Of the many ideas to come out of the Blue Ribbon Tax Structure Commission’s 18-month study, the over-arching plan to tax residents on “adjusted gross income” rather than “taxable income” strikes the right chord and should receive the Legislature’s overwhelming support.
The idea was conceived as an effective way to lower the state’s income tax rate by broadening the tax base. With this single stroke, the tax base would grow about $5 billion overnight, from $10.3 billion to $15 billion. That would allow the state to reduce its rate on the highest income tax earners from about 9 percent to below 7 percent, bringing the state’s tax rate from among the highest in the nation to about the middle of the pack. Only nine other states currently base state income tax rates on “taxable income;” the others use the “adjusted gross income” standard.
The proposed change will be as “revenue neutral” as possible, according to the commission’s task by the Legislature. So, while the proposal will not seek to add more revenue to state coffers, it dramatically changes the perception that Vermont’s tax rate is among the highest in the country.
Former Gov. James Douglas, along with many state Republicans, has been arguing for the past decade that Vermont’s alleged high tax rate has chased away business. If that is true, this measure would help alleviate those concerns. Personally, we have always thought investors were more politically and economically savvy than that, but the measure cannot hurt and it would keep the state out of the headlines as a high tax state.
More controversial is the Commission’s suggestion that the sales tax be broadened to include services (as well as products), and to sunset many exemptions on taxes. The outcome of such a change would lower the sales tax from 6 percent to 4.5 percent.
The expansion of the sales tax would include services from professionals (from plumbers to lawyers, Realtors to home inspectors), including taxes on home heating oil, which in itself would add about $108 to the average homeowner’s fuel bill annually. As if that single example of an added tax is not bad enough (and would probably earn an exemption, adding services to the tax base would make a whole host of Vermont professionals less competitive with their New Hampshire counterparts on the eastern side of the state. The consequence of losing even a handful of those professionals (by having them move across the border to do their business) would result in lost income taxes — an unintended consequence that needs careful examination.
While we question the need to broaden the sales tax for the relatively small gain achieved (will the public really hesitate to buy an item taxed at 6 percent compared to 4.5 percent), the commission’s suggestion to sunset all tax exemptions (with the exception of food, education and some health care provisions) makes good sense. The proposal does not mean that all exemptions would be eliminated, but that each would come up before the Legislature for review. Dozens of exemptions have accumulated over the decades at a cost to the state of more than $1 billion in revenue.
Many are arcane. Legislators recently revoked tax exemptions on pension benefits for survivors of the Spanish-American war, for example. As Rep. David Sharpe, D-Bristol, said in a recent report in the Rutland Herald: “We spend as much in Ways and Means (on exemptions) as they do in Appropriations on state spending, but they look at those expenses every year and we don’t.” Sharpe, who sits on the House Ways and Means Committee, went on to say that he couldn’t explain why, for instance, the state provided $500,000 to Blue Cross/Blue Shield as a property tax exemption, or why Vermonters get tax breaks on insurance annuities (at a cost to the state of $10.5 million annually), but not for certificate of deposits in banks.
Taking a close look at those exemptions — in the context of fairness and social impact — would be another significant accomplishment of these recommendations and should be embraced wholeheartedly.
In sum, the Commission’s work holds the promise of significant reform. If that turns out to be true, the commission’s work will be of great benefit to the state and proof that the work done will not be another report that collects dust on a shelf.
Angelo S. Lynn