MONTPELIER — Lawmakers may have cut a deal with Gov. Peter Shumlin earlier this week not to raise any new taxes this session. But that doesn’t mean the fight over revenues is over.
House and Senate leaders worked late into Thursday evening on a tax bill that may well end up including revenue-neutral changes to the income tax code. The proposal would result in tax increases on wealthier Vermonters; lawmakers would use the revenue to bring down burdens on the middle class.
Shumlin said Thursday he’s opposed to the idea and that the terms of the bargain he struck Tuesday with House Speaker Shap Smith and Senate President John Campbell included a prohibition on late-session reforms to tax codes.
“That’s the agreement we made,” Shumlin said. “That’s the agreement.”
But given the earlier passage of an increase in the gas tax, according to Rep. Janet Ancel, it makes sense for elected officials to find ways to make other taxes more progressive.
“The gas tax is a regressive tax, so to the extent that we just increased a regressive tax, it makes sense to me to see if we can make the income tax more progressive at the same time,” said Ancel, a Calais Democrat and chairwoman of the House Committee on Ways and Means.
Both the House and Senate earlier this year sought to cap the deductions used by wealthier Vermonters to reduce their income taxes. The House opted for a cap of about $30,000 on itemized deductions; the Senate version used a $12,000 cap on the home mortgage interest deduction.
The provisions had been the keystones of the legislative bodies’ respective revenue packages and would have funded much of the new spending that lawmakers had previously been considering.
When Shumlin, Smith and Campbell emerged from their offices earlier this week to announce the no-new-taxes bargain, it appeared to eliminate the need for the new ceilings on deductions. But Ancel and Sen. Tim Ashe, chairman of the Senate Finance Committee, had other ideas.
Instead, they’ve recast the proposals into a revenue-neutral reform proposal, using the revenue produced by capping deductions to buy down marginal rates for all income tax filers.
People with earnings high enough to land them in the top tax bracket — those with incomes in excess of about $370,000 — would see their marginal rates fall from 8.95 percent to 8.75 percent. But because they’re also the population that tends to benefit most from deductions, many would see net increases in their tax bills.
The changes would, under one version under consideration, have the most drastic effect on the 295 Vermonters reporting annual incomes of more than $1 million, 100 of whom would see their taxes rise on average by $25,000 a year.
Some ultra-high earners would actually benefit from the change: Of those earning more than $1 million, 195 would see their annual income tax burdens drop by an average of $6,500.
In a revenue-neutral proposal that features winners and losers, the rich would, on the whole, suffer the most.
People making $200,000 and up would see their tax burdens climb by an aggregate total of $5.4 million per year, based on 2010 tax data. Filers reporting incomes of less than $150,000, meanwhile, would see their obligations drop by a total of $4 million annually.
Of the 342,000 filers in Vermont, 72 percent would see their tax bills go down, 5 percent would experience a tax increase, and 23 percent wouldn’t be affected.
In an income tax system that generates more than a half-billion dollars annually, the changes would have only a minor impact on effective tax rates. But Ancel said the ability to bring down marginal rates would combat Vermont’s image as a high-tax state.
That image is fed in part by the fact that Vermont is one of fewer than 10 states to assess income tax based on “taxable income,” which allows for a far greater number of deductions than the “adjusted gross income,” or AGI, system used by most states.
A report issued three years ago by the Blue Ribbon Tax Structure Commission recommended that lawmakers shift from taxable income to AGI, largely to improve perception.
“We always get compared to other states unfavorably because our rates are higher, and that’s because the base we’re taxing is smaller,” Ancel said. “So our committee has been working off and on since we got that report to moving closer to AGI, and this is a move in that direction.”
At a news conference Wednesday, Shumlin said that with only days left until adjournment, now isn’t the time to be breaking out such significant reform proposals.
“I have made very clear that the consensus in this building, which I had encouraged, was not to take action on tax policy, but to finish up the work we have done, balance the budget, and get home,” Shumlin said.
But Campbell on Thursday said Shumlin’s opposition isn’t sufficient reason to scrap the proposal.
“My tax committee feels that this policy would be positive for the state of Vermont, and they’re going to keep pushing along,” the Senate president said.
Ancel said this concept has been under review in her committee for years and that lawmakers have devoted enormous committee time this session to reviewing versions of the reform proposal.
So what will Shumlin do if lawmakers proceed with the plan and send it to his desk? While he may wield the veto pen, the Democratic governor might not be willing to sacrifice other elements that will be in the tax bill.
The legislation includes a fiscal year 2015 funding mechanism for the online health insurance exchange. And if Vermont departs the session without that mechanism, it could mean trouble for the governor’s health care reform effort.
The mechanism wouldn’t begin generating revenue for two years, but the federal government is requiring all states to have their fiscal year 2015 exchange funding in place this year.
Mark Larson, commissioner of Vermont health access, said it’s unclear what the absence of the funding mechanism would mean. But he said consequences could be as severe as the feds yanking Vermont’s exchange certification.
Even if it merely complicates Vermont’s relationship with the federal government, Larson said, that could bode poorly for a state that will be relying on generous allowances from the Centers for Medicare and Medicaid Services as it seeks to proceed with unique health care reform plans.
Campbell didn’t seem averse to engaging in a late-session game of chicken.
“We can’t control what the governor is going to do,” Campbell said. “I guess we’ll just have to wait and see.”
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