McClaughry: Large tax changes on the table

By John McClaughry

Last month the three-member Vermont Tax Structure Commission delivered a well-written, informative and conscientious report. The Legislature will now need to come to grips with some very large taxation change proposals.

The longest part of the report deals with our complex property tax financing of education. It recommends replacing the education homestead property tax with an income tax. Non-residential property would continue to be taxed for education at a statewide rate.

John McClaughry

John McClaughry is vice president of the Ethan Allen Institute.

The report argues that the present tax is regressive: it claims a greater part of the income of lower income homeowners, than their higher income neighbors. The present system offers a choice of paying education tax based on income and receiving a credit the following year, or based on property value. Thus “there is no longer a clear link between the budget voted and the voter’s tax bill, [and] the cost control and accountability of the budget process is weakened.”

The Commission’s proposed Education Income Tax would resolve this timing disjunction. Voters in each school district would set the rate applied to each resident’s previous year Adjusted Gross Income to raise the funds to meet the coming year’s budget. The state would collect the tax. The Commission believes this will be an improvement. What economic effect it would have by driving up the income tax rate schedule remains to be seen.

The Commission wants the sales tax to fall on the widest possible range of goods and services. It proposes that consumers pay the sales tax on scores of service transactions, other than business to business exchanges, casual exchanges, and — the big one — health services. As a sweetener it says that the sales tax rate could be lowered from 6% to 3.6%.

It’s hard to imagine a single tax change that would produce a more politically potent reaction from thousands of Vermonters faced with collecting and paying the tax over to the government. The report lists 121 services that could be covered. A sampler: attorneys, architects, accountants, engineers, plumbers, electricians, excavators, truckers, taxi drivers, barbers, cosmetologists, auto repair, and investment counselors.

Most if not all of the groups targeted by the services tax will clamor to be exempted, like “health care.” As the exemptions mount, the promised 3.6% tax rate creeps up to 4%, then 5% and maybe further, to raise the same amount of revenues as today’s 6% rate.

The Commission recommends some mechanism to hold low income persons harmless from the effects of the tax on services and goods (notably food) not now taxed; but people with incomes above the lower-income line would of course pay the full freight.

The Legislature that commissioned the report was eager to force everybody to contribute to the campaign to defeat the menace of climate change. So it’s no surprise that the Commission addresses taxation as a technique for exacting that contribution.

The Commission obligingly recites the horrors (Gov. Peter Shumlin’s characterization) of the coming climate change end times, without asking whether that mantra is scientifically defensible. Their report avers that “when accounting for the environmental and health benefits, all options considered by the decarbonization study commissioned by the legislature would result in net benefits.” Actually the decarbonization report found that the only way decarbonization of Vermont could produce enough “climate benefits” to overcome the conceded loss of economic welfare was to include undefined global benefits enjoyed by the whole world.

The Commission did, however, stop short of urging a carbon tax or cap-and-trade system to make motor fuel and heating oil so expensive that Vermonters can’t afford them anymore. As usual, it noted that revenues from any carbon tax should be used to diminish the burden on lower income families caused by the carbon tax. It did lamely “support the use of tax credits and exemptions to reduce the upfront cost of some investments that will make the transition [away from fossil fuels] possible, even though in general the commission strives to keep the tax base as broad as possible.”

On the brighter side, the Commission rejected two bad ideas: an unenforceable wealth tax and a value-added tax hidden in the price of goods in place of the visible sales tax. The report will appall the climate movement by recommending an add-on registration fee for the electric vehicles that taxpayers are paying millions to subsidize, but which don’t pay a dime of motor fuel taxes to maintain the roads and bridges.

Alas, the politicians who created the Commission didn’t dare to address the most important question: “What do Vermonters get for being taxed $4.5 billion a year?” Once that is agreed upon, a tax structure commission can recommend efficient and equitable ways to bring in the needed revenues without killing the golden goose.

But answering that question requires a full-blown performance review. Democratic leadership in Texas invented the gold standard performance review in the 1990s, saving billions of dollars. But Democrats here, though they endorsed the idea in their 2004 platform, will never do it. And neither will Republicans.

John McClaughry is vice president of the Ethan Allen Institute.

Images courtesy of Flickr/401kcalculator.org and John McClaughry

8 thoughts on “McClaughry: Large tax changes on the table

  1. If global warming is a true crisis, then lets go after the largest global makers of CO2. Ban all products form China and India until the lower their CO2 emissions.

  2. John,
    Coming from a working background, my concern is regarding all the loopholes and dodges in our current system that determines income and often allows those with greater wealth to hide how much they make.
    For example, my oldest son has a high production logging business that he built himself from the ground up. He spends long days working at this fairly dangerous profession, often in some pretty nasty weather, while having to contend with expensive breakdowns and the ups and downs of a fluctuating market.
    I think we need to be careful not to disincentives hardworking Vermonters by relying too much simply on taxing their income which is pretty straightforward and giving a break to those with palatial houses who can hide much of theirs.

  3. Flat Tax is the way to go. Everyone pays the same rate regardless of income, no deductions for anything. It should be the only tax allowed. Get government out of manipulating the tax system to prioritize whatever segment of society and business they think should be promoted for two reasons, (1) They are always wrong. (2) This is a major source of corruption in government. With a Flat Tax system everyone understand exactly what the entire tax burden is and they become more interested in keeping the rate as low as possible. The biggest scam ever perpetrated on low income taxpayers was the Graduated Income Tax. The wealthier one is the more tax write-offs you can take advantage of. Let us imagine that a Fat Tax rate of 25% was required.

    Income = 0 Tax = 0
    Income = $10k Tax = $2,500 You keep $7,500.
    Income = $100,000 Tax = $25,000 You keep $75,000
    Income = $1,000,000 Tax = $250,000 You keep $750,000

    Everyone has skin in the game. Nobody can tell you, ” You don’t pay taxes so you shouldn’t have your say.” Everyone is equal and everyone pay the same rate on their income.

    No Property Tax – No Sales Tax! Do your taxes on a Postcard! Get rid of unnecessary government employees, lawyers, tax preparers and headaches. Big savings of money right there! The really big savings is eliminating the politician’s ability to sell out the average taxpayer for political donations and their own profit. People will pay real interest in what is going on whenever government proposes an increase in the tax rate.

  4. John:
    I would be willing to bet that the income tax changes these folks are recommending will drive more folks to be neighbors with Gov Sununu in NH. The bottom line is this.
    There is very little argument that the total taxing burden on ALL folks that pay taxes is maxxed. The need is to re divy where and how the proceeds go. That will not be doable until the climate change gurus come to grips with the affordability issues that surround this monster, as they do with any other massive government change, and start leveling with the people who will be paying for this folly for ions. If it is so urgent that climate action start to move forward, privitize the thing, let those like Blitzdorf and others start paying for it right now, and others who want to fork over their life savings, well, they are free to do that. At the same time people like me and many others have the freedom to NOT do it either. Arguing the merits till Hell freezes over will not trump the need for leveling with the people, on affordability.
    It is that simple, Economics 101 and business ethics 101.

    • Mr. Hall identifies the giant cost elephant in the room that no one in power in Vermont wants to discuss when he writes “until the climate change gurus come to grips with the affordability issues that surround this monster,”.

      Only Willem Post has consistently put forth hard numbers on what the war on climate change will cost Vermonters……And it’s a staggering number amounting to hundreds of millions of dollars or more…..Numbers that the “gurus” in Vermont don’t want to acknowledge.

      So beyond Willem’s data, can anyone:

      1. Tell us what the Global Warming Solution Act is going to cost Vermonters?

      2. Cite any figures put forward by the legislature on what the GWSA will cost?

      3. Cite any figures put forward by the Governor on what the GWSA will cost?

      4. Cite any indication from the Climate Council that it will investigate and determine what the GWSA will cost?

      5. Cite any figures from the “experts” as defined in Vermont as the renewable energy industry on what the the GWSA will cost?

      6.Cite any figures or any interest on the part of the left leaning Vermont media to determine the cost of the GWSA?

      7. Cite any figures from any source on what the GWSA will cost Vermonters?

      What we have in Montpelier are endless efforts to find new sources of tax revenue. With the new Vermont Tax Structure Commission report we get a rearranging of the tax laws to get more revenue from the same people all in the name of tax “fairness”……..Meanwhile serious efforts to reduce costs are avoided.

  5. Is my wallet a BOTTOMLESS PIT for Politicians in Mont PECULIAR to Keep Draining? those of us on limited incomes have to very careful in our own Budgeting or we will run short at the end of the month. The Pols in MontPECULIAR Hit us to the tune of 740+dollars a week PLUS 66$ a day for mealsPLUS 127$ a night if the stay over ALSO $75 dollars a day when they claim work from home. This adds up to QUITE a chunk of money from Their EMPLOYERS The VOTERS of VERMONT.. Can we afford this ???

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