McClaughry: Governor and Legislature agree on tax increase – next year

John McClaughry is vice president of the Ethan Allen Institute.

By John McClaughry

The smoke has cleared from the legislative battlefield of 2017, and it’s a good time to review the outcome to see who got what — and what lies ahead.

In January Gov. Phil Scott strongly urged a budget with no tax rate increases. To their credit, the Democrats in the legislature obliged, ending six years of annual scrambling to find taxes to pay for the eternally ambitious agenda of Scott’s predecessor. That’s a big plus.

The big battle was over the use of “up to $26 million a year savings” from switching teachers health insurance plans from exorbitant “Cadillac” plans favored by the Vermont-NEA teachers’ union to less expensive plans offered through the Vermont Educational Health Initiative (VEHI).

In April Scott’s administration noticed that the ObamaCare-forced teachers’ health insurance switchover would result in $75 million a year lower costs to the Education Fund. The problem he faced was twofold: how to get local school districts to use the insurance cost savings to reduce homestead property tax rates instead of spending the windfall , and how to pay off the Vermont-NEA by holding teachers harmless for the higher deductibles and copays of the less generous (but less expensive) VEHI Gold CDHP plan.

Scott’s solution was a statewide teachers’ health insurance benefit, negotiated with the union by him instead of the 60 school district bargaining units. Scott has been in Montpelier long enough to understand that “bargaining with the State” really means “pleading with the State.”

With the power to impose a contract, the governor could inform the Vermont-NEA that there would be an 80/20 premium split, the same as state employees pay. In return he would assign $49 million in savings to individual teachers’ Health Savings Accounts (HSAs) or Health Reimbursement Arrangements (HRAs) to allow them to come out even. Then he could redirect the remaining $26 million to property tax reductions and/or increased spending that he favored (higher education, preschool).

When this proposal arrived 25 school districts were well along, or finished, with their union negotiations, and the Senate was about to act on the House-passed appropriations bill. Naturally, the legislators were annoyed.

Scott’s proposal galvanized the Vermont-NEA into frantic opposition (example: “the governor wants to take power away from working women!”).

For years the union’s highly paid Uniserv agents have whipsawed one district’s contract settlement to get more favorable terms from another. Moving teachers’ health insurance to the state level would give the union one less issue for the whipsaw – even though local bargaining would continue to include salary schedules, grievances, work rules and a host of other issues.

It’s no secret that on any issue of central importance to the Vermont-NEA, it has an iron grip on Democratic legislators. The union thus required the Democrats to denounce Scott’s proposed infringement of the union’s peculiar definition of “local control”.  In its place, nineteen Senate Democrats offered a complicated scheme where the State reduced Education Fund payments to local districts by the amount the State calculated that they ought to not spend. That passed 20-9, but was ultimately dropped from the bill sent to the Governor.

Scott vetoed the two relevant bills, then announced he wouldn’t shut the government down for want of an approved budget, and then ended up accepting pretty much the same union-backed scheme the Senate Democrats had offered to start with. That scheme will be in effect only for fiscal 2018, after which a nine-member commission will try to figure out what to do in future years.

The approved compromise plan for fiscal 2018 now has the regrettable downside of having the State  instruct school boards how to apply their savings. Who will want to serve on school boards, if the State strips away more and more decision making power? (Answer: friends of the union).

Perhaps the most serious result of the compromise plan is the use of more than $40 million in one-time funding to slightly reduce homestead property tax rates for just one year. Gov. Scott denounced that provision as “unsustainable and irresponsible” – two weeks before he agreed to sign on to it.

My verdict: all parties did try hard to produce compromises that accepted the health insurance switchover, agreed to the 80/20 premium split, and produced a token homestead property tax rate reduction. But the union will almost certainly continue to get its way, and as Rep. Cynthia Browning of Arlington – probably the most level-headed Democrat in Montpelier – said, “this sets up an increase in taxes next year.”

John McClaughry is vice president of the Ethan Allen Institute.

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