Tax Commission recommends lower rates, broader bases

by Rob Roper

Kathy Hoyt, Bill Sayre, and Bill Schubart of the Blue Ribbon Tax Commission

The Blue Ribbon Tax Commission presented its recommendations for reforming Vermont’s tax structure to the legislature on Thursday. Broadly, the three member panel made up of Bill Sayre, Bill Schubart and Kathy Hoyt concluded that Vermont should lower its tax rates while expanding the base of assets we tax.

In regards to the sales tax, the recommendation is to lower the rate to 4.5% from the current 6% while expanding what the tax covers to include a number of non-business-to-business services. Now, real estate, legal, landscaping, carpentry, plumbing, financial and many other services are tax free in Vermont. This would no longer be the case.

For the income tax, the Commission recommends that we lower Vermont’s income tax rate, but broaden the taxable base of income by having Vermonters pay on their Adjusted Gross Income (AGI) instead of our federal Taxable Income. This is a more standard way for states to levy income taxes, however, it would eliminate savings many popular deductions, such as the home mortgage deduction, and deductions for charitable contributions.

Taken in total, the recommendations of the Commission are essentially revenue neutral, although the panel acknowledges there will be winners and losers if the changes are adopted. This, of course, creates political friction, which will make any action on the total proposal difficult to take.

“It sound like from the presentation that you really have to take it as a whole because there’s a lot of offsetting,” said Minority Leader Don Turner (R-Milton). “When you lower rates in one area you have to balance that somewhere else. So from that perspective, home heating fuel is a big concern for me because now there’s no tax on it. I think it would be a substantial hit to homeowners if we added a sales tax to that.”

Turner’s issue is just one of hundreds of similar concerns this proposal is going to spark over the coming weeks as legislators start to hear from their constituents.

We will explore a more in depth look at these proposals of the Blue Ribbon Tax Commission next week in True North Reports, but today wanted to focus on some of the more minor aspects of the presentation that jumped out as deserving attention.

The Stealth Soda Tax

Attorney General Bill Sorell came out with a proposal in December to place a penny per ounce tax on sugary beverages. The idea was not met with much support inside the legislature or by incoming Governor, Peter Shumlin, who said he would not support it.

However, the Blue Ribbon Tax Commission suggested a round about way to collect the cash by declassifying soda as food and subjecting it to the six percent state sales tax. As member Bill Schubart explained, “This is probably going to sound too much like a value judgment, but the combination of water, dye, flavoring, and sugar in any of its forms does not really constitute food, so we’re recommending the removal of sugar sweetened beverages from the tax expenditure. In other words, we are saying it’s not food.”

This opens a real can of worms, or Gummy Worms as the case may be. (The ingredients for Gummy Bears are, by the way, sugar, glucose syrup, starch, flavoring, food coloring, citric acid and gelatin. Is that food? You see where this is going.) Logically, if the combination of sugar and water is not food, than sugar by itself cannot be food, nor can water – the basic building block of life. Will these items bought in their pure form be taxed?

The attempt to give Governor Shumlin a politically correct, face-saving way to tax soft drinks continues….

“Progressivity” and Vermont becoming a playground for the rich

Despite the fact that the recommendations of the Commission would flatten Vermont’s tax code, the commissioners made pains to point out that Vermont’s tax code would still be “among the most progressive in the nation.” That word does indeed hold power. But should it?

The Commission laid out several “myths” about taxes in Vermont that their research “busted.” One of these is the notion that wealthy people on the whole are leaving Vermont due to the high taxes. According to the commission, those coming into our state actually have a higher income than those who are leaving.

This came as a surprise to members, but it really shouldn’t. Consider that when Toyota cars first came to America they were cheap, and middle class people and those with lower incomes were the primary purchasers of the vehicles. Now we have the Lexus. Those migrating away from buying Toyota brands are now the lower and middle class drivers and those migrating to the Toyota brands are more affluent. Similarly, the more expensive our government makes it to live in Vermont, the more it becomes a luxury item only the wealthy can afford.

In addition, Bill Schubart pointed out that under our current progressive tax structure, “The other piece of data that is difficult is that Vermont has the greatest income disparity, or the second greatest income disparity as I read it, of any state. And it’s becoming more disparate rather than less.”

What Vermont’s current progressive policies (not just tax policy, but that’s certainly a big part of it) have fostered is an environment that is driving out the middle class and exacerbating the income disparity between rich and poor. Flattening our tax code — removing some of its “progressivity” – will benefit the middle class, as the Commission states. But they commission seemed afraid to say it in that way.