Who pays taxes? - A look into some of the taxes Vermonters pay in support of state government
Some people are opposed to any new taxes, but when the subject comes up, the next thing people ask is “Who pays?” Followed by “Is it fair?” As we near the end of the 2015 legislative session, there has been much discussion in the media and within the State House about whether to raise taxes or cut spending. You may have read headlines claiming that state budgets have not kept pace with economic growth and revenue should be raised to stave off cuts to cherished programs. Others voices claim Vermont's taxes are too high and that we need to cut spending. What's a voter to think? And just as important, will raising taxes be done piecemeal or might it be part of a comprehensive strategy to improve the economy?
In Ways and Means where I serve, it is our responsibility to sort through the conflicting information to develop policy and revenue proposals that meet the financial requirements of the state budget. To do so we take testimony on all sides of each issue.
There are three basic types of taxes available. They are consumption taxes, income taxes and property taxes. Consumption taxes include sales of tangible goods, liquor, rooms and meals, and the like. Consumption taxes also include motor fuel taxes and gross receipt taxes on heating fuels (oil, propane and natural gas). Fuel taxes may be the subject of future posts. Income taxes are applied on personal and corporate income. And property taxes in Vermont, as we know so well, are levied on our real estate. In addition to these three, there are other taxes most people don't see and may never have heard of. These include bank franchise taxes, employer assessment taxes, insurance premium taxes, health care provider taxes and some even more obscure. In a typical legislative session, the House Ways and Means Committee and the Senate Finance committee adjust a number of these as necessary in order to fills gaps in the budget and/or to make taxes more equitable.
In addition to calculating the amount of revenue that each tax might raise, discussion inevitably involves whether taxes are progressive or regressive, whether a particular tax is targeted to those taxpayers we believe should actually pay that tax, whether a tax will change behavior in a desired way and also whether the tax will have unintended consequences, such as driving sales across the river or drive taxpayers out of state.
In this post, I will discuss conflicting opinions that have been promoted during recent months regarding income and consumption taxes, parts of which will likely be part of the final revenue bill that is adopted before the final gavel comes down.
To help fill the $113 million budget shortfall that we faced in January, adjustments to income taxes and consumption/sales taxes are on the table. Among the latter, the following are being considered: taxes on cigarettes, snuff and alternative tobacco products (known as e-cigarettes), taxes on soda, candy, vending machine sales, bottled water and taxes on dietary supplements. Not all of these are raised at once. Also under consideration are taxes on satellite TV services and a proposal to tax carbon (motor and heating fuels) in order to reduce green house gases.
As you may know, sales taxes are generally regarded as regressive - that is that families of modest income pay a higher percentage of their income for over the counter purchases, while families with much more expendable income needn't worry as much about the tax. Each product has its own constituency who hates for us to increase taxes, and there are advocacy groups that want to see taxes go significantly higher. For example, those who are addicted to cigarettes cry foul when taxes go up. On the other side are those that want to dramatically raise taxes on tobacco products and use the revenue for smoking cessation or other health care causes. Likewise for sugary beverages, beer and every other type of consumption tax you can mention. Currently soda and candy are not taxed because they are classified as groceries, ie food. You may have followed the debate over the sugar sweetened beverage tax earlier this session. While the advocates were very passionate in their belief that the tax would reduce obesity, we found that the tax wouldn't work as proposed, in that there was very little certainty that consumers would see the tax reflected in what they'd pay at the cash register. Further, under federal law, we cannot charge the sales tax to anyone receiving SNAP benefits (food stamps). A more detailed analysis of the sugar sweetened beverage tax (SSBT) is available to anyone who requests it.
Income taxes should need no introduction except to point out that some taxpayers are able to itemize their deductions, while others do not. Those who itemize are able to deduct from their income such things as property taxes, mortgage interest, gifts to charity, extraordinary medical expenses to name the most common. What's critical about itemized deductions is that taxpayers who itemize are generally of higher income than those who don't. Some of the wealthiest among us are able to claim very high deductions, making their taxable income considerably smaller and thus reduce their taxes accordingly. Much of the debate this session has been around whether to cap the total amount of deductions a taxpayer may claim or just cap charitable deductions. Decisions about these issues have not been determined as of this date but will likely be finalized by adjournment.
We have also looked at adjusting the Vermont estate tax and the capital gains tax. Capital gains are often a large part of the income for taxpayers who are heavily invested in the stock market or who own multiple pieces of real estate. Some of these taxpayers may generate large incomes in this manner year after year. However, not all capital gains are the same. A large capital gain might be a onetime event for a farmer who sells a farm or an entrepreneur who sells the family business that has taken years to build. In these cases, the capital gains are something that has taken a lifetime to achieve.
So, when we adjust income, capital gains and estate taxes, the question is often “Who pays and is it fair?”
Since I have been on Ways and Means we have made several attempts to make state income taxes more progressive and more equitable – that is to avoid giving one group of taxpayers an advantage over another. At least once, a proposal we passed did not work as intended, and we undid it the following year.
Which gets us to the question: should we simply tax the rich? A recent position paper by Public Assets pointed out that since the Great Recession the Vermont Gross State Product (GSP) risen dramatically while the State budget, as a percentage of GSP, has remained relatively flat. As a standalone statistic it appears quite convincing. The argument goes that therefore we should substantially increase spending to keep pace - and increase taxes to fund that spending. On the other hand, if we view state spending as a function of adjusted gross income (closer to what people actually have to spend) then the state spending and state taxes are much closer to what people actually have in their pockets. To continue on this path, if we look at the dramatic rise in income of the wealthy since the doldrums of the recession, we have to admit that the recovery has benefited the wealthy most of all. However, if we look at their increased income compared to the peak before the recession, their gain has been more modest. This is not to say that the wealthy can't afford to provide more in support of state government, it's just that the answer is never as simple as it appears at first blush.
During the final days of the 2015 legislative session, decisions about much of the above will have to be thought through and put into clear and convincing language upon which we will vote. Please follow developments with us and share you opinions as we deliberate. We appreciate your input.