MONTPELIER — Legislative leaders are set to renew the debate over an income-tax reform that could shift burdens off the middle class and onto the rich.
But it’s unclear yet whether House Speaker Shap Smith and Senate President Pro Tem John Campbell are willing to flout their Democratic governor by bringing to the floor a proposal to which Peter Shumlin appears inalterably opposed.
The 2013 legislative session came to a dramatic close in May when Smith and Campbell, under veto threats from Shumlin, withdrew a proposal that would have capped the itemized deductions now used by mostly wealthier residents to lower their state income tax bills.
The issue will soon resurface as key lawmakers convene a series of legislative hearings — the first comes Friday in Montpelier — in which the proposal will get another airing.
But while Smith and Campbell both indicated in May they would pursue the policy change when lawmakers returned in 2014, neither is saying now whether they’ll bring the legislation to a vote on the House or Senate floor.
“I think that if we’re going to do income tax changes, they need to be significant enough so that Vermonters are going to notice,” Smith said.
He said that means that the reductions in middle-class tax bills would need to be large enough to catch the notice of the average taxpayer when she opens next year’s bill. He said last year’s proposal, which capped itemized deductions at $30,000 — there is currently no limit — might be tweaked by the tax committees.
He said he’ll withhold judgment on the proposal until he sees the final version, which will be hammered out this fall and early winter by select members of the House Committee on Ways and Means and the Senate Committee on Finance.
“I’ll look forward to getting a report from Ways and Means to see where I think we’re at with regard to that threshold question of whether the changes are significant enough,” Smith said.
Lawmakers say the plan offers a revenue-neutral mechanism to deliver middle-class tax relief without violating Shumlin’s pledge not to raise broad-based taxes.
According to projections by the Legislature’s Joint Fiscal Office, the existing proposal would have the effect of adding $5.4 million in tax liability to people reporting income of more than $200,000 a year. Lawmakers would use the revenue to lower tax burdens on people making between $50,000 and $125,000.
The changes would be drastic for people earning more than $1 million, about 100 of whom — based on tax data from 2010 according to the JFO — would see their annual tax bills jump on average by nearly $25,000. Benefits to lower- and middle-income filers are more modest: people earning between $75,000 and $100,000 would see their annual tax bills drop on average by about $80.
Shumlin has made numerous cases against the plan, saying Vermont risks tax flight if it increases burdens on the rich, and also that lawmakers couldn’t guarantee revenue neutrality. Based on 2007 tax data, Shumlin said, the proposal would actually result in a $10 million tax increase on the whole.
More recently, the Shumlin administration argued that with the massive undertaking of single-payer financing waiting in the wings in 2015, it makes sense to save major tax reforms until then.
Smith said he doesn’t find that last rationale persuasive.
“If income tax reform made sense in 2014 I think we would do it in 2014,” Smith said. “It wouldn’t matter that we had potential financing for health care coming in 2015.”
Campbell said he has yet to decide whether to make a stand on the issue of income tax reform. He said the path ahead lies in part on the Legislature’s ability to make a water-tight case for the accuracy of their projections.
Campbell said members of his chamber will need to prove to Vermonters that whatever plan they present to Vermonters won’t have any unintended fiscal consequences.
Rep. Janet Ancel and Sen. Tim Ashe, heads of the House Committee on Ways and Means and Senate Committee on Finance, respectively, are working on getting solid numbers. Complicating that effort is the Legislature’s inability to secure from the Shumlin administration the tax data that would provide the foundation for that analysis.
At a meeting of the Committee on Ways and Means Friday, Ancel will ask Administration Secretary Jeb Spaulding to help her retrieve that data. She said she’ll also talk with committee members about next steps for the tax proposal, though she said its failure or success “is probably more of a political than a policy call.”
Ancel and Ashe have said the plan makes sense from both a policy and political perspective. They say the existing system offers tax breaks to people for things like mortgage interest on second homes in other states, and other expenditures with no practical benefits to Vermont.
“I haven’t changed my view that it would be a good change to make,” Ancel said.
Like most major proposed changes to tax policy, however, Ancel said the direct financial impacts on a diverse set of interests make it an uphill battle politically.
“There are always a lot of other issues that make changing tax policy very difficult, and I’m not unaware of those,” Ancel said. “There will be many people who will weigh in on what the path forward should be, and I don’t know what it will be at moment.”
Ashe said a general fund shortfall of as much as $70 million could change the contours of the income-tax reform debate, particularly if a large enough coalition of lawmakers wants to retool the proposal into a mechanism to help fill that gap.
Ashe will hold a series of five informal meetings, likely in December, at sites across the state to discuss the income tax reforms and other issues. He said he’ll invite the Vermont Chamber of Commerce, Vermont Businesses for Social Responsibility, and other groups to join the discussion.
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