Eric Davis: Trump tax cut will affect Vermont

The Vermont Legislature will reconvene next week for the second session of the 2017-18 biennium. Responding to the impacts of recent changes in tax and health care policy enacted by the Republican Congress or announced by the Trump Administration will be a major item on the Legislature’s agenda for 2018.
The highest income Vermonters, those with incomes of $300,000 or more, will see their federal taxes significantly reduced by the Republicans’ tax bill. Most middle-income Vermont households will see small federal tax cuts in 2018, but between 5 and 10 percent of this group could see their federal taxes increase.
The most adversely affected taxpayers will likely be two-earner households whose income comes from salaries (as opposed to business or self-employment earnings), and whose combined state income taxes and property taxes are more than $10,000 annually.
How will these changes in federal tax law affect Vermont revenues in 2018? While the state income tax system has decoupled from the federal system in many ways, there are still some connections between the two.
Vermont uses federal taxable income as the basis on which state income taxes are calculated. Because of the increase in the federal standard deduction in the new tax bill, many middle-income Vermont households will see their taxable income decline. Under current law, their state income taxes would decline slightly as well. However, those households with large deductions that are being eliminated or restricted could see their state, as well as federal, taxes go up for 2018.
How will the Legislature and the Scott Administration respond to these changes? Will they allow the federal changes to be passed through in full? Will they try to “hold harmless” for state income tax purposes those households whose federal taxes will go up because of the changes? If many households will see their taxable incomes decline, will the declines be large enough to threaten the state’s revenue base? Will legislators attempt to raise state income taxes on the highest-income households, arguing those households will have the capacity to contribute more to Vermont’s coffers?
The federal tax bill repeals the mandate that all individuals must have adequate health insurance or pay a tax penalty. How will this change affect enrollment in health insurance plans in Vermont — the individual market, employer-provided insurance, and Medicaid? If large numbers of younger and healthier Vermonters drop insurance coverage, that could lead to premium increases for older and less healthy participants in insurance plans.
Another consequence could be providers’ having to absorb the costs of more uncompensated care for the uninsured, which would also lead to premium increases. One way of avoiding these impacts would be for the state to impose an individual insurance mandate. Massachusetts took this approach prior to Congress’ enactment of Obamacare, and the state mandate did result in a reduction of the rate of increase in insurance premiums in the Bay State.
Finally, Congress adjourned for the year without a long-term reauthorization of the Children’s Health Insurance Program, which covers about 4,600 children in Vermont through Dr. Dynasaur. While the Republican leaders in Congress say they will reauthorize CHIP when Congress returns in January, federal funding could well be reduced from current levels.
In the short term, the state has sufficient funds on hand to cover the CHIP-eligible children through February. If partisan wrangling in Washington further delays the reauthorization of the program, policymakers in Montpelier will need to find almost $2 million to sustain the program for the rest of the fiscal year, through the end of June.
In the longer term, reauthorization of CHIP at reduced levels could result in the loss of up to $20 million in federal funds coming to Vermont for this program that has strong support throughout the state.
Eric L. Davis is professor emeritus of political science at Middlebury College.

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