Way sought to make taxes more equitable
ST. ALBANS — School taxes are the missing piece in an ongoing effort to revamp Vermont’s tax structure, according to Rep. Carolyn Branagan, R-Georgia. To remedy that problem the state recently hired a California firm to study the state’s education taxes.
Earlier this year, a blue ribbon tax commission released an analysis and recommendations for the state income and sales taxes.
“We can’t not think about the property tax,” said Branagan, who is the vice chair of the House Ways and Means Committee and a member of the Joint Fiscal Committee (JFC), which hired the consultants. School taxes are the biggest portion of the property tax.
The three members of the commission declined to take on the task of analyzing the property tax, said Branagan.
The consultants, who were due to begin their work this week, have been charged by the Vermont Legislature with examining a number of elements of the property tax including equity, quality of education, cost and the impact of the property tax on economic development both locally and statewide.
In June, the Franklin County Chamber of Commerce asked Sara Teachout, who is on the staff of the Joint Fiscal Office, to present the results of the blue ribbon tax commission’s study at a public meeting in St. Albans.
Branagan expects the Legislature to take up one of the study’s major proposals, shifting the basis of the income tax from taxable income to the federal adjusted gross income (AGI), next session.
The adjusted gross income provides a larger tax base, explained Teachout. It is used by the other New England states with income tax. By shifting to the AGI, Vermont would make it easier for businesses to compare Vermont’s income tax rates with those of neighboring states.
With the shift to the AGI would come lower nominal tax rates.
“I, at this point, support it,” said Branagan.
The shift is also supported by Rep. Janet Ancel, D-Calais, who heads the House Ways and Means Committee, as well as Gov. Peter Shumlin and Rep. Shap Smith, D-Morrisville, speaker of the House.
The shift would enable businesses considering moving into our out of the state to make an “apples-to-apples” comparison between Vermont and its neighbors, said Branagan.
Another suggestion, that the state reduce the sales tax rate, but broaden the range of goods and services taxed, has not attracted much legislative support, according to Branagan. “My opinion, at this point, is changing the sales tax is dead,” said Branagan.
In her presentation, Teachout said Vermont ranks in the middle of the states in terms of the number of services taxed. Among the services taxed in Vermont are tuxedo rentals, tire repair, and commercial linen supplies. “There’s not a lot of rhyme or reason why we tax them and not others,” said Teachout.
Vermont’s sales tax rate is not only a problem for retailers along the border with New Hampshire, which has no sales tax. It is also a problem for retailers competing with Internet sales, suggested Teachout.
According to Branagan, there is some talk amongst legislators of eliminating the sales tax altogether.
The commission also examined the question of whether high-income residents are fleeing the state and found they are not. On average, tax filers moving into the state make 18 percent more than those who are leaving , the commission found.
In addition, many people who fall into the highest tax bracket remain there for only a year or two before dropping into a lower bracket. Only 52 percent of Vermonters who made more than $500,000 in 2002 did so in every year between 2002 and 2008, explained Teachout.
In April, a study published in the National Tax Journal found that when New Jersey implemented a so-called millionaires tax in 2004 high-income earners did not flee the state. New Jersey had increased the tax rate for those making more than $500,000 per year from 6.37 percent to 8.97 percent.
When the tax ended, New Jersey had more millionaires than when it was implemented. “This suggests that the policy effect is close to zero,” the study’s authors concluded.
When it comes to the property tax, which is currently a property tax with a rebate based on income, there is division on whether the tax should be changed to weigh more heavily in favor of property or income, according to Teachout.
However, even with income sensitivity, Teachout said the property tax is still regressive, with those who have less income paying a higher share of their income in the form of property taxes than those who earn more.
The commission also has recommended that the Legislature take action to review and limit tax expenditures. “Tax expenditures form a shadow budget of about $1 billion,” said Teachout.
Tax expenditures are tax rules exempting some people, businesses, goods, or services from taxes. The commission is recommending that all tax expenditures be accompanied by a clear statement of legislative intent and be put in place for a limited time. When the tax expenditure expires, the Legislature could then review the expenditure and see whether there was a valid policy reason for extending it.
In general, the commission recommended broad tax rules with few exceptions as producing the fairest and simplest tax system. “Every time you have an exception to the rules, the rates go up,” said Teachout. The revenue lost when an exception is made must be made up elsewhere.
The purpose of examining the tax system is to increase equity not revenue, according to Branagan. “The amount of money we’re generating cannot go up,” said Branagan.
“I won’t go along with anything that simply increases revenue,” she added.
The study of the education tax will add a crucial piece to the discussion, enabling legislators to take a look at the tax structure in its entirety, she suggested.
“We’ve got to find a way to make it more equitable and fair,” Branagan said of Vermont’s taxes.