions in foregone revenue.

In other words, if our tax system were up to date, our budget would only need a little tweak instead of major surgery. And the Democratic majority wouldn’t be constantly scouring for ways to scare up some additional money; it’d be flowing in just like always, enough to cover our expenses.

You can see why I wanted to be there.

Senate Finance chair Tim Ashe (D/P-The Big City) called the hearing because of his concerns over our creaky tax system.

“This discussion is about realignment of our tax structure in line with how our economy works today. …We need to be thinking about the future. It’s not about taxing Vermonters out of the state or any of that; it’s saying, how do we avoid an annual crisis management approach? It’s not about taxing this or that person more or less; it’s, are we taxing the right things? Once you determine that, then you determine the rates that are fair and reasonable.”

As part of this work, the committee is taking a fresh look at the fabled 2011 Blue Ribbon Tax Commission’s report, which I’d thought had been relegated to the Dustbin Of Perpetual Ignorage. The commission had some pretty sound ideas for a better tax structure — but ideas that promised to raise many a hackle in the Statehouse.

Among many other things, the Commission called for imposing the sales tax on most services as well as goods, and repealing many sales tax exemptions. This would allow for a 1.5 cent cut in the sales tax rate. On the income tax, it recommended moving to Adjusted Gross Income as the definition of taxable income, plus the elimination of pretty much all tax deductions. Tax rates would have been adjusted downward to make the changes revenue-neutral; but it would have made for a much simpler and fairer income tax system. If Senate Finance is resurrecting the report under Ashe’s leadership, then that’s a good thing as far as I’m concerned.

Teachout's teach-in.

Teachout’s teach-in.

Sara Teachout of the Joint Fiscal Office presented a series of charts highlighting portions of the tax system; all are available online here.

On the sales tax, she showed that American consumption patterns have reversed in the past six decades. In 1952, 60% of our consumption was in goods and 40% in services. Today, goods consumption has fallen to roughly 35%, with services up to 65%.

You can see how that would create a problem, when your state’s sales tax is applied only to goods.

And then there’s Internet retail. It was about 0.5% of total retail purchasing in the year 2000; it’s up to 8% now, $80 billion annually nationwide, and seems certain to continue its inexorable rise.

You can see how that would create a problem when there’s no structure to enforce state sales tax on Internet retail. And the Internet is a double whammy for Vermont’s economy and tax collections; not only is there the direct impact of lost sales tax revenue, but there’s the broader impact from lost retail sales at local brick-and-mortar stores. That means less economic activity, plus fewer jobs and lower incomes in the retail sector.

Ashe estimates the loss in sales tax revenue at about $50 million per year. Please note: this is not new revenue; this is revenue we used to take in but we’ve now lost. As the Senator puts it:

We get blamed for overspending, but $50 million would have just been coming in. Instead, we have to fill the gap. That’s the part where we keep raising revenue and people say, ‘Why are you doing that?’ It’s not a desire to raise taxes; it’s a replacement strategy.

Now let’s look at the income tax. Vermont has one of the narrowest income tax bases in the country because of the way we calculate taxable income and our generous rules on tax deductions. As I’ve noted earlier, the average million-dollar earner in Vermont claims more than $500,000 in deductions. Nice work if you can get it.

A proposal now before a House committee would cap itemized deductions at 2.5 times the standard deduction. This would substantially increase taxable income for top earners, and generate more modest tax hikes for the upper middle class. Total revenue is estimated at $35 million per year*.

*Correction: I misread the source for this figure. It’s actually about $15 million per year. It’s part of a proposed House tax package that would raise $35 million.

I may be more of a policy geek than the vast majority of Vermonters, but perhaps you see why I’m so interested in this work.

Sen. Ashe is not necessarily in favor of the itemized deduction cap; he would prefer a broader, deeper consideration of Vermont’s tax structure.

What I would not want to do is have the House and Senate entertain that, and then have that not be satisfactory to put us on a sustainable path, and have to do something else very substantial a year or two later. So the question is, can you configure our revenues in a way where we won’t have to come back for a while? Can we buy 20 years of revenue structure with what we do next? That’s the thing that’s important to me.

Philosophically, I don’t like the radio-dial approach that most legislatures take, which is ‘This year we go up a little, next year we go down.’ Predictably is worth something.

Indeed, Ashe predicts that the preponderance of this year’s budget-balancing will come in spending cuts, not revenue hikes. That’s mainly because of a timing issue built into the system: spending cuts take effect right away, while changes to the tax code take months — up to a full year, in fact — to take effect and start generating new money. But in spite of this year’s very crowded legislative agenda, he is hoping to clear the groundwork for a full consideration of tax issues in the near future:

I would like the [Finance] Committee to do what it can to choose a path this session. That path may be articulating what the future ought to look like, as the Blue Ribbon panel did. Maybe not in the same way, but to say, ‘This is what we intend to do, the broad outline of a tax structure for the future,’ take it on the road, let it get beat up a little bit, have it evaluated by others, and come back next year.

Go big, or go home. I wish him the best in his endeavor, which does seem awfully optimistic and (dare I say it) progressive. On the other hand, I wouldn’t want his best to become the enemy of the good; if there are positive steps to be taken this year, and I see the deduction cap as an obvious positive step, then I don’t want to put it off in hopes of getting pie in the sky next year.

For health care expansion and SSBT, a long road ahead

Last week brought some relatively cheery news for fans of better access to health care and of the sugar-sweetened beverage tax. The House Health Care Committee passed a fairly wide-ranging bill that would help close the Medicaid gap, provide more assistance to working-class Vermonters seeking health insurance and encourage more primary care providers, among other things. To pay for all that, the Committee opted for a two-pronged approach: the revised 0.3% payroll tax proposed by Gov. Shumlin, plus the two-cents-per-ounce tax on sugar-sweetened beverages.

A good package, a nice bill. But is it a meaningful step, or simply a McGuffin? When you read between the lines of Committee chair Bill Lippert’s statement, and see the slightly shopworn look on his face, well, you start thinking the latter.

I have no illusions that what we propose will be a final product at the end of the session, but it was our responsibility… to identify and articulate priorities that could make a difference now and could be investments for the future, even in a time of tight budgetary constraints.

Glass half full, or glass half empty? I hear a guy resigning himself to the inevitable disembowelment of his bill.

Enough inference. The next stop is the Ways and Means Committee, where opinion is split on the SSBT and there’s widespread opposition to the payroll tax. After that, well, there’s a lot of room for pessimism.

There’s little appetite for raising taxes in Montpelier — or should I say “raising more taxes,” since tax increases will almost certainly be part of a budget-balancing deal. (Front runner: Ways and Means chair Janet Ancel’s plan to cap itemized deductions at 2.5 times the standard deduction.) There’s also the EPA-mandated Lake Champlain cleanup that needs funding. In this climate, it’ll be hard to justify funding the health care package as well.

Regarding the SSBT specifically, Governor Shumlin and House Speaker Shap Smith don’t like it. Really, there aren’t many real fans; some just see it as the least bad option. Most lawmakers seem allergic to the payroll tax, even in reduced form. But let’s say, just for the heck of it, that the Health Care Committee’s bill passes the House. What awaits in the Senate, that notorious den of centrism where liberal House bills go to die?

“I wouldn’t predict what a vote today would be,” says Senate Finance Committee chair Tim Ashe (more D and less P with each passing day). “I’d say they both start in difficult places in terms of a Senate vote. Individual committees may be more or less favorable, but in the whole Senate, both would struggle to pass at this time.”

Gulp. Well, I guess I shouldn’t be surprised. So I guess that leaves us with no money for enhancing our partially-fixed health care system?

“That’s an open question,” says Ashe. “There are the resources to pay for new initiatives or increased support for existing initiatives can come from existing sources or new revenues.”

Oh really? You’ve found a pot of money somewhere?

“I’ll mention just one resource. …This year, Vermonters without insurance are going to ship about six million bucks to the federal government in a penalty. Next year that money goes up to 12 to 14 because the penalty basically doubles.

“So 23,000 Vermonters will be shipping all that money to Washington, and they will get nothing for it. Question is, is there a way to help them NOT send the money to Washington and get nothing for it, but to keep the dollars here and give them something for it? I don’t know what the answer to that is, [but] it makes you scratch your head and say, ‘Well, jeez, wouldn’t it be easier if they just had insurance here?'”

Nice to see the Senator thinking outside the box, BUT… he himself admits he doesn’t know the answer to that. And even if we could somehow funnel the penalty money into health insurance, we’re talking “about six million bucks” this year and 12 mill the year after that. That’s a far cry from the Health Care Committee’s $70 million a year.

Six million, or even 12, isn’t going to buy you a whole lot of improvement. The Medicaid gap would remain painfully wide, and good-quality insurance would remain out of reach for many working Vermonters.

But that’s the kind of year we’ve got. Best to ratchet down expectations.

Of course, we’re now looking at budget gaps in the $50 million range for each of the following two years. Substantial health care reform keeps receding further over the horizon. And universal access? Rapidly approaching pipe dream territory.

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.