Another Stealth Tax Increase

by Bruce Shields

Leftist legislators face a real challenge: How can they raise more money from hard pressed Vermonters without voting for a tax increase? If they vote for an outright tax increase, voters don’t like it. If they reduce spending, they will risk facing primary opponents from even further to the left.

The magic solution is found in the legislature’s annual Tax Expenditure Report.

The term “tax expenditure” describes the difference between the potential and actual sum raised by a particular tax. Some very popular income tax deductions and exclusions are property taxes paid, charitable contributions made, health care premiums paid for employees by employers, interest received on State or Federal bonds, and interest paid on home mortgages. Together these make up about three fourths of all tax deductions and exclusions.

Interestingly, the Vermont legislature is very tough on some classes of taxpayers. If a town exempted a Logging Museum from its municipal property tax, the legislature requires that that property remain in the tax base used to calculate school taxes the town’s taxpayers are required to remit to Montpelier.

Recently the State for the first time began to supply to towns solid current information on the value of all state owned parcels, such as boat launch sites, VTrans salt sheds, and state buildings, parks, and wildlife management areas. Towns receive some Payment in Lieu of Tax (PILOT) from the State based on those valuations.

In Act 75 of 2005 the Legislature mandated that each January 15 the Administration must present a comprehensive snapshot of tax expenditures, covering the full range and amount of tax expenditures under state tax laws. The 2008 report contains 230 pages, covering corporate and personal income taxes, sales and use tax, meals and room tax, and property tax.

By 2010, the Left had discovered its magic solution: that cutting back tax expenditures were a way to raise revenue without running the risks of voting for higher tax rates.

In that year’s Miscellaneous Tax Bill the legislature requested a targeted study of which Federal income tax deductions and exemptions Vermont could reduce or eliminate in order to raise more money. That coincidentally meshed with a study by the Congressional Budget Office of the cost of hundreds of “minor” exemptions (that is, not the popular ones listed above).

Many of the tax expenditures now apparently flagged for extinction primarily benefit small businesses, such as accelerated depreciation for capital improvements and lower tax rates for long-term capital gains.

The honest method of simplifying taxes requires a two-step process. First, the legislature reduces selected tax expenditures. That increases revenues. Then the legislature adjusts the tax rate schedule downwards to reduce revenues by approximately the same amount. This is revenue neutral.

The current legislative game is, however, to quietly eliminate various income tax deductions without making the revenue-neutral tax rate adjustments. This results in a stealth tax increase, at least until taxpayers reorganize their affairs, or move away.

So keep alert, or you will likely have some ugly surprises by the time your 2012 Turbo Tax ships next fall.

Bruce Shields is President of the Ethan Allen Institute (www.ethanallen.org).