Taxes and budgeting

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Taxes will be a big issue for this year’s legislature. There will be lots of discussions about the impact of the new federal tax cuts on state revenues. You’ll hear about changes to Act 60. You’ll hear about increasing the cigarette tax to help pay rising health care costs in the Medicaid program.

Taxes are complex, as anyone who has filed more than the “short” form knows. In one respect, that’s good. The complexity means that we’re trying to achieve certain public policy goals through the tax system — goals such as giving people a deduction for saving for college, investing for retirement, or donating to charity. But the complexity also means that when the tax code is opened up and changes are made, a lot can happen. This can have huge impacts down the road — impacts that can’t readily be seen when the changes are made.

Because of tax law complexity, people tend to speak in generalities about the tax system. That often obscures important information — information that if you had beforehand, might change the way you think about an issue.

For example, you often hear that Vermont has high taxes. That might be true for certain taxes — such as the property tax. However, if you consider all the taxes that we pay, our tax burden is almost exactly average for the country.

And when people talk generally about a tax — such as the income tax — they gloss over a whole host of specific items involved in determining that tax. These are items that cam be taken out of or added into the process of calculating how much each of us owes. These additions or subtractions can have a bigger effect on a person’s tax bill than a change in the overall tax rate.

Here are some interesting facts to keep in mind as tax discussions heat up in Montpelier.

Last year, Republican legislators in the “money” committees complained that wealthy Vermonters leave the state because of high taxes. There is, in fact, no hard and fast evidence for this. On the contrary, federal studies show that more higher-income folks moved into Vermont during the 1990s than left.

Our state income tax rate is a point away from a 31-year low. And since the early 1990s, the rate for the wealthiest Vermonters has fallen about a third.

Vermont taxpayers who buy and sell stock get a special tax deal available in only two other states. Vermont allows a full break on federal capital gains tax reductions. 47 states levy an extra tax on the gains. 60,000 Vermonters benefit from this break, and it costs the state $25 million in lost revenue. More than half of this $25 million goes to just 1,200 people.

Vermonters collectively will have their federal taxes fall $60-$80 million this year because of the tax cuts that Congress enacted last summer.

Estate taxes for wealthy Vermont families will fall because of changes in federal law. How much this windfall could cost the state is hard to predict, but estimates are $2.4 million this year and up to $8.4 million by 2006.

Cutting or level-funding the state block grant to schools will save no money. It may mean broad-based state taxes won’t go up, but it inevitably means local property taxes will.

Restricting income sensitivity for property taxes has the effect of tilting the burden of school taxes away from upper-income Vermonters towards middle- and low-income Vermonters.

The budget and tax discussions getting underway now in Montpelier will affect your pocketbook — make no mistake about that. But who pays more, and who pays less, will often be obscured in partisan rhetoric — especially since this is an election year. But it’s in your interest to stay tuned — and to let your legislators know that you’re watching what they’re doing.

This is Allen Gilbert.

–Allen Gilbert of Worcester is a writer and parent who is active in education issues.

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