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Guest editorial: Vermont's dysfunctional tax system

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Posted on July 5, 2018 |
By Randy Brock



Editor’s note: This op-ed was written by Republican Sen. Randy Brock of Swanton, who served as state auditor from 2005-07, was the Republican nominee for governor in 2012 against Gov. Peter Shumlin, and was in the state Senate from 2009-13 and was reappointed to that post in Franklin County by Gov. Phil Scott to fill a recent vacancy. He is a member of the Senate Finance Committee. He wrote this piece prior to the governor’s decision not to veto the Senate’s bill for the third time and allow that budget proposal to become law. Here’s Brock’s reason why he supported the Senate’s proposal, which included raising property taxes on non-residential property.

 

On Thursday, the ongoing battle between the governor and the legislative leadership moved to the Senate floor. A new budget and tax bill, H.16, passed unanimously. It contains the Senate’s latest compromise proposal to resolve the budget impasse.

The day before, a joint meeting between the Senate’s Appropriations, Education and Finance committees heard first from the Scott administration and then from the Legislature’s non-partisan Joint Fiscal Office. These two were then tasked with trying to reconcile their positions. The reconciliation was imperfect, but the bill that the Senate passed emerged. After considering the presentations and the results of JFO’s analysis, the committee, which included four Republicans, unanimously voted to propose to the full Senate a compromise budget proposal that would leave residential property tax rates level from last year and increase non-residential rates one percentage point lower than the rate contained in the budget bill that the governor first vetoed. Although the residential rate remained flat as the governor had insisted, the non-residential rate did not.

WHAT IS THIS ALL ABOUT?

• Education fund spending in the original budget was higher than anticipated revenues, absent an increase in property taxes. That’s what caused the governor’s veto. Another budget adopted during the special session did the same thing with the same result.

• Proposals to make up the difference between planned spending and available revenues were to:

Raise property taxes, or

Use unexpected revenues or so-called “one-time income,” which this year, miraculously, is plentiful.

No one raised the obvious third-choice (the elephant in the room) to resolve the shortfall, i.e., by reducing spending.

• The governor insisted on “no new taxes,” a position he has consistently voiced.

ARE WE SHORT OF MONEY?

We have $171 million more that we had last year. We have at least $55 million in unanticipated revenues, theoretically more that enough to keep property taxes flat with additional money for things such as partially paying down the unfunded teachers pension fund liability.
But what happens next year? Using non-recurring revenue to buy down tax rates works once, but unless these revenues are continuing, the risk is that we will have solved this year’s problem without figuring out how we are going to fund the continuing expense that we have now built into future years.

Put another way, suppose you take on a new mortgage that requires payments of $500 a month. You pay the first month’s mortgage with $500 that you won from the lottery. But unless you plan to win the lottery every month, where are you going to get next month’s payment?

THE SCOTT PLAN

The administration points to its longer-term plan of creating education fund savings through staffing attrition, special education restructuring and other measures. The question is how comfortable are we that the administration’s savings will be achieved – and what happens if they are not? Projected revenues won’t be enough to meet the needs of the next budget. Thus, we must ask: Are we confident that we won’t need to win the lottery again to make the next mortgage payment?

That’s the problem: JFO’s analysis of the administration’s plan projects a $50 million-$55 million gap next year should the governor’s no-new-tax plan be adopted. The compromise plan that the committees adopted on Wednesday allowed for a $30 million-$35 million shortfall, still a significant risk that would have been averted had we adopted higher tax rates.

UNDERLYING PROBLEMS

Should the Legislature adopt the budget the committee passed, and should the governor accept it, we still will not have solved the underlying problems.

• Spending, particularly education spending, continues to outpace revenue.

• Every year school spending increases, even though every year student population declines.

• Local school spending decisions bear no relationship to individual tax consequences.

Even when the Legislature sets a flat tax rate, that rate is an average. Individual Vermonters’ tax bills, due to a myriad of factors, may be higher or lower, despite the rate set.

• The educational funding system is hopelessly complex and defies comprehensible explanation.

• The relationship between Vermont’s major taxes is unclear. Every year we add one or more patches to the system, often with unintended consequences. Our tax system is opaque, and we are a prime candidate for major tax reform.

This year’s budget impasse is symptomatic of the dysfunction of our tax system, particularly property taxes and education funding. Continued patching of our tax system is no longer an option. It is now hopelessly complicated, devoid of any relationship between spending decisions and individual tax consequences, frustrating for local school boards and lacking in effective state-level controls.

To address these and related issues, the proposed bill includes a Tax Structure Commission, a successor to the 2009-2010 Blue Ribbon Tax Commission. Its two-year project is to make recommendations on reforming Vermont’s tax structure after taking a comprehensive look at all three of Vermont’s major taxes: property, sales and income. The commission is charged with examining how Vermont’s taxes work together, whether they are fair and equitable, how well taxpayers can understand them, whether they produce reliable and balanced revenue and whether they are accountable to taxpayers.

Someone once said that any bill that makes all parties a bit unhappy is probably a good one… (and this) is a good faith effort that deserves consideration. Most important, it keeps the homestead rate flat. It’s worth being adopted by the House and signed into law by the governor. It’s time to move on.

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