House committee rejects Douglas plan to change capital gains tax

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(Host) The House Ways and Means committee has rejected Governor Jim Douglas’s plan to change Vermont’s capital gains tax.

Douglas wanted to use money from the changes to lower tax rates for middle and upper income people. But the committee says it’s more important to save this source of revenue to help deal with looming budget deficits.

VPRs Bob Kinzel reports:

(Kinzel) Douglas proposed eliminating the so called 40% exemption for capital gains because he says unearned income should be taxed at the same rate as earned income.

Here’s how the exemption works – if a person receives a thousand dollar gain from the sale of a business asset – the first $400 is exempt from state income taxes while the remaining $600 is subject to taxation.

Douglas wanted to eliminate the exemption, except for people over 65, and use the roughly $20 million raised by this change to lower income tax rates for people earning more than $53,000 a year.

House Democratic leaders supported the elimination of the exemption but wanted to use the money for various state programs including efforts to reduce property taxes.

House Ways and Means committee chairman Michael Obuchowski says the entire plan has now been put on hold because lawmakers are concerned about future budget deficits:

(Obuchowski) "You want to preserve capacity for the future because we don’t know what the future holds …and that coupled with projections as high as $80 million projected deficits in 2010 and the budget that we’re going to see this year is not going to meet all the needs of the people of the state of Vermont…all those facts coupled together that say the wisest thing that we can do at this point financially is to keep our powder dry."

Obuchowski says it’s critical for the state to be prepared to deal with new budget pressures as the national economy declines:

(Obuchowski) "As we watch what’s happening we see financial institutions crumbling around us. Vermont state government essentially is a financial institution to a certain degree and the more that we can weather this storm and keep our fiscal integrity intact the better off we’re going to be to come out of it."

Tax Commissioner Tom Pelham says he’s disappointed by the committee’s decision but he says he was worried that lawmakers were going to eliminate the exemption and then spend the money instead of cutting income tax rates:

(Pelham) "The governor had a very good proposal into the Legislature that would have made our income tax system fairer and would have lowered income taxes for up to 70,000 of Vermont’s middle income taxpayers on the other hand we were looking at proposals in the Legislature where they wanted to close the loophole but then spend the money and the governor was dead set against that."

Pelham says he believes it’s possible to meet the state’s budget demands while still implementing an income tax cut.

For VPR News I’m Bob Kinzel in Montpelier.

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