News Analysis Shows Tax Commission Ideas Subject To Politics

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Taxation is the third rail of politics in Vermont, regardless of which party is in power, and that fact hasn’t changed since Democrats seized control of the executive branch in November and held their majorities in the Vermont House and Senate. Though few Democratic lawmakers in the Statehouse are enthusiastic about Gov. Peter Shumlin’s proposed budget (even the governor himself, in his address, said: "My administration takes no pleasure in delivering this budget"), raising income taxes is not a part of the equation at the moment.

Shumlin took a no-new-taxes pledge in the General Election, and he has made it plain in repeated interviews that he has no intention of reneging on that promise — though he has proposed new taxes on insurers, home health agencies, dentists and hospitals in his budget.

"I am not one of those Democrats who feel that Vermont’s biggest challenge is that taxes are not high enough," Shumlin said shortly after he was elected. "I think they’re too high. I do think they discourage economic growth. I don’t want to raise taxes."

The governor and the legislative leadership have worked hard over the last few months to quell the business community’s fears that the Democratic power juggernaut in Montpelier will lead to higher taxes.

House Speaker Shap Smith and Senate President Pro Tem John Campbell, both Democrats, have also expressed reluctance to look at income or sales tax hikes as options for resolving the state’s projected $176 million shortfall.

That means the Legislature and the governor’s administration will likely move ahead with plans to make cuts in benefits for Vermonters who are enrolled in the Catamount Health program; taxes on health programs; and reductions in funding for the state-funded mental health and disability service nonprofits.

In light of this political climate and the state’s budget crisis, it’s perhaps not surprising that state leaders have relegated the Vermont Blue Ribbon Tax Structure Commission’s report to the back burner. The commission’s 18 months of research, efforts to gather a full range of testimony and public debates on policy options didn’t warrant a footnote in the governor’s budget address.

In mid-January, the three-member panel outlined reforms to the state’s tax system. Though their suggestions are "revenue neutral," meaning if taken as a whole, they don’t raise or lower taxes, the recommendations include significant changes to the tax code. The commission suggested that the Legislature consider two main policy changes: 1. Collecting income taxes on adjusted gross income instead of taxable income; and 2. Extending the sales tax to services and clothing and shoes. In addition, the commission recommends that the state continue its efforts to force Internet retailers, such as, to collect Vermont sales taxes. It also recommends that the Legislature re-evaluate the $1 billion worth of tax breaks the state gives groups, individuals and companies. If adopted, the proposals would broaden the tax base and enable the state to lower income and sales tax rates.

Though these concepts are new to Vermont, they aren’t exactly novel. They are standard fare in the world of tax policy, according to analysts interviewed for this series. Economists from across the political spectrum agree with the thrust of the commission’s reforms, which boil down to this simple idea: If you broaden the tax base (make more income, services and goods subject to taxation), you can lower the rates.

Continue reading the rest of the VTDigger analysis »

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