Shumlin proposes 'sin tax' hike
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By LOUIS PORTER Vermont Press Bureau - Published: April 21, 2009
MONTPELIER — The leader of the Vermont Senate recommended Monday that his colleagues increase "sin" taxes, including taxes on tobacco products and liquor, and boost the levy on satellite television service.
Peter Shumlin, a Windham Democrat, would also like to close the capital gains tax "loophole" and use the revenue to lower income tax rates. Right now Vermont is one of only a handful of states that taxes capital gains income at a much lower rate than wages.
Under Shumlin's proposal, a 40 percent exclusion for capital gains would be removed, but there would instead be a $5,000 a year exemption for capital gains income. Taxpayers who earn up to $12,500 in capital gains a year would benefit, while those who earn more would pay more in taxes.
The state budget passed by the House and the version now being worked on by the Senate both have a roughly $24 million hole. The House proposed closing the gap by imposing an income tax surcharge that would hit higher-earning Vermonters hardest and a series of other changes, including more aggressive tax collections.
Shumlin's proposal would keep some parts of that plan but jettison the income tax surcharge, instead using the sin taxes to raise revenue.
Members of the Senate are also looking at the taxes paid on so-called flavored malt beverages, examining whether they should be taxed as liquor or at their own rate.
Other revenue ideas may be on the table as well, including the possible elimination of a provision in tax law that allows some filers to deduct state tax from their income. That could raise roughly $19 million, according to lawmakers.
There is a long way to go before any tax increase is passed by the Legislature and sent to Gov. James Douglas for his signature – or veto. Any bill the Senate passes with some version of Shumlin's proposal would likely be altered in a conference committee with House members to work out a compromise, given the differences in the two proposals.
A variety of new taxes would remain possibilities through that conference committee negotiation, and such talks would likely unofficially involve members of the Douglas administration, as well.
"We are trying to find a tax package that will raise needed revenue and be acceptable to the administration," said Sen. Ann Cummings, D-Washington, chairwoman of the Senate Finance Committee. "This gets everything into conference and on to the table."
Shumlin said the two halves of the proposal he outlined Monday might be acceptable to the administration.
First, Douglas — using very strident language — proposed leveling the tax rates for earned and unearned income two years ago, the Democrat pointed out.
"He sounded like Bernie Sanders," Shumlin quipped.
The revenue from closing that capital gains tax loophole would allow the lowering of income tax rates across the board, including the state's highest-in-the-nation "top marginal rate," Shumlin said.
"There are hardly any states in the country that have the capital gains loophole in place. Anyone affected by it will find the impact small in light of the reduction in the federal capital gains tax rate in recent years," he said.
"It is my belief that economic development is adversely affected by the impression that Vermont has the highest income tax rate in the country," Shumlin added.
Secondly, another part of the proposal — increasing the tax on those like himself who subscribe to satellite television service — is an issue of tax fairness, Shumlin said. He noted cable television service is taxed at higher rate.
"These are tax inequities we can fix," he said.
Gov. James Douglas might accept the increase in capital gains taxes, provided that all of the money raised was used to lower other taxes, said Secretary of Administration Neale Lunderville.
"The key with this proposal is that every dollar you gain from changing the capital gains law needs to be spent lowering taxes," he said. "Any changes to capital gains need to go into lowering rates for all Vermonters."
"The idea has merit," he said. But "I want to watch this proposal very closely to make sure it doesn't morph into another way to raise income taxes."
But the idea of raising other taxes, whether a gas tax, an income tax, sin taxes or others is completely opposed by the administration, Lunderville said. Instead, the state should do more to cut its spending, he said in a refrain consistent from the start of the session.
"These are all taxes that Vermonters cannot afford to pay," Lunderville said. "We are in the middle of putting a budget together, but the governor has been very clear this is not a revenue problem, this is a spending problem."
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