Your Taxes and the State Budget
Every year as we approach adjournment the legislature passes a Miscellaneous Tax bill (Misc Tax). The bill often contains things such as changes to filing requirements for the homestead declaration, obscure taxes on bank franchises and any proposed changes to sales and/or income taxes. In a normal year, the legislature and Governor agree to Misc Tax before the budget is ready for passage. But this was not a normal year. Misc Tax and other key policy and tax issues were held hostage to political wrangling.
For the second year in a row, Governor Phil Scott vetoed the state budget while insisting on changes he wanted in property tax rates. He insisted that some $63 million in one-time money be used to artificially lower statewide property tax rates for one year. One-time money is non-reoccurring revenue that, once spent is not available in following years. The problem with using one-time money as Phil Scott proposed is that the same amount has to be raised the following year to fill the hole left behind. In essence it’s a fool’s errand.
Scott actually vetoed the budget twice and threatened to veto it a third time, even though he found each budget to be very responsible pieces of work. But without a budget in place by July 1st state government would be forced to immediately reduce services and then shut down. Second, without setting statewide property tax rates, local governments couldn’t set town by town school tax rates and schools couldn’t collect revenue to operate local schools. Third, the budget bill included several very important changes to Vermont Tax Code necessitated by the Trump tax cuts, and finally, the bill included several very important provisions to help working families and retirees.
At the end of May in a special veto session, House and Senate passed H.16 and Governor Scott allowed it to become law without his signature. The bill contained all of what would have been Misc Tax, other critical legislation as well as the state budget. You can read a section by summary of the bill, (perhaps the most useful short document pertaining to tax changes) here. Or you can read the entire 275 page bill here.
(Note, for those who enjoy studying legislative gymnastics, see the section on the process that brought the bill to passage at the bottom of this post.)
So what exactly did we pass?
Investments in Vermont’s Future
The budget balances the state’s budget and uses revenue sensibly to make critical investments in Vermont’s future including:
Investments in Vermont’s failing mental health system
Investments in our overburdened criminal justice system
Investments to help families combat the opioid crisis
Investments in affordable housing
Paying down debt obligations such as in the Teachers Retirement Fund that will save Vermonters millions of dollars going forward
Investing in community services including home health agencies, area agencies on aging and meals on wheels
And, the budget builds state reserves to prepare for the next economic downturn. Strong fiscal management protects our bond ratings.
Key Tax Provisions
Act 11 set the residential statewide property tax rate at same rate as last year, raised the non-residential rate a few percentage points from. It also set a default tax rate for residential property that was absent from current statute. The default rate describes what happens if a bill setting tax rates doesn’t pass another year.
Very importantly, the Act eliminated what has been know as the General Fund Transfer (the annual transfer of money from the General Fund the Education Fund) that had been the subject of political gamesmanship year after year. Instead, those funds now come from dedicated revenue from the Sales Tax and ¼ of the Rooms and Meals Tax.
Next, to reconcile Vermont income tax rates with the Trump tax cuts, the bill returned over $300 million to Vermont taxpayers. That was necessary and appropriate because the reduction in federal tax rates put millions of dollars in Vermonters’ pockets that, lacking changes to Vermont’s tax code, would be taxed as increased income if no adjustment in Vermont rates had passed. In short, Act 11 reduced Vermont income tax rates across the board by 2%.
To help working Vermont families, the bill increased Vermont’s Earned Income Tax Credit from 32% of federal to 36% of federal. EITC puts money directly in working families pockets and has been established as one of the most effective anti-poverty programs every developed.
To help retirees, we eliminated the taxation of Social Security benefits for taxpayers who make up to $45,000 a year and phased out the taxation of benefits for taxpayers between $45,000 and $60,000.
We also provided increased funding for military personnel to attend any of the Vermont state colleges – Castleton University, Northern Vermont University at Johnson and Lyndon, Community College of Vermont (CCV), and Vermont Technical College (VTC).
The Process that Lead to Passage
You may remember from high school social studies that both the US and Vermont Constitution require that money bills (the budget and tax bills) originate in the House, the people’s house, before going on to the Senate. As the July 1 deadline for an impending government shutdown approached and because the Governor had vetoed the budget that had started in the House, timing of passage in both chambers was critical. A decision was made to have the final combined reconciliation State Budget and Misc Tax bill be put into legislative language in the Senate, but use an existing House bill as a vehicle. As a result, the Senate took a House bill pertaining to Vital Records “off the wall” and amended the Budget and Misc Tax language to it and then send it to the House.
Sound crazy? Well, yes, to some. And in fact, there was a minor kerfuffle when H.16 arrived in the House for final passage, but upon consideration H.16 was a viable House bill and that this sort of thing had happened in the past, the bill passed and a crisis was averted.
On balance, Act 11 (what H.16 became when it became law) is a good piece of work. We averted using one-time money as the Governor proposed and set the state on more stable footing going forward.