Ways & Means takes testimony on Blue Ribbon Tax Commission ideas

by Angela Chagnon    

The House Ways and Means Committee heard some diverse reactions to the Blue Ribbon Tax Commission Report on Wednesday, with testimony from Jack Hoffman, a policy analyst for the left wing Public Assets Institute, Gary Flomenhoft, professor of a Public Administration class at UVM, and economists Rep. Cynthia Browning (D-Arlington) and Tom Kavet of Kavet, Rockler & Associates LLC.

The Commission’s recommendations are, in very broad strokes, to expand the income tax base by switching to ann Adjusted Gross Income base, and then lowering and flattening the rate structure. Also, to expand the sales tax on goods to cover services as well, allowing for a rate reduction to 4.5% from the current 6%. Taken together, these recommendations are revenue neutral, reflecting a slight decrease in income tax revenue offset by a slight increase in sales tax revenue.

Hoffman, a staunch advocate of higher taxes and a progressive tax structure, questioned the Commission’s recommendation to allow for less income tax revenue. Although he did support expanding the sales tax to include services, Hoffman preferred to add a fourth tax bracket (the Commission recommended three) on high income earners.

Hoffman said that the top 5% earners in Vermont saved $190 million due to the Bush tax cut extensions.  “There’s capacity there, at least for the next couple years.” (Although economist Art Woolf pointed out in a piece on Vermont Tiger that with this logic, every time the federal government raised a tax, the state should compensate by lowering one – something Hoffman would surely disagree with.)

While Hoffman thought it made sense to tax internet sales, he suggested it would be better handled on the Federal level.  He went on to testify that the tax system should give breaks to “things that give benefit to society as a whole” and not give preference to businesses, but, “In general, we support the commission’s recommendations.”

Rep. Janet Ancel (D-Calais), new chair of the Ways and Means Committee, questioned if New Hampshire businesses would be subject to the tax for services provided in Vermont.  Hoffman affirmed that they would.

Alison Clarkson (D-Woodstock) pointed out that portable services – such as those offered by lawyers and dentists – were easily moveable across the state border, and would thus avoid paying a service tax.  She suggested gathering more data regarding the tax to “clearly understand” the economic shift.  “I haven’t seen the work to support switching the sales tax to a service tax.”

Rep. Carolyn Branagan (R-Georgia ) voiced her concern about increasing the sales tax, pointing out that people with lower incomes and the elderly on fixed incomes were impacted much more than those with higher incomes.  “Why do we need to raise the sales tax?” she asked.

“The retail tax base has been declining for the last 20 years,” said Hoffman.  “The only way to compensate with the current system is to continually raise the rate [on goods] or cut services.”

One committee member later indicated that a consensus seemed to building around adding a fourth bracket as Hoffman suggests, but abandoning the plan to expand sales tax on services altogether.  Commission member Bill Sayre commented that this is not at all a direction that the Commission intended.

Gary Flomenhoft of UVM advised the committee to use the tax code to control people’s behavior. His detailed proposals can be found HERE and HERE.  Touting the mantra “Tax Bads, Not Goods”, Flomenhoft believes in controlling behavior through tax policy by taxing “bad” behaviors (smoking cigarettes, consuming junk food) and lowering taxes on “good” behaviors (green energy, etc.).

“If we want more earned income, investment, production, and innovation we should tax these less,” he proposed.  “If we want less pollution, depletion, sprawl, speculation, unearned income we should tax these more.”

Flomenhoft recommended restructuring the income tax and broadening the tax base to include things like the “soda tax”. “Give people freedom of choice, but hold them accountable for their actions,” Flomenhoft said, adding that people tended to base their choices on media influence and advertising.  He suggested taxing unhealthy behavior to pay for healthcare.

Flomenhoft did not like the idea of a service tax, saying it created a “disincentive” for labor.  Instead, he recommended taxes on pollution, carbon, and imposing rent charges on the use of “common assets” like groundwater.  He also suggested adding a tax on financial transactions.

When asked if a tax on energy would hurt Vermonters, Flomenhoft responded, “It spurs innovation and efficiency.  Look at Europe.  In general, they use half as much energy with much higher taxes.” He did not point out that although the United States uses more energy, we are also the top producer of energy.).

Rep. Cynthia Browning (D-Arlington), who is an economist, told the committee, “The primary goal of the tax system is to raise revenue to fund government services.”

“Start with the idea that every economic activity should be taxed,” she said, telling them not to favor certain activities over others. She advised against using the tax code to control behavior, but instead to use the budget through grants and regulations.

Browning supports the sales tax and recommended broad-based, stable low-rate taxes that are lower than specific taxes.  She favored eliminating tax deductions and taxing non-profits that owned a lot of land and had an income of more than one million dollars.

Tom Kavet, an economist with Kavet, Rockler and Associates, distributed a booklet of 2009 income charts, noting that the number of top earners in the state has fallen.  One of the legislators remarked that the charts disproved the theory that the “rich were getting richer and the poor were getting poorer”.  This drew scornful laughs from some Democrats, but Kavet agreed with the observation.  “The poor aren’t getting poorer, they’re just not getting richer at the same rate as the rich.”

Kavet recommended analyzing tax expenditures and obtaining fact-based analyses.  “You’re spending revenue before you know how much you have,” he said.  He suggested expanding the sales tax to everything, including necessities, with rebates to lower income earners, allowing Vermont to lower it’s sales tax to a much more appealing 1.8%. This idea initially had strong support inside the Commission, but the policy unraveled as people began insisting upon exceptions for certain items such as health care and food.