By Steve Cairns
In early 2018, Congress passed a sweeping change to U.S. tax law, which immediately created a problem for Vermont. As was widely reported then, if the Vermont Legislature did nothing in response, there would have been about a $32 million increase in state taxes due from residents in 2018. This is because the Vermont law effectively begins the Vermont tax calculation with federal taxable income, a number that increases significantly for most taxpayers in 2018 as a result of the federal changes.
In 2017, the Legislature changed the law for 2018 to begin the Vermont tax calculation with federal adjusted gross income (AGI) instead of taxable income (32 V.S.A § 5811(21)). Then they modified this section to allow the same itemized deductions and exemptions as on the federal tax return, which effectively got us back to the same Vermont taxable income as in prior years (H.516 Act 73).
The recently enacted Vermont tax legislation (H.16 Act 11), which was approved by the House and Senate during the 2018 Special Session and allowed to go into law unsigned by the governor, contains many changes to both income tax and property tax. Some of these changes to 32 V.S.A § 5811(21) will have a positive effect on many Vermonters:
- Reduction of tax rates at all levels
- Creation of a deduction for some or all taxable social security
- Creation of a 5 percent charitable contribution credit capped at $20,000 of donations
- Creation of standard deductions and exemptions
- Increase of the Vermont Earned Income Tax Credit to 36 percent from 32 percent of the Federal EITC
However, there is a subtle but dramatic change to the income tax law that will result in a noticeable increase in Vermont income tax for many taxpayers. That change is the removal of all federal deductions that remain for federal taxpayers. This was clearly stated in multiple documents that came out of the Joint Fiscal Office, but it was never revealed directly what the impact that this simple change would have on many taxpayers. By thoroughly reviewing the available JFO documents (here, here and here), it becomes obvious that many Vermont taxpayers with greater than $100,000 of gross income will be paying higher income tax in 2018 than they paid in 2017 on the same income — as much as 11 percent or more. Virtually everyone that I have talked to (including legislators) have no clue these changes are coming. Furthermore, the administration elected to not change the withholding tables, so many more taxpayers will be under-withheld when it comes to filing their returns next year.
The total projected income tax increase amounts to $1.8 million. However, there is an additional tax burden shift up the income scale of $10.2 million to pay for the reduction of taxes outlined above. So in all, the shift of income taxes to Vermont’s middle and upper income taxpayers amounts to about $12 million.
With the exception of a single article that briefly discussed this increase and burden shift back in early March, there was no press about this. It seems that after the proposed income surtax to pay for education expenses was shot down by the Senate Finance Committee, the remaining income tax increase was ignored by the press and the legislators. I am obliged to inform you of these changes and recommend that all who may be affected should review their withholding or estimated payments with their tax advisor. I would further recommend that everyone ask their legislators why they increased income taxes on some Vermonters when there is a significant surplus this year.
But wait, there’s more. Not content with this shift of the income tax burden up the income scale, the Legislature also increased property taxes for some resident homeowners. They did this by reducing the available property tax credit to some:
- The maximum housesite value that a Vermont homeowner with less than $90,000 of household income can receive a credit on has been reduced from $500,000 to $400,000. This is effective July 1, 2018 and can result in more than a $1,200 reduction in property tax credit on the same income for the coming year.
- The maximum housesite value that a VT homeowner with $90,000 or more of household income can receive a credit on has been reduced from $250,000 to $225,000 again resulting in decreased property tax credits of several hundred dollars for many.
Again, I believe the press missed most of this and failed to inform taxpayers of the potential negative impacts of these changes. There will be many unwanted surprises for unsuspecting taxpayers next tax season. Some have already found out how much more they will be paying when they opened their new property tax bills.
Both Winston Churchill and Rahm Emmanuel have been credited as saying, “Never let a good crisis go to waste.” Look at the Legislature’s response to the 2018 federal tax cuts and you will see what they mean. The federal tax changes created a crisis for Vermont. The majority in the Legislature used this crisis to sneak in a tax increase on the “wealthy” while at the same time touting that they dropped the tax rates. They increased income taxes by almost $2 million according to the aforementioned JFO reports. In addition, they shifted the tax burden higher by adding low income benefits that are financed by an additional increase in tax of over $10 million on those over $100,000 of adjusted gross income.
The response to the federal changes is not revenue neutral, as many wanted including the administration. With all the hoopla over the federal changes, a potential income tax surcharge for education and the end of session tussle over the non-resident property tax rates, the Legislature failed to inform their electorate either directly or through the press of what they were doing to increase taxes. In my high school English class, this type of behavior was referred to as deception. The supporters of this increase should be ashamed.
Steve Cairns owns Advisor Tax Services and lives in Stowe.