This year some Vermonters are paying what amounts to a new, stealth income tax.
That’s the word from Steve Cairns, owner of Advisor Tax Services in Stowe. He says some of his clients are finding out that a significant tax increase is lurking in this year’s tax filing.
Recent changes to U.S. tax law have prompted a $32 million increase in Vermont taxes, he said.
“There is a subtle but dramatic change to the income tax law that is now resulting in a noticeable increase in Vermont taxable income for many taxpayers,” Cairns told True North. “The change is the removal of all federal deductions that remain for federal taxpayers.”
Cairns discovered the stealth change when he examined several documents prepared by the Vermont Legislative Joint Fiscal Office — but few know about the increase.
“It was never revealed directly what the impact that this simple change would have on many taxpayers,” he said.
In Vermont, changes to state itemized deductions have been going on for some time. In 2009, Vermont limited the state income tax deduction to $5,000 on the income tax return. In 2015, the Legislature limited the deduction again.
“In 2015, Vermont removed the deduction entirely, then capped the remaining deductions to 2.5 times the federal standard deduction,” Cairns said. “Last year, they got rid of it all. It was a three-step process.
“I think that’s why you didn’t hear a peep from the Vermont legislature about the SALT [state and local tax] deduction at the federal level like we heard from New York, New Jersey, Illinois and California. They were panicking, all trying to come up with various Mickey Mouse ways of making charitable contributions instead of paying their property taxes.”
Cairns said taxpayers who itemize their tax deductions — those who don’t take the standard deduction — can deduct what they’ve paid in certain state and local taxes. These deductions include property, income and sales taxes.
But in February of 2018, Cairns got an email from Vermont Tax Commissioner Kaj Samsom that indicated an elimination of itemized deductions.
“The proposal to get rid of the deduction seems to have come from the administration,” Cairns said. ” … The Vermont law effectively begins the Vermont tax calculation with federal taxable income, a number that increases significantly for most taxpayers in 2018 as a result of the federal changes.”
Some residents have already found out how much more they will be paying when they opened their new property tax bills. According to Cairns, new Vermont tax legislation (Act 11) was allowed to go into law unsigned by Gov. Phil Scott last year. The act contains numerous changes affecting income tax and property tax.
Cairns says several changes to 32 V.S.A § 5811(21) are good for most Vermonters. For example, it reduces tax rates at all levels, creates a deduction for some or all taxable social security, creates a 5 percent charitable contribution credit capped at $20,000 of donations, creates standard deductions and exemptions, and increases the Vermont Earned Income Tax Credit to 36 percent from 32 percent of the federal Earned Income Tax Credit.
However, the benefits end for those Vermonters with incomes of $100,000 plus.
“Vermont taxpayers are discovering that if they have greater than $100,000 of gross income they will be paying higher income taxes in 2018 than they paid in 2017 on the very same income,” Cairns said.
Increases as high as 18 percent from 2017 are occurring, he noted.
“Virtually everyone that I have talked to, including legislators, had no clue these changes were coming,” Cairns said. “The administration chose not to change the withholding tables, so many taxpayers will be under-withheld when it comes to filing their returns.”
The total projected income tax increase amounts to $1.8 million. However, there is an additional tax burden shift of $10.2 million to pay for the reduction of taxes in 32 V.S.A § 5811(21).
The shift of income taxes to Vermont’s middle- and upper-income taxpayers amounts to approximately $12 million, according to Joint Fiscal Office calculations.
Mary Lou and Gary Durett, of Eden, said the new tax changes took them by complete surprise.
The Duretts are in their 70s and still working. Gary works part-time at a nearby Sears store and Mary Lou works as an administrative assistant at a local Christian church.
“What’s so disturbing about all of this is, this year, we’re going to have pay the state so much more,” Mary Lou told True North. “We didn’t even change our withholding this year. We also didn’t get any sort of advance notification that this was even coming so we could prepare for it.”
The Duretts, both native Vermonters, have pensions from previous jobs, and they work hard earning their dual income. Now they blame lawmakers for making it even harder to make a living.
Last year, they received $63 back in a tax return from the state. This year, the couple said they have to send over $500 to the state.
“We’re ok with the feds,” Mary Lou said, “but this Vermont thing is a big change for us. We talked with our accountant and, hopefully, with some diligent work in advance, we won’t have so much to pay-in next year.
“As I understand it, the people in Montpelier made some pretty bad choices for the people of Vermont. That’s why we’re still working because we can’t survive without employment. It’s sad that when you get to be our age and want to retire you just can’t do it,” she said.
In addition to the state’s shifting of the income tax burden to higher income earners, the Vermont Legislature also increased property taxes for some homeowners, according to Cairns. They did it by reducing the available property tax credit for some.
“The maximum house site value that a Vermont homeowner with less than $90,000 of household income can receive a credit on has been reduced from $500,000 to $400,000. This is effective July 1, 2018, and can result in more than a $1,200 reduction in property tax credit on the same income for the coming year,” he said. “The maximum house site value that a homeowner with $90,000 or more of household income can receive a credit on has been reduced from $250,000 to $225,000, again resulting in decreased property tax credits of several hundred dollars for many.”
He added: “The Vermont Legislature failed to inform the electorate, either directly or through the news media, of what they were doing to increase taxes. My high school teachers referred to this type of behavior as deception.”
Lou Varricchio is a freelance reporter for True North Reports. Send him news tips at email@example.com.