Heating Oil News

Major changes proposed in Vermont tax policy

January 14, 2011 After 18 months of research, hearings and deliberations, the Legislature’s Blue Ribbon Tax Structure Commission recommended Thursday simplifying several taxes, broadening the state’s tax base and reducing rates to increase the state’s economic competitiveness.

The panel’s report calls for restructuring the state income tax by eliminating deductions and reducing rates.

It proposes eliminating most exemptions to the sales tax, expanding it to services and reducing the rate from 6 percent to 4.5 percent.

And it calls for enhanced legislative and public scrutiny of the millions of dollars of tax exemptions and credits.

Although the three-member panel failed to agree on the package, they urged lawmakers, the Shumlin administration and advocates for special interests to consider the entirety of their recommendations rather than home in immediately on those they opposed.

“That the commission did not agree on every recommendation does not diminish its work,” the report from William Schubart, William Sayre and Kathy Hoyt states. The three stressed repeatedly in their briefings that they had agreed on much — although not on eliminating income tax deductions or on adding the sales tax to services.

Despite the panel’s request, many people had trouble holding back on their concerns or objections, including Gov. Peter Shumlin.

"The report provides an excellent foundation for an important conversation, which I welcome,” Shumlin said in a statement. While he had good things to say about the income tax proposal, he voiced wariness about increasing the state’s reliance on the sales tax because he said it would have disproportionate effect on low-income Vermonters and businesses located near the New Hampshire border. New Hampshire doesn’t have any kind of sales tax.

Matthew Cota of the Vermont Fuel Dealers Association questioned changing the state’s longstanding policy of exempting heating fuel from the sales tax because it was viewed as a necessity. Based on quick calculations, Cota suggested average homeowners would see $108 in sales tax added to their annual fuel bills.

Other advocates held their fire — for now.

Dawn Francis, government relations lobbyist for the Lake Champlain Regional Chamber of Commerce, said, “We are open to considering all of the recommendations proposed, recognizing that there will always be winners and losers in any reform initiative. We will be asking our members to consider the Commission’s findings as a whole before taking positions.”

The commission briefed the Legislature’s two tax-writing committees because legislative leaders have said tax reform is a priority this session.

“We will definitely spend time on it, absolutely,” said House Ways and Means Chairwoman Janet Ancel, D-Calais.

Income tax reform

Hoyt made the case for the commission’s income tax proposals.

Many states use federal adjusted gross income rather than federal taxable income to calculate taxes, she said. By changing to adjusted gross income and eliminating deductions, Vermont would tax $5 billion more income. With a bigger base, the state could lower its rates, Hoyt said.

Using 2008 data, the commission found that the changes would raise nearly as much as the current system — $527.6 million compared to $541.2 million. The $13.5 million gap would be made up from $23 million in extra revenue raised from the sales tax changes. The commission saved $10 million in case its projections were off.

Lower income rates, Hoyt noted, would go a long way toward addressing the perception that Vermont is a high tax state.

Sayre didn’t agree with the total elimination of deductions because of his worries about the impact of the change on the one-third of taxpayers who claim them. Instead he suggested capping deductions.

Christopher Rice, a lobbyist representing realtors, mortgage bankers and apartment owners, said his clients see a potential double whammy affecting home buying and homeownership from elimination of the mortgage deduction and the addition of the sales tax to services.

Sales tax

Schubart said broadening the sales tax to services recognized the change in the way people spend their money. Where once consumers mostly bought things, now more than 60 percent of total consumer spending is for services.

Vermont already taxes 30 services, Schubart said, so the question for the commission was whether the state should continue its piecemeal, “stealth” approach to adding services to the tax base or “go with a bright line rule.” The panel chose a modified “bright line” with exceptions for business-to-business transactions. Sayre offered one justification for this exemption; many small business contract for services and would otherwise be at a disadvantage compared to big businesses with in-house capabilities.

Ways and Means member Rep. Oliver Olsen, R-Jamaica, asked if the panel considered the extra cost of educating service providers — many who are one-person operations — about the tax. “There is a potential significant cost,” he argued.

Several other Ways and Means members worried that lowering the sales tax rate while broadening the tax base would tempt lawmakers in the future to restore the higher rate and reap the reward — millions in new revenue.

“One of the concerns for me is we are creating more tax capacity,” Rep. William Johnson, R-Canaan, said. Although he would like to see lower tax rates, he said, “Probably right now high tax rates are the only thing constraining this Legislature.”

Click here to read the full article from Burlington Free Press