Editorial: Budget quandary: To cut or tax?

On Friday, the Vermont Senate passed a $24.3 tax package as part of its $4.68 billion budget plan to fund state government next year. The increased taxes, which passed by a vote of 20-8, includes a controversial 53-cent tax hike on a pack of cigarettes as well as several taxes Vermonters will not see directly. We expect the House to tinker with it, but on the whole this proposal will sail through and get the governor’s signature. But what of next year? Will Vermont again mostly cut its way to a balanced budgets, or raise taxes?
The encouraging news is that the Senate successfully closed the $176 million gap in funding for its budget, and that the budget passed by a 27-1 vote. The Senate achieved that near-unanimous vote by being willing to raise limited amounts of taxes, while cutting back on spending.
The discouraging news is that the state has cut more than $300 million in services to Vermont residents during the past three years, and the next year isn’t looking that promising: Tea Party Republicans in Congress may force larger cuts in the upcoming budget before year’s end (meaning Vermonters might have to shell out even more to care for Vermont residents most in need.) Sen. Ann Cummings, a Washington County Democrat and chairwoman of the Senate Finance Committee, says some financial analysts peg the projected shortfall in the next fiscal year (2013) at $60 million, but that could be greater depending on the deficit-cutting mood in Congress.
To better understand the Legislature’s options next year, taking a closer look at this year’s tax package and budget cuts is instructive.
For all the controversy it caused, the proposed $1 tax hike on a pack of cigarettes would have raised about $12 million. The governor opposed it and in a compromise the Senate settled for a 53-cent a pack hike on a pack, which generates $5.9 million. Comparatively, a new levy on medical and dentist insurance claims will raise $12.58 million, while an increase in the ‘provider tax’ on hospitals, nursing homes and home health will raise $7.9 million. Rejected was a proposal to raise the income tax rate on the top two highest brackets, a move that would have raised about $16.7 million. But the proposal does reduce the general tax transfer to the Education Fund by $23 million — meaning that schools will have that much less to work with in state funds — and that local residents will have to pay the difference if parents want the same level of spending.
Notably, legislators and salaried state employees are continuing a 5 percent pay cut; the state is subsidizing 300 more child care slots to help Vermonters get jobs; and about $12 million is expected in savings through managing of the state bureaucracy — such as leaving state jobs unfilled, encouraging voluntary reduced work weeks, reducing benefits for state employees and cutting costs for outside consultants.
Interestingly, an amendment that would have extended property tax exemptions for three non-profit ice-skating rinks used by local schools survived when Lt. Gov. Phil Scott, a Republican, cast the deciding vote in favor of retaining the tax break for those three rinks. It was a pittance in terms of the money involved, but it’s significant to understand how closely this legislature is picking apart the budget to come up with savings. And if that’s so, just how much more can be saved by pinching pennies, or will more of next year’s deficit have to be made up via tax increases.
Gov. Shumlin seems set against the idea, saying repeatedly that the state’s problem isn’t that we don’t tax enough but that we tax too much. Senate Democrats, on the other hand, were split on the income tax measure this year, with several saying that would be more supportive next year after the recession has eased off and the economy is stronger.
As for the ability to grow our way out of current troubles, the loss of federal stimulus dollars will be a significant blow to the state’s ability to grow jobs, but don’t expect to see state dollars replacing what has been crucially important money to keep the state afloat. There’s too little money in the state’s till to act as stimulus, unless we raised taxes… or dipped into the state’s $55 million in the rainy day fund, something legislators are reluctant to do.
So, brace yourself for another tough budget year in 2013. State cuts on programs to the needy are nearing a reasonable limit, but it’s unlikely income tax increases on the relatively few (top 4,000 tax filers) would pass a governor’s veto, which leaves coming up with more creative ways of making up a lot of money — and what that usually means is a lot of cost-shifting to the middle class in ways that are hard to track.

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