Commentary: Large Tax Changes on the Table

The Vermont Tax Structure Commission has delivered its report, and its recommendations should trigger an intense debate. Switching public education support to the income tax and expanding the sales tax to include services will be very controversial. It’s regrettable that the legislature didn’t begin with a performance review, to decide what state government should be doing with $4.5 billion a year, and then address the tax structure needed to pay for it.

            Last month the three-member Vermont Tax Structure Commission delivered a well-written, informative, and conscientious report.  The legislature will now need to come to grips with some very large taxation change proposals.

            The longest part of the report deals with our complex property tax financing of education. It recommends replacing the education homestead property tax with an income tax. Non-residential property would continue to be taxed for education at a statewide rate.

            The report argues that the present tax is regressive: it claims a greater part of the income of lower income homeowners, than their higher income neighbors. The present system offers a choice of paying education tax based on income and receiving a credit the following year, or based on property value. Thus “there is no longer a clear link between the budget voted and the voter’s tax bill, [and] the cost control and accountability of the budget process is weakened.”

            The Commission’s proposed Education Income Tax would resolve this timing disjunction. Voters in each school district would set the rate applied to each resident’s previous year Adjusted Gross Income to raise the funds to meet the coming year’s budget. The state would collect the tax. The Commission believes this will be an improvement. What economic effect it would have by driving up the income tax rate schedule remains to be seen.

            The Commission wants the sales tax to fall on the widest possible range of goods and services. It proposes that consumers pay the sales tax on scores of service transactions, other than business to business exchanges, casual exchanges, and – the big one - health services. As a sweetener it says that the sales tax rate could be lowered from 6% to 3.6%.

            It’s hard to imagine a single tax change that would produce a more politically potent reaction from thousands of Vermonters faced with collecting and paying the tax over to the government. The report lists 121 services that could be covered. A sampler: attorneys, architects, accountants, engineers, plumbers, electricians, excavators, truckers, taxi drivers, barbers, cosmetologists, auto repair, and investment counselors.

            Most if not all of the groups targeted by the services tax will clamor to be exempted, like “health care”. As the exemptions mount, the promised 3.6% tax rate creeps up to 4%, then 5% and maybe further, to raise the same amount of revenues as today’s 6% rate.

            The Commission recommends some mechanism to hold low income persons harmless from the effects of the tax on services and goods (notably food) not now taxed; but people with incomes above the lower-income line would of course pay the full freight.   

            The legislature that commissioned the report was eager to force everybody to contribute to the campaign to defeat the menace of climate change. So it’s no surprise that the Commission addresses taxation as a technique for exacting that contribution.

            The Commission obligingly recites the horrors (Gov. Shumlin’s characterization) of the coming climate change end times, without asking whether that mantra is scientifically defensible. Their report avers that ‘when accounting for the environmental and health benefits, all options considered by the decarbonization study commissioned by the legislature would result in net benefits.” Actually the decarbonization report found that the only way decarbonization of Vermont could produce enough “climate benefits’ to overcome the conceded loss of economic welfare was to include undefined global benefits enjoyed by the whole world.

            The Commission did however, stop short of urging a carbon tax or cap-and-trade system to make motor fuel and heating oil so expensive that Vermonters can’t afford them anymore. As usual, it noted that revenues from any carbon tax should be used to diminish the burden on lower income families caused by… the carbon tax. It did lamely “support the use of tax credits and exemptions to reduce the upfront cost of some investments that will make the transition [away from fossil fuels] possible, even though in general the commission strives to keep the tax base as broad as possible.”

            On the brighter side, the Commission rejected two bad ideas, an unenforceable wealth tax and a value-added tax hidden in the price of goods in place of the visible sales tax. The report will appall the climate movement by recommending an add-on registration fee for the electric vehicles that taxpayers are paying millions to subsidize, but which don’t pay a dime of motor fuel taxes to maintain the roads and bridges.

            Alas, the politicians who created the Commission didn’t dare to address the most important question: “what do Vermonters get for being taxed $4.5 billion a year?”  Once that is agreed upon, a tax structure commission can recommend efficient and equitable ways to bring in the needed revenues without killing the golden goose.

But answering that question requires a full-blown performance review.  Democratic leadership in Texas invented the gold standard performance review in the 1990s, saving billions of dollars. But Democrats here, though they endorsed the idea in their 2014 platform, will never do it. And neither will Republicans.

John McClaughry is vice president of the Ethan Allen Institute.


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