MONTPELIER — Lawmakers look poised to shelve, for now, a proposal to expand the sales tax to include services as well as goods. However, key legislators say that doesn’t mean they won’t revisit the idea some time in the future.
The years-long debate over the sales tax expansion took on heightened significance this summer when a conservative super PAC featured the proposal in a series of well-funded political attacks.
House Speaker Shap Smith had as recently as May voiced his support for extending the sales tax to include services provided by people like carpenters, hair stylists, landscapers or auto mechanics. By broadening the base, Smith said, Vermont could lower the tax rate.
But when the Republican super PAC, called Vermonters First, began running television commercials decrying the plan and assailing “out of control” Democrats, Smith backed away from the proposal, and other lawmakers downplayed the seriousness with which they were pursuing it.
The PAC attack didn’t play well with voters — Democrats added two seats to their already overwhelming House majority. But a panel created to study the sales tax will soon recommend formally against the expansion.
“That kind of expansion of the base is just too dislocating and too radical a change to do in this business climate,” Rep. Janet Ancel said Monday at a meeting of a group called the Sales and Use Tax Study Committee.
The seven-person panel, made up of lawmakers, Commissioner of Taxes Mary Peterson and two private-sector officials, was created by the Legislature in part to study the erosion of the sales tax as a revenue source. The 6 percent tax generated about $360 million in fiscal year 2012, but is declining relative to other general-fund taxes.
That decline is due largely to changes in consumer behavior. When Vermont enacted its sales tax in 1971, consumers spent equally on goods and services. Today, about 70 cents of every consumer dollar is spent on services.
The sales tax expansion would, proponents say, allow it to adapt to the shifting economic landscape. But lawmakers, the Shumlin administration and private-sector officials say not enough is known yet about the potential downside to taxing services.
“This change in the tax system, moving from what we have to what some people have conceived, is as radical as changing from the health care system we have today to the health system we are likely going to have in January of 2014,” said Tom Torti, president of the Lake Champlain Chamber of Commerce and member of the committee. “It needs the same studied, reasoned approach before we go ahead.”
Lawmakers, however, aren’t ready to abandon the idea entirely.
Sen. Richard Westman, a Lamoille County Republican who served as commissioner of taxes in the Douglas administration, said continued erosion of sales tax revenue may force the Legislature to revisit the plan.
“I don’t think it’s the time to move on that issue, but I would hate to have us say anything that was disparaging towards it,” Westman said Monday. “Because I think at some level we have to do some more groundwork moving forward on that issue.”
The decline in sales tax revenue could ripple across the fiscal landscape, Ancel said, resulting in increases in other taxes that residents might find even more unpalatable. More than a third of sales tax revenue goes into the education fund.
“So to (the) extent we lose that base … those things all have an impact on property taxes – actually a pretty direct impact on property taxes,” Ancel said. “The one tax that really can’t carry any more weight is the property tax, and it’s the one that keeps going up.”
The statewide property tax rate is projected to jump by 5 cents next year, if school districts don’t start shaving significantly from their budget proposals. Ancel said the fragility of the sales tax, and its potential to upset other funding streams, should make lawmakers think twice before allowing more exemptions to the tax code.
“As we change to more of a service economy, it’s all the more important to try to preserve the base that we have,” Ancel said. “And that means … being really cautious about creating new exemptions and new exclusions from the sales tax.”
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