Eric Davis: Shumlin budget offers political cover

Gov. Shumlin’s 2014-15 budget is a political masterstroke in an election year. By relying on one-time funds such as a tobacco settlement and payments by Entergy associated with the shutdown of Vermont Yankee, the governor was able to close almost all of a projected $70 million budget gap without having either to cut programs or to raise broad-based taxes.
Democrats and Progressives in the Legislature, as well as many of the state’s advocacy groups, were generally supportive of the governor’s budget, which includes small increases to many human services, education and environmental programs that have strong support among Democrats, Progressives and advocates. The legislative reaction to the budget was much more positive than last year, when progressive Democrats and members of the Progressive Party strongly opposed Shumlin’s plans to cut a number of human services programs.
About the only part of the governor’s budget that may be turned down by lawmakers is his proposal to assess a fee of 0.9 percent on all private health insurance claims paid in the state. A similar proposal went nowhere in the 2013 session. This fee, which would almost certainly be passed along to business and individual policyholders by insurance companies, is not consistent with the governor’s goal of reducing health care costs in Vermont as part of the transition to a single-payer system.
Although the governor’s budget will help him get re-elected this November, it does not address some longer-term financial issues facing the state. As legislative Republicans pointed out, the governor plans to increase state spending somewhere between 3.5 and 5 percent, depending on what base is used for the calculation, at a time when inflation is running at about 1.5 percent and the overall economy is growing at no more than 3 percent, and perhaps a little bit less. By relying so heavily on one-time funds to balance this year’s budget, the administration will face significant challenges in developing balanced budgets for 2015-16 and future years. The Vermont economy is simply not growing fast enough to support the current level of state spending over the longer term.
Also, the governor used his budget speech to jawbone school boards to keep their 2014-15 budgets as close to level-funded as possible, in order to avoid burdening property taxpayers. If a level-funded budget is good enough for the schools, why is it not good enough for Montpelier?
The governor said nothing about income tax reform in his budget speech. Vermont is among the minority of states that use the federal definition of taxable income as a basis for calculating the state income tax. Most states now base their income tax on adjusted gross income, or income before federal deductions, exemptions, and preferences.
An AGI-based income tax can be structured to benefit middle-class taxpayers, while imposing slightly greater burdens on upper-income taxpayers, who benefit more from the federal deductions, exemptions, and preferences. Such a change in the Vermont income tax was floated by legislators at the end of last session, but did not receive any support from the governor at that time, or this year, for that matter.
Data presented to legislative committees last week by the state’s consulting economist, Tom Kavet, shows that such income tax reform could be a very timely measure. From 2011 to 2012, the incomes of Vermont households in the $150,000 and up category increased by an average of 8 to 19 percent. Over the same period, the incomes of the bulk of Vermont households, those between $40,000 and $75,000, increased by an average of no more than 1 percent.
Eric L. Davis is professor emeritus of political science at Middlebury College.

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