PAI Blog > Op-Eds
Manage government to need, not just money
By Jack Hoffman, VTDigger.org, October 27, 2011
One of the good things to come out of Tropical Storm Irene was seeing the state respond to human needs. Individuals, businesses, government, and other institutions all had a similar reaction to the crisis: they jumped in with both feet and did what they could to help their fellow Vermonters.
The moment, unfortunately, was fleeting. A month after Irene struck, the Shumlin administration was back into manage-to-the-money mode, building a state budget based on how much money is likely to be available, not on what will be needed to meet Vermonters needs for the coming year. Because it now looks like Vermont will have $75 million-$80 million less next year than even a conservative estimate of need, Administration Secretary Jeb Spaulding has asked all agencies and departments to prepare baseline budgets 4 percent below this year’s appropriation.
We need new thinking and a new approach.
If manage-to-the-money had guided our response to Irene, we would have had two choices: delay repairs until the money came in or take money from existing programs to pay for the damage caused by Irene. We could have told people who use Route 4 or Route 107 to wait until next June to see if there was any money left over to rebuild those roads. Or we could have cancelled school (or Medicaid services) and reallocated those funds to road and bridge repair.
Needless to say, we didn’t do either of those things. We put people first and responded to their need for help, recognizing that we’d have sort out how best to raise the money later.
We need to put people first again in our state budget process. That’s not to say that we should ignore affordability. But the budget should be a means to an end. It should be one of the primary tools we use to create the state we want to live in, a state with the kind of broad middle class Governor Shumlin promised to rebuild.
With mange-to-the-money, which has dominated Vermont’s budget process for far too long, balancing the budget with available revenue—regardless of economic circumstances or the needs of the state—has become the end. As a result, we’re spending less this year for basic General Fund programs and services than we did last year even as Vermonters’ need for state services has increased, and the administration is looking to cut even more next year.
The effects of this kind of squeeze aren’t dramatic right away, but the cracks are beginning to show. Vtdigger reported earlier this year that the state had fallen way behind in investigating elderly abuse complaints because of staffing cutbacks. A couple of years ago, flu vaccinations were hampered by reduction at the Vermont Health Department.
And if we take a broader look at the state’s well being, which is how we should be gauging government performance, we see that things are moving in the wrong direction. New data from the U.S. Census Bureau show that median household income in Vermont has fallen, and poverty has increased. Looking at other indicators: the number of families relying on foods stamps—Vermont’s 3SquaresVT program—is up, and so is the number of households qualifying for Vermont’s Reach Up program.
The administration should be developing a budget that will turn those numbers around, a budget that will start to deliver on the governor’s promise to rebuild Vermont’s middle class. A balanced budget serves no one if it’s not adequate to the job, just as half a bridge or half a road can’t honestly be called flood recovery.
Jack Hoffman is a policy analyst for Public Assets Institute (www.publicassets.org), a non-partisan, non-profit organization based in Montpelier.
Facts and myths about taxes
By Jack Hoffman, Rutland Herald, August 7, 2011
Do wealthy residents move if they are asked to pay more in taxes? Another reliable report — the fourth this year — says they do not. This latest was from the Center on Budget and Policy Priorities in Washington, D.C. It was both a review of recent studies that show no or weak connections between taxes and people’s moving from state to state and an analysis of cases where data about taxes and migration have been misused.
“This claim (about tax flight) is false,” said Robert Tannenwald, former vice president of the Federal Reserve Bank of Boston and one of the co-authors of the report. “The effects of taxes on migration are, at most, small — so small that states that raise income taxes on the wealthiest households will see a substantial net gain in revenue.”
There is good recent evidence to support Tannenwald:
— “The Impact of Taxes on Migration in New England,” by economist Jeffrey Thompson at the Political Economy Research Institute in Massachusetts, analyzed data from all 50 states and found that migration had a strong correlation with the availability of jobs and affordable housing and essentially no relationship to taxes.
— “Millionaire Migration and State Taxation of Top Incomes: Evidence From a Natural Experiment” by Cristobal Young of Stanford University and Charles Varner of Princeton University, found no difference in moving patterns between those people who were affected by New Jersey’s millionaires tax and those who were not.
— The final report of Vermont’s own Blue Ribbon Tax Structure Commission found that, for at least the past 16 years, people moving to Vermont consistently have higher incomes than those who move out of the state each year.
Gov. Jim Douglas liked to tell stories about Vermont taxes driving rich people out of the state. His successor reads from the same script. It’s a common myth, told again and again.
But as the results of these studies suggest, for most people decisions about where to live are not so simplistic. If they were, we’d all live in New Hampshire or Florida. In fact, what makes states attractive is the better schools, lower crime rates, better infrastructure and quality of life that typically come with greater public investment. All those positives describe Vermont. If wealthier people are coming here, not fleeing, we must be doing something right.
Gov. Peter Shumlin has said Congress should increase taxes on wealthy Americans to address our federal budget problems. But after the events of the last few weeks, it should be clear that that is unlikely to happen with this president or this Congress. So Vermont, and all of the other states, are left with the responsibility of paying for the necessary services that Congress refuses to fund. That means raising the taxes that Washington refuses to raise.
Vermont has the resources. Thanks to Washington’s extension of the Bush tax cuts in December, the top 5 percent of Vermonters are saving $190 million on their federal taxes this year and a like amount next year. As Vermont prepares to enter the next budget cycle with the prospect of reduced federal funding, it is important that decisions about spending and taxes be grounded in reality, not myths.
All Vermonters should share the risks of health care reform
By Paul A. Cillo, Vt Digger, April 19, 2011
Governor Shumlin is right. Health care reform is needed—the sooner the better. One big reason: Health care is busting the state budget.
But proposed reforms are not likely to produce real budget savings until 2015 at the earliest. And health care costs will continue to balloon until these reforms are in place. What happens to state budgets in the meantime? Which Vermonters bear the burden now? And who bears the risk if the needed reforms fail to materialize?
So far, low- and middle-income Vermonters have disproportionately carried the load. Going forward, this is neither fair nor fiscally wise.
Vermont health care costs have increased nearly 9 percent a year on average for the last 10 years—twice the rate of the state’s economic growth—according to data from the Department of Banking, Insurance, and Health Care Administration (BISHCA).
Just as health care is eating up a larger share of the economy each year, it is also demanding a larger share of the state budget—now more than 30 percent. Unwilling to make the case for increased taxes, lawmakers have covered this increase by forcing down spending on everything else—the courts, education, child welfare, services for the elderly, and other services essential to our civilized society. Most of these spending cuts are in human services, the largest area of the state budget, which affect low- and middle-income Vermonters most.
Meanwhile, those in the upper income brackets are largely immune from the budget impacts of rising health care costs. These Vermonters tend to be untouched by cuts to human services. Their health insurance premiums typically take a smaller percentage of their larger incomes. And health care tax breaks benefit those with higher incomes more than those of lower earners.
Until the economy recovers and health care cost growth is slowed to a sustainable level, Montpelier needs to find a way to cover both the rapidly increasing costs of health care and the ongoing costs of public services that Vermonters need.
Rather than impose additional cuts on top of already steep budget reductions, lawmakers should raise sufficient revenue. The best way to do so would be to levy a temporary tax on Vermonters with the highest incomes. Here are three reasons such a tax would be both economically sensible and fair. Such a tax would provide:
1. A much needed stimulus effect on the state’s recovery. Budget cuts and tax increases can dampen economic activity by reducing the amount that might otherwise be spent on goods and services. However, economists point out that state spending funded by tax increases on upper income households, who have enough money to be able to save, can have a stimulus effect because it puts money into the economy that otherwise would go into savings.
2. Relief from federal cuts affecting Vermont. Thanks to the extension of the Bush tax cuts, the top 5 percent of Vermonters are receiving a federal tax reduction windfall of $190 million each year in 2011 and 2012. At the same time the federal government is reducing aid to Vermont—leaving the state to pick up costs previously paid with federal dollars. Taking back some of this tax-cut revenue can keep state services intact.
3. A stake in health care reform for all Vermonters. A temporary tax on upper-income Vermonters to help pay for the budget impacts of rising health care costs gives these Vermonters a solid reason to help the governor get those cost increases under control.
The governor’s leadership on health care reform is laudable. And the legislature should enact his reforms this year. But until the cost-saving benefits are real, all Vermonters—not just those with low and middle incomes—should share the risks and pitch in to cover the state budget consequences of rapidly rising health care costs.
Paul Cillo is president of the Public Assets Institute (www.publicassets.org), a non-partisan, nonprofit fiscal policy think tank based in Montpelier. You can find this report on their website.
A Welcome Change
By Jack Hoffman, VtDigger , March 7, 2011
Town Meeting last week marked the second year in a row that Vermont’s education spending has declined. And it happened without the angst we all felt last year.
Only three districts rejected their budgets. That’s the fewest in at least 20 years. And based on the anecdotal evidence, many budgets were approved by bigger margins than in recent years.
Another change this year: This was the first time in recent memory that the governor didn’t harangue school boards from January to Town Meeting Day about their reckless spending. Instead of the constant noise about out-of-control school budgets and threats to have Montpelier dictate education spending limits, there was mostly a welcome silence.
When the governor has talked about school boards, it’s been to acknowledge the responsible job they do. Although he hasn’t said it in so many words, Governor Shumlin appears to believe that the voters who elected him in the fall ought to be trusted to decide in March how much they want to spend to educate their children.
The budgets school boards put forward were constrained this year, which no doubt helped them pass. According to preliminary calculations by the Department of Education on the budgets that had been submitted by late February, overall spending was up 0.6 percent and education spending, which affects school tax rates, was down about 0.6 percent.
As we know from recent years, taxes can still rise even when there is little or no increase in spending. For the last two years, the Legislature has cut the annual transfer from the General Fund to the Education Fund. In addition, there was little growth in the sales tax and lottery revenue going into the Education Fund during the recession. Both of those factors shifted more of the cost of supporting schools onto the property tax.
Gov. Peter Shumlin’s budget would restore some of the money that has been cut from the General Fund transfer to the Education Fund, but not all. And he has proposed a permanent reduction in the transfer of at least $23 million a year for fiscal 2013 and beyond. Like his predecessor, the governor is asking local school boards to cut their spending and booking the savings in the state budget. If local districts improve efficiency or find other ways to save money, those savings should accrue to local property taxpayers. Unlike his predecessor, however, this governor acknowledges that a reduction of the General Fund transfer to the Education Fund means that property taxes will be higher than they would have been without the cut.
A way to ease that additional pressure on the property tax would be to have all residents pay school taxes based on income. Now about two-thirds of homeowners pay income-based school taxes on their homes. Nevertheless, the school finance system is still regressive. The typical Vermont family spends a greater share of its income to support our schools than do high-income families.
Moving away from the residential property tax for schools is a discussion Vermont should have—perhaps next fall and winter. In the meantime, we should be grateful that voters here still value education and that we don’t have to fight a governor trying to destroy public education as they are in Wisconsin and Ohio.
Public investment is key to prosperity
By PAUL CILLO – Rutland Herald, August 15, 2010
For 30 years, we’ve been told government is the problem and the best way to help the economy is to reduce taxes for business and get government out of the way. What we’ve been told is wrong. Our economy does better when government plays its rightful role, building and maintaining our public infrastructure and insuring that we have an excellent education system that serves everyone from pre-school-age youngsters to older adult workers.
These insights on how to strengthen the New England economy are contained in a new report released last week by the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. The report, “Prioritizing Approaches To Economic Development In New England: Skills, Infrastructure, and Tax Incentives,” was written by Jeffrey Thompson, a research economist at PERI, who works with Public Assets Institute and its counterparts in the other New England states.
Thompson reviewed the available research on what works and doesn’t work to bolster productivity and ultimately expand economic prosperity. We learn from his report:
The most effective options for creating jobs, both short-term and long-term, are investing in infrastructure and building workforce skills.
Tax cuts and business subsidies do little to create jobs in the short run and are not the most effective way to generate growth over the long term.
In the last 30 years, the U.S. has reduced its investment in public infrastructure, and there has been a subsequent decline in the rate of economic growth.
In the 1960s, New England was ahead of the nation in public infrastructure investment, but in the last two decades it has fallen behind the rest of the country.
Most of jobs that businesses use to claim tax credits would have been created without the incentives.
Investments in public infrastructure and education increase the productive capacity of a state or region; tax credits and other subsidies for individual businesses do not.
Vermont provided more than $400 million in tax breaks for businesses last year.
There are many other findings in the report that there isn’t room to describe here, but this study needs to become part of the public discussion as we look for ways to put Vermonters back to work and address the budget problems facing the state. The report also offers suggestions for how Vermont and the other New England states can find the money needed to start to rebuild our neglected infrastructure and strengthen our education system. Some of the money can come from simply redirecting existing resources — away from ineffective tax breaks and into renovating schools, upgrading sewer and water systems, expanding broadband access, repairing highways, and replacing bridges.
We’ve been misled for the last 30 years to believe that we don’t need government and that those who disparage government are the best ones to lead it. As Thompson’s study demonstrates, there is ample evidence that when government is doing its job and doing it well, it’s good for the economy.
Economic development and investment in public services and infrastructure are not mutually exclusive.
The state needs to be part of the solution to rebuilding and sustaining our economy.
We need to put ideology aside, study the available research, and make sure we use our precious public resources wisely, effectively, and in ways that create economic prosperity that all Vermonters can enjoy.
Paul Cillo is president of the Public Assets Institute (www.publicassets.org), a nonpartisan, nonprofit fiscal policy think tank based in Montpelier.
Dissing Vermont is Bad for Business
May 30, 2010, Times Argus
By JACK HOFFMAN
For years, the governor has been repeating a mantra: Vermont is bad for business. Its taxes are too high, its environmental regulations too onerous, its schools too expensive, he says.
This year he convinced lawmakers to lower taxes. His evidence came from a pretty solid source: the U.S. Census Bureau. It’s the same source he’s been citing for years; this time it was reported in Vermont Business Magazine in May.
There’s one glitch, however: The federal government stopped using that particular Census report several years ago, since the Bureau’s economists concluded its method of analysis led to findings that could be “misleading and misinterpreted.”
The Census Bureau produces two reports about revenues collected by the states. One focuses solely on state-level revenue. The other includes state revenues and revenue collected by local governments, like counties and municipalities.
The state revenue report, which is the one Vermont Business Magazine cited, distorts Vermont’s ranking because most of our property taxes are now state revenues. In other states, property taxes are primarily local taxes. This puts Vermont at the top of the state-revenue-only rankings.
To be sure, when state and local taxes are counted, Vermont still would be ranked higher than many states on a per capita basis. Which is exactly the kind of computation the Census Bureau stopped using in 2005. “Analysis based on rankings or per capita statistics can be misleading and misinterpreted,” the Bureau’s website says, “because of subtle yet important differences in state government organization and economic structure.”
A big problem, the Census explains, is that the state or state and local revenue in its reports is all of the revenue collected within a state’s borders—not just the taxes paid by residents. Alaska and Florida are two cases in point. Alaska collects a severance tax from oil companies, but has no general sales tax or personal income tax. So it would rank high in per capita taxes even though much of the revenue doesn’t come from residents. Florida relies heavily on sales taxes, many of which come from non-Florida residents.
A better way to compare state taxes is to look at the taxes residents actually pay. The Vermont Joint Fiscal Office did this in a study a couple of years ago. The study created a couple dozen hypothetical tax filers and then computed their taxes in each of 12 states, including Vermont, Florida, and other New England states. The Joint Fiscal Office study did not include property taxes.
The District of Columbia regularly analyzes the taxes paid in the largest city in each state and compares them to the district’s taxes. Like the Vermont Joint Fiscal Office study, the DC analysis creates hypothetical filers and calculates their taxes. The DC study does include property taxes. In the latest analysis released last fall, the DC study looked at families with incomes of $25,000, $50,000, $75,000, $100,000, and $150,000. In that study, Burlington was in the middle of the pack, except for the lowest income bracket, where it ranked 44th.
The Vermont Business Magazine article was correct when it said: “Methods of calculating states’ comparative tax rates differ on the basis of who’s doing the calculating.”
Methods of deciding what’s good for business also differ depending on who’s doing the calculating. So it’s interesting to look at another survey, in this month’s Kiplinger’s Personal Finance Magazine, which ranks the “10 Best Cities for the Next Decade.” Working with the Martin Prosperity Institute, the magazine weighed the cities’ affordability, public transit, and the number of people working in the “creative class”—like artists, educators, scientists—to find “great places to start a business or find a job.”
Number 8: Burlington, where, Kiplinger’s said, “environmentalism”—specifically the local-food movement—“drives much of the city’s economic growth.”
The JFO and DC studies show that Vermont’s taxes compare favorably to many other states. Vermont’s well-educated workforce, clean environment, excellent public schools, and overall high quality of life are widely cited as reasons to set up shop here.
So you have to wonder why the governor is so intent on seizing any information—even misleading information—that makes Vermont look bad. And why he seems to think that slashing revenues and weakening our schools, public services, and environmental protections would be good for Vermont’s economy.
Jack Hoffman is a policy analyst for Public Assets Institute (www.publicassets.org), a non-partisan, non-profit organization based in Montpelier.
School taxes may be more complex, less fair
Mar. 14, 2010, Times Argus
By PAUL CILLO
Montpelier’s goal this year should be to make the education tax system simpler and fairer for all Vermonters. Instead, in the haste to cut General Fund spending, Gov. James Douglas would make it more complicated and less fair – increasing taxes on middle-income Vermonters and lowering them on those with higher incomes. Sound crazy? It is.
Most Vermonters agree that the fairest tax is one that’s based on the taxpayer’s ability to pay. That way, a family’s school tax obligation goes up or down as their income goes up or down.
Property taxes don’t work that way. They’re based on the value of the house. But when Vermonters lose jobs and income — as many have during this recession — school taxes on this fixed asset can become an unsustainable burden.
That’s why the education finance law introduced “income sensitivity” in 1997. It allows most Vermont homeowners to pay their school taxes based on the amount of their household income rather than on the value of their house. This was not intended as a program for low-income Vermonters, but as a way to make the system fair for all working Vermonters — and consistent with the Vermont Supreme Court’s 1997 Brigham decision.
Here’s how the system works. Each town school district votes in the spring on the amount it wants to spend per pupil in its schools. Based on the town’s spending decision, the state sets the tax rates on both the fair market value of homes and the household income of residents in that town. Higher spending per pupil results in higher rates on both homes and household income. The same spending per pupil in any two Vermont towns results in the same tax rates in those two towns.
Even with the current income sensitivity system in place, however, a 2009 Vermont Tax Department analysis shows that middle-income Vermont households were paying nearly six times the percent of income for school taxes that their wealthier neighbors pay. Middle-income households pay 2.9 percent, on average, while those with the highest incomes pay just one-half of one percent.
Nevertheless, as part of his fiscal 2011 budget, the governor has proposed lowering school tax rates for households with incomes above $90,000 and raising them for those earning between $60,000 and $90,000. A family of four with two workers each making Vermont’s average annual wage of $38,000 would fall right in the middle of this tax-increase category.
Douglas also wants to require more Vermonters to pay school taxes on both their property and income. Currently, Vermonters with household incomes above $90,000 who pay based on income must also pay school property taxes on their house value above $200,000. Those below $90,000 can pay based on income only. Under the governor’s plan this latter group who pay based on income would have to pay property tax on their house value above $400,000, too. It appears that the House is moving to adopt at least this part of the governor’s plan.
Both of these changes, however, increase taxes on middle-income Vermonters in order to provide a tax break for those with higher incomes. The Joint Fiscal Office estimates that about 30,000 Vermonters would see higher taxes from these changes.
One of the governor’s key complaints about Act 68, which he signed in 2003, is that it’s too complicated; no one can explain it, he says. But the system he proposes is even harder to understand. Instead of one property rate and one income-based rate for each town, his system would have a three-tiered income-based tax rate as well as the requirement that those with incomes less than $90,000 also pay property taxes on their homes’ value above $400,000.
Under this system, it would be virtually impossible for voters to determine what they owe at the time they vote on their school budget. And if school boards cannot explain the tax consequences of their spending decisions to voters, local control becomes meaningless.
The Legislature is discussing these proposals; the House is seriously considering adopting parts. Montpelier is taking the system in the wrong direction. What would make the system less complicated and more fair would be to simply have all Vermont residents pay school taxes based on their ability to pay.
Paul Cillo is president of the Public Assets Institute (publicassets.org), a non-partisan, nonprofit fiscal policy think tank based in Montpelier.
Vermonters Are Not Just Taxpayers
Jan. 3, 2010, Times Argus/Rutland Herald
By JACK HOFFMAN
Because of the recession, more Vermont families are struggling, just as the state’s ability to help them has shrunk. To solve the state’s budget problems in a way that protects families and keeps our economy strong, the Legislature and the administration should take a balanced approach. They should raise new revenue to match the cuts and remember that Vermonters use services as well as pay taxes. So far, that’s not what’s happened.
Since the start of the recession two years ago, Vermont’s main response to its fiscal problems has been to reduce the services that all of us pay for and all of us depend on, and that are essential to Vermont’s economic health. In the last two years, the Legislature balanced the budget by making $4 in cuts for every $1 in new revenues.
We were told that no one raises taxes in a recession. But the fact is, states always raise taxes during recessions. Vermont raised taxes in the recessions of the early 1980s and early 1990s—and so did a majority of other states. At least 30 states have raised taxes in this recession—and Vermont was among them. Twenty years ago, Republican Gov. Richard Snelling made cuts—but he also raised taxes.
This time, however, our state’s response to its budget problems was skewed heavily—4 to 1—toward cuts.
Given the anti-government rhetoric of the last 30 years, it may not be surprising that elected officials find it easier to join the chorus calling for cuts. For one thing, the effects of cuts are often hidden—like the corrosion of the Champlain Bridge just below the water line. But sooner or later they show, and we end up paying more in time, money, lost business, and disrupted lives.
Some cuts also produce false savings. These are the cuts that reduce the state budget but shift costs onto individual Vermonters, often those who can least afford them. A good example was the decision this year to use $25 million that should have gone to schools to help fill the revenue shortfall in the General Fund budget. That simply shifted costs onto the property tax, which is already over-used, and which burdens lower-income homeowners more heavily than better-off ones.
This recession is a temporary problem. As with previous slowdowns, the economy will eventually turn around and state revenues will rebound. But if the administration and the Legislature keep reducing services as they have, they risk doing permanent damage to our state’s public structures and our economy. Vermont’s public schools, for example, are among the best in the country. Do we really want to make cuts that will result in average schools with average costs, which is what some elected officials are proposing?
This is not to say that we shouldn’t look for ways to deliver services more efficiently or even eliminate some expenditures, like certain tax credits. But that’s not how the budget cuts of the last couple of years have been made. Cutting back on meal preparations for homebound seniors or keeping disabled Vermonters on waiting lists for nursing care isn’t being done because it’s more efficient. Rather, it’s been politically safer to curb those services than to ask people still prospering in this economy to contribute more.
Elected officials often speak to voters as if they were taxpayers only. But all Vermonters also rely on the services those taxes pay for: safe food and drinking water, education, health care, highway maintenance, police protection, courts, care for those who are old, sick, or disabled, help for the unemployed, and more. The administration and the Legislature need to recognize this dual role when they approach the budget this year. To protect what we have, maintain a state we can be proud of, and prepare for a prosperous future, Vermont needs a balanced approach to balancing the budget. It must raise new revenues, not just cut services.
Jack Hoffman is a policy analyst for Public Assets Institute (www.publicassets.org), a non-partisan, non-profit organization based in Montpelier.
Property Tax Rise: Don’t blame the schools
Dec. 6, 2009, Times Argus/Rutland Herald
By PAUL CILLO
Vermont’s school boards and teachers with the support of local voters have been effectively managing school costs while keeping the state’s public schools among the best in the nation.
Nationally released student test scores place Vermont in the top five states. Meanwhile, public education expenditures as a percentage of Vermont’s economy have remained flat for 15 years—at less than 6 percent of gross state product. That’s in spite of Vermont schools’ health care costs rising by an average of over 9 percent each year—against a relatively modest drop in public-school enrollments of a little more than 1 percent yearly.
Vermont has a financially sustainable public education system that achieves excellent results. It keeps its education spending flat as a percentage of the economy under hugely trying circumstances. This should be cause for congratulations.
Yet, since his inauguration last January—when he called the system “fundamentally broken”— Governor Douglas has been leading the charge against our schools, and handing out rebukes to the people who run them and the voters who support them.
This week, the administration renewed the assault with the release of the news that the school tax rate would need to go up 2.2 cents next year. Nothing in the tax commissioner’s letter to legislative leaders mentioned health care costs or the state’s shortchanging of the Education Fund.
To help balance the General Fund during this fiscal year lawmakers cut $25 million that would have otherwise been transferred to the Education Fund—which up until now has been the one stable fund in the state. The administration is recommending an increase in the statewide school tax rate to cover this shortfall.
It could have been worse. In addition to the cut, the governor had proposed burdening the Education Fund with $40 million in teachers’ retirement costs that had always been paid by the General Fund. Since each $10 million in the Education Fund requires a 1-cent increase in property taxes, this would have resulted in an added 4-cent increase in property taxes next year. The legislature rejected this proposal and passed its budget over the governor’s veto.
Now it appears that the administration is planning to use property taxes to cover even more of the General Fund problem after fiscal 2011. Some of the federal dollars helped fulfill the General Fund’s commitment to the Education Fund this year. But federal stimulus funds are expected to dry up after 2011 leaving the Education Fund short tens of millions of dollars. But the administration apparently does not intend to fill the hole with General Fund monies, which are raised from a more equitably distributed variety of sources, including the income tax. Instead, it envisions use of—you guessed it—property taxes, which fall more heavily on low and moderate income Vermonters.
There is no question that the global economic downturn is taking a big bite out of General Fund revenues. But the legislature and the administration should not be looking to raise property taxes to solve this problem. Property taxes are already too high.
Our state should explore ways to work with school districts to deliver high quality education for less money by lowering health care costs, collaborating where possible, and using technology. But we will get nowhere fast by shifting costs onto the Education Fund and then chastising school boards and teachers for the rising costs of education. These people do the most important job in our state: preparing our children to thrive in an ever more complex world. They deserve the support of our governor and elected officials, not their blame.
Paul Cillo is President of the Public Assets Institute in Montpelier. www.publicassets.org
Responsible funding begins at home
Aug. 4, 2009, Times Argus
By JACK HOFFMAN
Gov. James Douglas, in his new role as chairman of the National Governors Association, delivered a pointed message recently to President Barack Obama and Congress: Don’t shift new costs for health care onto the states without additional resources to pay for them. Douglas was at the association’s annual summer meeting, and he was expressing the fear many governors have about the health care reform plan taking shape in Washington, D.C.
“I think the governors would all agree that what we don’t want from the federal government is unfunded mandates,” Douglas said. “We can’t have the Congress impose requirements that we are forced to absorb beyond our capacity to do so.”
The president and many members of Congress say they want to make health care available to all, or nearly all, Americans. But that effort is likely to increase costs to the states, especially those like Vermont that have expanded coverage to many of their residents who couldn’t afford private health insurance premiums. Health care is already crippling Vermont’s budget. Costs are rising much faster than inflation or tax revenues, and that has forced cuts in other areas of state government to cover the increased spending.
The promise of health care reform is that it will slow the growth in costs. But Douglas and the other governors are worried about what will happen in the meantime. If reform increases the number of people who qualify for Medicaid, the governors want the federal government to provide the money to cover them.
Fair enough. But the governor should practice at home what he preaches to Washington. Here in Vermont, he wants to shift the cost of teachers’ retirement onto local school districts, which is every bit an unfunded mandate as the cost-shift he fears from health care reform.
The administration argues that teachers’ retirement should be paid out of the state’s Education Fund because that is the primary account for school funding. For the sake of consistent accounting, this makes sense. But then the revenue to cover the cost of the retirement benefits should be shifted from the General Fund to the Education Fund along with the costs, which was the policy Vermont adopted when the Education Fund was created a dozen years ago.
What the administration wants to do is transfer the cost of teachers’ retirement – about $40 million a year now, but more than $100 million in a couple of years – without any General Fund revenue to pay for it. The governor says that local school districts should be able to simply absorb this additional cost. But if they can’t – or if local voters decide they don’t want to scrimp on their children’s education to pay retirement benefits – the additional money will have to come out of the property tax, which we rely on too much already.
Vermont needs to address the problem of teachers’ retirement and health care for retirees. But like many of the state’s budget problems, it is unrealistic to think we can simply cut other services and programs to meet this growing obligation. It’s equally unrealistic to think that the already overused property tax can absorb this cost.
In his warning to Congress, the governor understood it was too much to expect the states to take on additional costs for health care by squeezing everything else in their budgets. The same holds true for local school budgets. If local districts are going to be asked to take on more financial obligations, they need additional revenue. No one wants to shoulder an unfunded mandate, whether it comes from Washington or Montpelier.
Jack Hoffman is a senior policy analyst for Public Assets Institute in Montpelier.
Property Tax Increase – Unnecessary, Unwise, Unfair
Apr. 29, 2009
By PAUL CILLO
Desperate to fill an estimated $250 million hole in the state’s general fund for next year, the Legislature is on the verge of accepting the governor’s plan to increase property taxes by $60 million or more.
Much of this revenue is to cover obligations to retired teachers. That money historically has come from the general fund, which raises revenues from a variety of sources, the biggest being the income tax. Under the new plan, teachers’ retirement and some other general fund obligations would be paid from the education fund.
No matter how the administration tries to cloud the issue by blaming local schools boards for high property taxes, taking money from the education fund to pay for general fund obligations increases property taxes.
Governor Douglas says he wants to reduce property taxes. In his Inaugural Address in January, he told Vermonters: ”Property taxpayers cannot wait another year for relief.” But what he’s proposing will shift more costs to the property tax.
Vermont business leaders, at a press conference last week, called on the Legislature to resist raising taxes that would further burden struggling small businesses during the recession. But the planned new tax increase — on business property, primary residences, farms, and other property — does just that. The plan would shift the burden from the wealthy onto low- and moderate-income Vermonters and small business owners who can least afford it during the recession.
The good news here is that Montpelier now appears to understand it can’t cut its way out of this budget hole; it needs to raise revenues. The bad news is the property tax is the wrong tax to raise, for three reasons:
1. The property tax is over-used.
Property taxes raised more than $1.2 billion in 2008 for municipal services and schools-more than twice the state’s income tax revenue and nearly four times the sales tax’s. Unlike other state taxes, property tax rates are adjusted each year to raise the amount of money needed to pay for local services. While general fund tax rates have been relatively stable, the property tax has increased regularly over the past decade to pay for spending decisions made by town voters. It would make more sense to raise taxes that haven’t seen recent increases than to turn to the one that has.
2. The property tax is still regressive.
Even considering income sensitivity, the provision that allows many Vermonters to pay their school taxes based on income, the wealthiest Vermonters pay a lower percentage of their income for property taxes than others do. That is the definition of a regressive tax.
Shifting more costs from the general fund onto the property tax means shifting costs from the wealthy to low- and moderate-income Vermonters.
3. There are other options.
The Legislature has better ways to raise the revenue to balance the budget. First, eliminate the capital gains loophole. Forty percent of capital gains, which accrue mostly to those with the most money, are not taxed in Vermont. The governor supports closing the loophole as a matter of fairness — and the change would raise $35 million this year.
Second, increase the income tax rates for those with income of $200,000 or more. This is the group that received a huge federal tax cut during the Bush years; these Vermonters saved $152 million in federal tax in 2006 alone. The Legislature could take back some of that tax cut to fill the hole and maintain essential services for Vermonters.
These two options are smarter than using the property tax because they don’t hit those who are struggling in this recession. Those with capital gains and incomes of $200,000 or more are those who are still benefiting the most from the current economy despite the downturn.
Increasing property taxes now is unnecessary, unwise, and unfair. The governor should drop this plan, and if he doesn’t, the Legislature should stop it.
Paul Cillo is President of the Public Assets Institute, a nonprofit, Montpelier-based think tank that analyzes state tax and budget issues (www.publicassets.org).
School funding ‘fundamentally broken’?
Mar. 8, 2009, Times Argus
By PAUL CILLO
Vermont has the most equitable, stable, sustainable, and publicly accountable education funding system in America. Vermonters spend a lower percentage of their income on school property taxes now than they did before Act 60 was enacted in 1997. The Education Fund has a projected surplus this year-allowing the legislature to lower the education property tax rate.
Vermonters control the purse strings. In 2008, local voters weighed in on school budgets with 170,000 votes in communities across the state.
And more good news: The state education commissioner reported last month that student test scores showed improvement over last year in reading, writing, and math. Vermont’s public schools rank in the top five in the nation.
We should be celebrating.
Yet we hear that Vermont’s school funding system is-in the words of one prominent critic-”fundamentally broken and beyond repair.” Why? The system is too complicated for people to understand, some say. Plus, school property taxes have increased while enrollment has declined.
On the first point, yes, the system is complicated; most people can’t explain it. That’s true of every such system in the country and every one Vermont has had. In fact, Act 68 is far easier to explain than the foundation system it replaced. Act 68 should be even simpler to explain. But that’s no reason to dump it.
On the second point, Vermont’s K-12 student count has indeed dropped 5 percent over the past four years. It’s logical to think that spending should go down, too. But it’s not that simple. School buses still need to be driven, school buildings heated, and 12 grade levels taught. Many basic costs don’t change when enrollment fluctuates.
There are other reasons for spending growth. Vermont passed its landmark legislation in 1997 to correct an unconstitutional system that left some towns with under-funded schools and high tax rates, while other towns enjoyed robust spending with low tax rates. Over the past 12 years, Acts 60 and 68 have substantially closed the spending disparities between wealthy and poor districts. To accomplish that, lower-spending towns spent more. They needed it.
And while the higher-spending towns did not budget less than before, their spending growth slowed. As we move closer to equity, the overall rate of growth is diminishing-all before the so-called two-vote legislation, which takes effect this year.
School taxes as a percentage of personal income have dropped since 1996. They used to consume 5.4 percent of Vermonters’ personal income; now they take 4.8 percent.
Meanwhile, in the past five years municipal taxes have grown as fast as school taxes. If the school funding system is “beyond repair” because spending is growing too fast, is the municipal finance system on the rocks, too? We don’t hear anyone making that assertion.
And what about health care? In 2008, health care cost Vermonters $370 million more than the year before-an increase greater than five times the growth in education spending. Almost nobody understands the health care finance system. Is health care on the list of finance systems declared irreparably broken? Nope.
Maybe these complaints about Act 68 aren’t really about education funding at all. The real problem may be the General Fund, which is facing a $250 million shortfall next year. The governor’s 2010 budget drives up property taxes by relying on $40 million from the Education Fund to balance the General Fund. It seems like the Education Fund – the only healthy state fund – is the solution here, not the problem.
It wouldn’t be the first time that happened. In 2006 and 2007, the state held money in the General Fund that should have been transferred to the Education Fund as the law required. The result was $25 million in higher property taxes to fill the hole.
Vermont’s education finance system could be made better. But the bottom line is: it ain’t broke. Until someone can point to a system, anywhere in the country, that works better than ours, we shouldn’t be looking to scrap it.
Paul Cillo is President of the Public Assets Institute, a nonprofit, Montpelier-based think tank that analyzes state tax and budget issues (www.publicassets.org).
An irrational fear of taxes
Feb. 5, 2009, Rutland Herald
By JACK HOFFMAN
The word taxes has become so toxic that it’s impairing our ability to talk rationally. Here’s an example: According to the governor, some middle-income Vermonters can afford to give up 5 percent of their salaries to help balance the state budget. Meanwhile, he says, asking others with the same income to pay far less than 5 percent in additional taxes would make living in Vermont “unaffordable.”
In his budget address, Gov. Douglas hinted that certain nonprofit organization employees could afford to help balance the budget. Later, Rep. Patty O’Donnell fleshed out the governor’s suggestion. She outlined a plan to impose a 5 percent pay cut on people making $60,000 or more from nonprofit organizations that receive state funding. The governor proposed a similar pay cut for state workers above the same income threshold.
One thing we learn from this plan is that its proponents believe that Vermonters with incomes over $60,000 have the capacity to give more to balance the state budget. What is harder to understand is why they see a pay cut as less onerous than a tax increase. For the people affected, it’s no different. It reduces their incomes and increases the state coffers.
A 5 percent pay cut for someone making $60,000 would be $3,000. For a single person, that would be more than his entire Vermont income tax bill for last year. Even for those with higher incomes – people the governor described as “nonprofit executives [with] robust compensation packages” – the pay cut would be equivalent to a 75 or 80 percent tax increase.
Neither the governor nor Rep. O’Donnell has explained what distinguishes a public or nonprofit employee from anyone else who makes $60,000 or more a year when it comes to stretching their own household budgets.
So, just for a moment, let’s assume there is no difference, and everybody making $60,000 or more could give up 5 percent of their income. Collecting that in the form of a surtax would generate $573 million – and just about double Vermont’s current income tax collections.
The state is facing a revenue shortfall, but it doesn’t need that kind of money, and no one has suggested anything like a 5 percent surtax. All that critics of the current budget-balancing strategies have proposed is to look at the kind of tax increases Vermont imposed in the last two major recessions, in the early 1980s and early 1990s. These tax hikes were much less than 5 percent of income and in the 1990s were tilted toward people in the higher income brackets. Back then we weren’t afraid to ask all Vermonters with a greater ability to pay to help us through the crisis.
Take 5 percent out of some workers’ paychecks and that’s called “shared sacrifice.” Take a fraction of that and call it a tax, and suddenly people can’t afford it. With our leaders using this kind of logic, how can Vermonters trust that we’re all in this together?
Jack Hoffman is an analyst for Public Assets Institute, a nonprofit organization that does not receive state funds.
State shouldn’t add to joblessness
Jan. 22, 2009, Rutland Herald
by Jack Hoffman
While Congress gets ready to spend hundreds of billions to keep people working, why is Vermont planning to lay off state workers and slash school budgets, sending teachers to the unemployment lines?
Gov. Jim Douglas recently went to Washington with other governors to ask that the states get a share of the economic stimulus package that is intended to create jobs. Here at home, though, the governor and the Legislature are trying to balance the state budget by cutting services and eliminating state jobs. The governor also has recommended putting a freeze on the Education Fund, the one healthy, stable account in state government. The proposed freeze would require many school districts to cut their 2010 budgets below 2009 levels, which would mean laying off teachers and other staff.
People are getting fired in the private sector because demand has shrunk for the goods or services they provide. That’s not the case with public sector employees. If anything, demand for their services is increasing as more and more people turn to state government for help.
Anyone who drives on Vermont’s potholed roads knows that there is plenty of highway maintenance work to be done. With about a third of our bridges either structurally deficient or functionally obsolete, the to-do list at VTrans could keep people busy through the recession and well into the next recovery.
The demand for education doesn’t slack off in recession, either. Children still need to learn. But the governor said freezing school budgets — which means a cut for many districts — was simply a matter of fairness: Other state services are being cut during the recession, so it’s only fair to cut education, which is adequately funded. Making sure that schoolchildren are hurt because other services are being undermined doesn’t feel like fairness. It smacks more of mean-spiritedness or short-sightedness.
Vermont spends more on education than many other states; its schools also perform better than in most other states. Is it really fair to give kids mediocre schools, with fewer teachers, because other Vermonters are losing their jobs?
Creating jobs is the over-riding goal of the stimulus package Congress is debating. Disagreement centers on whether tax credits to businesses to create private-sector employment or direct government support of infrastructure projects is the most effective way to put people back to work.
Public-sector jobs are every bit as real and important to the economy as private-sector jobs. Both pay real wages, and that money in turn buys goods and services in the community, which helps support employment for others. In the most recent 12-month period for which we have data, Vermont suffered a net loss of 2,000 private-sector jobs. In the same period — November 2007 to November 2008 — state and local education jobs increased by 250, although those gains were canceled out by cuts elsewhere in state and local government.
Laying off teachers and state employees may reduce state expenditures in some areas. But it will increase the demand for unemployment benefits and put added pressure on other government services.
So how can we maintain Vermont’s public-sector jobs? Raising taxes in a recession is difficult. But on balance, temporary, targeted tax increases will cause less harm than cutting state and local services and putting more people out of work.
After the Bush administration was so lax with the $350 billion bailout of banks and other financial-industry businesses, many people are demanding more accountability. Perhaps the states shouldn’t get any job-creation money from the feds unless they demonstrate that they are doing everything in their power to minimize their own job losses.
Jack Hoffman works for the Public Assets Institute in Montpelier.
Sharing the pain as battle lines are drawn
Dec. 7, 2008, Times Argus
by Paul Cillo
It’s been heartening to hear elected officials, editorial writers, and policy makers talking about Vermonters sharing the pain as we address the state’s massive revenue shortfall.
That’s the right tone. We’re all in this together. We know there will be pain and we agree we should share it.
So what’s the pain and how do we share it?
Elected officials tend to talk about the current budget crisis as a spending problem: spending is too high so we need to cut the budget.
In fact, we have a revenue problem: too few dollars coming into state coffers. An economic recession is sweeping the country. The stock market is down, the real estate market is down, retail sales are down, and people are losing their jobs. All this means less property, sales and income tax revenue to the state – less money available to fund the state services we all depend on. If state revenues had not plummeted, we would not have a budget crisis.
On Nov. 18, state economists revealed the extent of the problem – revenues are expected to be more than $107 million lower this fiscal year than last year. And they will probably remain at least $100 million below fiscal 2008 levels through fiscal 2010. These are big numbers equal to nearly 10 percent of the state’s general fund.
How can we fill this huge revenue hole?
The federal government may help. Gov. James Douglas and other governors met this week with President-elect Barack Obama to ask for more federal money for Medicaid and highway maintenance as part of a federal economic stimulus package. Vermont could get over $100 million a year for two years just for Medicaid from this package, which Congress is expected to approve promptly next year. While the money is likely to be a temporary fix, it’s what we need to get through this immediate crisis.
The state still has more than $100 million in rainy day funds – reserves that can help fill the revenue hole as longer-term solutions are put in place. While these funds should not be swallowed in one gulp, they exist for times like these. The state should not be afraid to use them strategically– and plan to replace them as the economy improves.
Temporary tax rate increases for people in the upper-income brackets also should be part of the solution. Such increases are less of an economic drain in a recession than either general tax increases or budget cuts, according to economists like Barack Obama’s new budget director, Peter Orszag.
Republican Gov. Richard Snelling used this approach during the 1991 recession, and those tax rate increases helped see the state through hard times. In fact, in the two major recessions that occurred during Snelling’s tenure – in 1983 and 1991 – Vermont dealt with its budget problems with a package of cuts, tax rate increases and deficit spending.
Cuts will have to be part of the mix in the current crisis as well. Additional federal funds will help. The rainy day funds will help. Temporary tax rate hikes will help. But there still won’t be enough money to cover the cost of the state’s current services.
The cuts, though, should be made thoughtfully – targeted and not across the board. They should be coordinated with the new economic stimulus plan, which means the state shouldn’t rush to cut services that may be restored with additional federal funding. And, like the tax rate increases, the cuts should not be permanent.
Montpelier needs to set priorities and be sure to protect those Vermonters who cannot afford fuel, health care, food, housing, and other life necessities during these difficult times.
Vermont has gotten through deep recessions in the past, and we did it by sharing the pain. And as in the past, the only way we can share the pain is with a balance of revenue and budget adjustments.
Policy makers should learn from our past successes and use this balanced approach to solve this year’s fiscal problems.
Voters chose more effective government
Nov. 9, 2008, Times Argus
by Jack Hoffman
Gov. James Douglas sounded the right note in his re-election speech when he declared his top priority would be to address the problems in Vermont’s economy. In fulfilling his promise to “revitalize Vermont’s economy,” the governor must be mindful of the enormous shift in the country’s — and the state’s — political mood that culminated on Tuesday.
Barack Obama won the biggest popular vote of any Democrat since 1964, when Lyndon Johnson defeated Barry Goldwater. Vermonters voted 2-1 for Obama: only Hawaii and the District of Columbia gave him bigger margins of victory.
That win was not only a mandate for the policies Obama advocated during his campaign. It was a repudiation of the policies that produced the current economic crisis.
According to the exits polls on Tuesday, only 20 percent of the electorate believes the country is on the right track. What track is that? For nearly 30 years, we’ve been hearing that government is the problem – that lower taxes, smaller government and less regulation would bring prosperity to all.
But that has not worked. The median income of most Americans has actually declined since the 1970s, after inflation. And the disparity between rich and poor has grown. In Vermont, that gap has widened more than almost anywhere else in the country in recent years. Meanwhile, the state’s employment growth has lagged behind most other states. Vermont created new jobs at half the national rate from 2002 to 2007.
As the governor and the Legislature look to shore up Vermont’s economy, they cannot rely on the policies that have generated anemic job growth and expect them to produce a different result. Americans — and Vermonters — affirmed Tuesday that it is time for new thinking. Obama’s message — embraced resoundingly by Vermonters — was that government has an essential role to play in promoting prosperity, rebuilding the middle class, transforming our industries for a green 21st century and helping those who have been left behind by forces larger than themselves.
To do these gigantic jobs, government needs adequate resources – both personnel and funding. The era of weak, underfunded government – government that cannot deliver for its people – is over.
Vermont is one of 39 states that are struggling to close budget gaps this year or next. In all likelihood, the federal government will step in to help Vermont and the other states in their hour of desperation. There is growing support, even among some of the old anti-government crowd, for a new economic stimulus package that would target aid to the states. Increased funding for Medicaid, transportation and unemployment benefits are among the ideas being considered. These are classic stimulus proposals, aimed at alleviating the pressure on state budgets, putting money in the pockets of people who are most likely to spend it on everyday essentials and pumping money into local economies through spending on useful infrastructure like roads and bridges.
Such a package would be tailor-made for Vermont, which needs an additional $70 million next year just to cover its Medicaid obligations and has a serious backlog of road and bridge repairs. An infusion of federal funds could give Vermont some breathing room.
But Vermont’s economic woes are not a one-year problem. Vermont needs to use the opportunity to address its longer-term funding problems, which are tied up in a tax code that produces inadequate resources to fund the services that Vermonters want and need.
Vermonters re-elected a solid Democratic majority to the General Assembly and gave Gov. James Douglas a majority to serve a fourth term. Each has a legitimate mandate. But Vermonters – along with millions of other Americans – also said Tuesday they want government to play a more effective role in revitalizing the economy.
They don’t want to be told that government can’t afford to do it.
The T-word blocks all debate
Oct. 15, 2008, Bennington Banner
by JACK HOFFMAN
With a little less than a month to go before the election, it looks like we’ll go through another campaign cycle without an honest debate about taxes — in particular, taxes to pay for Vermont’s crumbling infrastructure. We seem to have arrived at a point where political leaders believe it’s more dangerous to utter the T-word than to neglect services government is expected to provide.
Vermont was forced to close two unsafe bridges this summer. We’re all dodging potholes on our way to work — and paying higher repair bills when we miss. The leading candidates for governor all acknowledge the obvious: We need more money in the transportation budget.
But none is willing to address the fundamental problem with the way Vermont raises money for our transportation system. None seems willing to have a forthright discussion, apparently because it necessarily means talking about new or different taxes.
The two major party candidates are proposing a deficit swap to prop up the highway budget. Both want to shift expenditures from the Transportation Fund to the General Fund — in effect, pay for certain expenditures out of the left pocket instead of the right. But that’s a phony argument because there isn’t enough money right now in either pocket.
The projected gap between General Fund revenue and obligations for fiscal 2010 is already over $100 million. Shifting costs to the General Fund only makes that gap bigger.
The problem for Vermont’s Transportation Fund is that revenues decline as the price of oil rises and people buy less. Vermont taxes motor fuels by the gallon. Whether gasoline is $1 a gallon or $4, the state collects only 20 cents. The tax on diesel is 26 cents a gallon. In the last five years, gasoline tax receipts have dropped 7.5 percent and diesel revenues are down 10 percent. Meanwhile, according to the latest information posted by the Agency of Transportation, the price of asphalt has risen 123 percent in the last year.
The candidates acknowledge the problem and recognize that higher gas prices result in less tax revenue. But they don’t go to the next step. Not wanting to utter the word “tax,” they won’t even initiate a conversation about necessary changes to Vermont’s tax structure. Clearly, we’ll never get caught up on highway and bridge maintenance with costs growing and revenues shrinking.
The governor has said we need more help from the federal government. That is certainly true. We have huge infrastructure problems in this country that require a federal response, and we could have addressed many of them with the money we poured into Iraq or the recent bailout. But if we were honest about funding the war or the bailout, we would have raised taxes to pay for them rather than pass the bill onto future generations. To ask the federal government to pay for our roads is really to ask Congress to raise taxes so Vermont doesn’t have to.
There is nothing in Vermont’s Constitution that requires elected officials to sacrifice services in order to avoid raising taxes. In fact, it appears to say just the opposite.
In Article 9, the Constitution says: “(A)nd previous to any law being made to raise a tax, the purpose for which it is to be raised ought to appear evident to the Legislature to be of more service to community than the money would be if not collected.”
It’s hard to see how deteriorating roads and bridges are providing more service to the community than a properly funded maintenance program. But it appears we won’t get a forthright discussion about paying for transportation during the election season unless voters demand it. There are still a few weeks left. Vermonters can tell candidates that simply promising “no new taxes” doesn’t answer the question of how we’re going to fix our roads.
Jack Hoffman is senior policy analyst with the nonprofit Public Assets Institute, based in Montpelier
State budget cuts will hurt Vermonters
Aug. 17, 2008, Times Argus
by Paul Cillo
On Tuesday, Governor James Douglas will unveil his plan to a legislative committee for $32 million in emergency cuts to the state budget.
Legislative leaders seem willing to go along. No hearings are scheduled, no citizens will be heard.
A few words are being spoken about sharing the pain. But the way they’re going about it, you’d think the pain was not going to be felt by real people: Vermonters.
What does it mean to cut the budget? Yes, it means the state will spend less. In fact, with these cuts, the 2009 budget would be smaller than 2008’s. But no one is talking about the price all of us will pay.
Vermont is a great place to live and work because of the public structures we’ve created over the years — physical structures like highways and sewage treatment plants; organizational structures like the courts and a democratic elections process; and social and community structures like health care, public housing, police, public schools, and libraries. The state budget reflects the values of Vermonters, who have long supported these public structures, which make civilized society and economic prosperity possible.
So there’s a dilemma when the state’s revenue system doesn’t produce enough money to maintain it’s public structures. If the state cuts services to balance the budget—especially in the crude, across-the-board way the governor is talking about—it undermines the quality of life and prosperity of our state.
That’s why state law requires that a governor who wants to make emergency cuts of more than one percent to a budget already approved by the legislature must prepare a plan as to how he’s going to do it. The governor says he has a plan: He’s proposing to protect about half of the General Fund budget and take the cuts from the other half. And in case you think these cuts are temporary, think again.The governor is looking to cut the base budget so the cuts will be permanent.
The law won’t let the governor cut appropriations to the judicial or legislative branches of state government—that protects the separation of powers. So, other than those and a few other protected functions, the administration is asking all of Vermont’s agencies to slice five percent off the top of their spending.
Vermont law also requires that the governor’s plan “indicate the effect of the expenditure reduction on the primary purposes of the program for which the appropriation was made.” In other words, the administration has to tell us how and where the ax will hurt.
The Joint Fiscal Committee has 21 days to respond to the governor’s plan. If the committee rejects the plan, the governor cannot implement it.
The committee should use the 21 days provided in statute. It should hear from Vermonters about what $32 million in cuts will mean to people who depend on state-funded health care or housing, to towns whose roads are in disrepair, to everyone who depends on the state to ensure that the food they eat and water they drink is clean and safe.
Budgets are passed after a lengthy public process during the legislative session. If the legislature were in session now, these deliberations and decisions would also be done with public input. The Joint Fiscal Committee should ensure that this important process is just as open and that the public has the same opportunity to weigh in on how they want their state budget balanced. If the committee cannot provide that forum now, they should reject the governor’s plan and wait until January when the legislature is back in session.
The state also has other options. One-quarter of the $32 million shortfall is in the Transportation Fund. A two-cent increase in motor fuel taxes could take care of that problem. It’s hard to believe that Vermonters would rather see their roads continue to deteriorate for lack of maintenance than pay two cents more per gallon, especially since the price at the pump fluctuated ten times that amount within the past month.
There’s also that rainy day fund: $87 million set aside for situations just like the one we’re in—a cyclical downturn, where revenues are not adequate to fund the state’s critical functions. A $32 million gap with $87 million sitting in the bank starts to look like a problem with an obvious solution.
The governor and legislative leaders refuse to consider these options. But they should get out from under the Golden Dome and look at the sky. It’s raining. Vermonters need an umbrella, and it’s the state’s responsibility to help provide it.
State spending should reflect Vermonters’ needs
Mar. 30, 2008, Times Argus
By JACK HOFFMAN
When the Vermont House starts debating the 2009 state budget this week, wouldn’t it be great if most Vermonters knew what they were talking about?
Imagine there already had been a string of events, starting with the governor’s budget address in January, that laid out for people the size of the projected 2009 deficit and the options for dealing with it.
Imagine that elected leaders already had held a series of forums – in person, on television and on the Internet – to explain that the state was likely to slide into recession by the end of the year, that more people would be needing government services, but that thanks to Vermont’s rainy day funds the state would be able to get through this rough patch and provide help when people needed it most.
Imagine that the governor had been reminding people of a five-year plan the Legislature and the administration had developed early in his tenure and that he had been talking about the steps needed to complete work on that plan. He might have said, for example, he was recommending additional revenue for the statewide broadband network and the state health care system to keep those projects on schedule. He might have pointed out the importance of completing the projects, despite the economic slowdown, because they would make Vermont stronger coming out of the recession.
That could be the budget process in Vermont. The annual budget debates in the House and Senate could take place against a broad backdrop of public discussions about Vermonters’ priorities and where the state should be headed in the next five and 10 years.The public doesn’t need to get into the weeds of the budget and help determine Medicaid reimbursements rates or highway paving priorities. The governor and Legislature are elected to do that.
But the budget debate should be more than incomprehensible squabbling over line items. The budget reflects the state’s concrete action on policies and priorities, which the public should help to shape.
Unfortunately, that’s not what we’ll get when the House debates the budget. We’ll hear, as we did from the governor in January, that the proposed budget is balanced. It’s as if balancing the budget is the only purpose, and the priorities that the budget is funding – and what Vermonters will lose with budget cuts – are secondary.
To be sure, Vermonters want a balanced budget. But in recent years, balancing the budget has been a lopsided exercise commonly know as “managing to the money.” The available revenue, as determined by the vagaries of the economy, dictates the size of the budget and shapes the priorities.
The administration and the Legislature have the capacity to exert more control than that. They don’t have to be limited by the current revenue forecast. If the demand for services exceeds immediate tax collections, which is typically the case during recession, Vermont created rainy day funds for just that situation. If Vermonters have decided they want their roads paved, their bridges maintained and a modern telecommunications network built – provided their political leaders explained in advance what the costs and benefits would be – they understand they will have to pay the bill.
At the very least, they deserve to have a say in whether to curtail services or fulfill commitments – that is, whether to manage to the money or make additional revenue available.
There’s a worn out cliché public officials love to use when talking about the state budget, especially in tough times like these. They liken the process to Vermonters sitting around the kitchen table, struggling to balance the family checkbook.
The state budget is not the family checkbook, and government’s role is not to cut back as families often must do when the economy falters. When families are struggling, government should do more, not less. Unlike many families, government can raise additional revenue or dip into reserves – rainy day funds – to get through the rough periods. When the economy improves and people can fend better for themselves, then government can pull back and start replenishing the reserves for the next recession.
Jack Hoffman is a senior policy analyst for Public Assets Institute. A new report on the state budget can be found at www.publicassets.org.
Poor towns aren’t gaming Act 68 system
Feb. 24, 2008, Times Argus
By JACK HOFFMAN
How and how much we pay for schools is never far from the top of the list of public policy discussions. That’s a good thing. In Vermont, we’re spending about $1.3 billion to educate our kids. That much money for such an important priority should be a hot topic.
The thread of this conversation has been that education budgets are getting out of control and that Vermonters are spending beyond their means. Accepting for a moment that this might be true, there are two possible causes. Either local school boards and voters are deciding that they need or want to spend this much to support their kids, or there is some flaw in the school funding system that is driving up spending despite the best efforts of voters to keep it in check.
If voters are deciding, even reluctantly, that this is what they need to spend, it’s difficult to argue that they’re wrong or that they’re spending too much for their own good. We are a democracy, after all where voters have the responsibility to make these decisions. If we can’t blame the voters, then it must be “the system.”
But a recent study by Public Assets Institute, “School-budget Voters Are Minding Their Own Purse Strings,” found no evidence that Vermont’s school funding system leads voters to irrational or reckless behavior. In fact, there are strong disincentives against gaming the system in the ways that some had feared would occur. Local voters have not become spendthrifts simply because their community gets more support through the Education Fund than some other towns.
Vermont’s current education funding system has been in place for just over a decade – longer than any school funding plan since 1982. Act 60 was passed in 1997 not long after the state Supreme Court ruled that the previous funding system was unconstitutional because it deprived Vermont schoolchildren of equal educational opportunity. The old system was based on local property taxes and created what the court called “gross inequities” in the money available to schools in property-rich and property-poor towns.
Act 60 – and the refinements that came later with Act 68 – established a statewide property-tax base on which all towns could draw. While this new system addressed the inequities cited by the Supreme Court, it also raised questions: Would the system encourage some communities to vote higher budgets because they knew the bulk of the money would come from taxpayers in other towns? Would the towns that benefited the most from Act 60 – and used to be the low spenders – become the biggest spenders? Would lower-income taxpayers end up shifting the burden onto their better off neighbors and thus drive up overall spending?
Public Assets Institute, which analyzes state tax and spending policies and provides non-partisan research, decided to examine these questions to see whether the skewed spending incentives of the old system had been replaced with new ones.
We found no evidence that they have. In fact, there are strong disincentives against gaming the system as some had predicted. Here are the major findings of the report we released last week:
- Towns that get more do not spend more. In fiscal 2008, there was a negative correlation between a district’s return from the Education Fund and its per-pupil spending. On average, the more a town received compared with what it paid in, the lower its per-pupil spending. (See Figure 1 on this page.)
- The consequences of higher spending fall on the people who approved that spending. When a town chooses to increase per-pupil spending, the tax consequences are, on average, more than 200 times greater on the homestead taxpayers in that town than on property taxpayers in other towns.
- High per-pupil spending was linked to high resident income. Towns with more high-income residents voted higher school budgets than those with lower-income residents.
By establishing a statewide tax base for education, Act 60 created a system in which a penny or percentage point on the tax rate raised the same amount in every town. This funding system maintained local control by giving communities the freedom to determine their own level of spending. However, it also required that in all towns with the same level of per-pupil spending, taxpayers had to make the same effort – that is, pay the same tax rates.
This mechanism that provides equal resources for equal effort has helped to increase equity among towns. But it also has proved to be a check on spending in towns that might appear to have an incentive to approve higher school budgets because they get back much more from the Education Fund than their local homestead taxpayers pay in.
Certain towns get a bigger return from the Education Fund, but individual taxpayers – and they are the people who approve the school budgets – are treated the same whether they live in a community that gets a big return or small return. Our analysis showed that the towns that get the best return, in fact, spend the least per pupil. Residents in these towns tend to be in the lower income brackets – as measured by adjusted gross income per exemption. It stands to reason, therefore, that they could not afford to vote for big spending increases.
Another question that has been raised about Act 60 and Act 68 is how much spending decisions in one town affect taxpayers in other towns. Our study showed the effect is slight. And again, the fact that higher spending means higher tax rates appears to discourage taxpayers from trying to game the funding system.
Our study did not find evidence that “the system” has built-in incentives to push up spending, so that brings us back to the local voters. Clearly, they are under pressure to try to balance the demands of feeding a family, paying for health care, keeping gas in the car and providing an education for their kids. But maybe they’re doing the best they can under the circumstances and spending what they think they need to on education even though it’s a struggle.
Jack Hoffman is a senior policy analyst at Public Assets Institute. The report, “School-budget Voters Are Minding Their Own Purse Strings,” can be found at www.publicassets.org.
Just the facts, please
Oct. 28, 2007, Times Argus
By JACK HOFFMAN
When the Legislature’s Joint Fiscal Office released its latest tax study recently, Gov.
James Douglas missed a great opportunity to give Vermonters some good news. The
study looked at a dozen states and found that low- to moderate-income taxpayers -
in other words, the large majority of Vermonters – pay less than their counterparts in
the other states.
Instead, the governor used the study to lash out at Democrats. “I will not tolerate
efforts by this majority to sugarcoat our extraordinary tax burden – one of Vermont’s
most significant obstacles to prosperity,” he fumed to the Burlington Free Press. He
claimed the study was designed to prove there was more room to impose higher
taxes.
The study did nothing of the sort. In fact, the Joint Fiscal Office analysts made no
judgments about Vermont’s overall level of taxation or whether taxes should be
raised or lowered.
What they did do was create 24 hypothetical tax filers – couples, single filers, heads
of households, high-income, moderate-income, low-income. Then they prepared
income tax returns for Vermont and 11 other states for each of the cases. They also
calculated sales and other taxes and then compared results.
The study found that Vermont still has a progressive tax system – that is, filers in
the low- and moderate-income ranges pay proportionately less than those in the
higher brackets – and that most Vermont taxpayers fare better here than they would
in the other states, at least for the taxes included in the study.
The report didn’t say whether this progressive system was good or bad, although
progressivity has been a hallmark of Vermont’s income tax for many years. Nor did
the study suggest that any of the hypothetical taxpayers should pay more or less.
Instead, it provided the kinds of basic data that should inform any policy discussion.
In addition to questioning the motives behind the study, Douglas complained that it
did not include property taxes when comparing the 12 states. That was a limitation,
but it didn’t take away from the information the study provided.
And the fact is the data to do this kind of property tax analysis aren’t available for
Vermont, let alone for the other 11 states.
For a few years in the mid-1990s the state gathered that information – real numbers
for what people in different income brackets were paying in property taxes in each
community. Then it stopped. That’s too bad, because if policymakers want to have a
meaningful discussion about education funding, they need to know the effects the
current system has on people in all tax brackets.
When it comes to taxes, the governor seems to look for bad news.
He often cites the Tax Foundation, which recently released a report that claimed
Vermont had one of the worst tax climates for business. In a study last spring, it said
Vermont had the highest “state-local tax burden” in the country.
That study boiled down each state’s tax system to a single number and then ranked
them on that one measurement.
One thing that should be clear from the Joint Fiscal Office study is that Vermont’s tax
system cannot be judged by a single calculation. Different taxes affect different
people in different ways, and the key to developing sound policy is understanding
those differences.
There is one other aspect that all of these tax studies overlook. They don’t take into
account how the money is used. For Vermonters to judge whether the governor is
right when he says taxes are too high, they need to know what they are getting for
their money and whether the services provided are the ones they want.
Neutral, factual information like the Joint Fiscal Office study should be used to foster
debate, not stifle it.
Jack Hoffman is a senior policy analyst for Public Assets Institute, which supports
open government and vigorous citizen participation in public policy development.
School-financing law is working
published Feb 25, 2007, Burlington Free Press
By Paul Cillo
Ten years ago — on Feb. 5, 1997, — the Vermont Supreme Court declared the state’s foundation formula for financing education unconstitutional because it failed to provide all Vermont children with equal educational opportunity. Vermont corrected the problem with Act 60 and later Act 68.
Financing education would be simple if both running a school and raising the money to pay for it were controlled either by towns alone or by the state. But a system of locally run schools funded by local taxes ends up treating children and taxpayers unequally across the state. And one that lets the state run the schools using state revenues strips communities of local control.
Act 68, signed by Gov. Jim Douglas in 2003, is a complicated law because it addresses this complicated problem. Like its predecessor, Act 60, it provides equal educational opportunity to all of Vermont’s children, it does so in a way that is fair to taxpayers, and it keeps control of schools in local hands.
Most people would agree that these are good goals. They are proud of Vermont’s schools and want to keep them excellent. They want all of our children to have a shot at a successful future. And they know that local control is not only the best way to manage a public education system, it is also central to the cohesion of our communities.
Still, understandably, they are concerned about increasing taxes. And some have turned that concern into a cry to repeal Act 68, which opponents say is “broken and can’t be fixed.”
In fact, there’s some good news about taxes — and for much of it, Vermont can thank Act 68.
1. School tax as a percentage of personal income has dropped. Yes, school costs have gone up significantly, and with them taxes. But personal income has grown faster. The result: From 1996 — the year before Act 60 — to 2006, the percentage of personal income that goes to taxes has dropped from 5.4 percent to 4.9 percent.
2. Most Vermonters are protected from rising property taxes. The income-sensitivity provisions of Act 68 allow people in owner-occupied homes to pay their school taxes based on income, not the value of their homes. Most of these households — 60 percent — do so. Even if school property taxes rise in their communities, they aren’t forced to move.
3. The confusing system is about to get simpler. Unfortunately, many people don’t know how much they’re paying. To pay based on income, taxpayers must first pay their property taxes, then wait for a check from the state. Because these taxpayers do not connect the two parts of the system, they feel they are paying a huge property tax bill. In fact, they’re paying the property tax bill minus the refund (or “prebate”). The Legislature has gotten rid of this two-step process. Starting this summer towns will bill taxpayers the actual amount they owe.
4. There’s more money due from state coffers for education. Under Act 68, money is transferred from the General Fund to the Education Fund each year. The law requires that the amount of the transfer grow at the same rate as General Fund base spending (anticipated year-after-year spending). Over the past two years, however, the General Fund transfer was millions less than required by law. To make up the difference, property taxes grew. If Montpelier plays by the rules, the burden on property taxes will be lighter.
Every state wrestles with funding public education. The money has to come from somewhere — and every state continues to rely on property taxes. Act 68 is fairer and more sustainable than an all-property-tax system. It balances the needs of all of Vermont’s children with those of its taxpayers and it trusts local communities to manage their schools best. Our system needs refinement. But Vermont’s Act 68 is still the best school financing law in the nation.
Paul Cillo is president of the Public Assets Institute, a nonprofit that analyzes state tax and budget issues. He is a former majority leader of the Vermont House and co-wrote Act 60.
Vermont’s School Finance Law Is Still the Best
published Jan 14, 2007, Valley News
by Paul Cillo
As the Vermont Legislature opened earlier this month, school taxes were once again on every leader’s lips. That makes sense. Vermonters care a lot about our schools. We recognize that public education may be the state government’s most important responsibility. In fact, it is the only public service the framers felt compelled to include in Vermont’s Constitution.
We expect public schools to prepare our children to be well-adjusted, competent citizens with an understanding of their own culture and the world. That challenge is formidable — and it costs money. And there’s the dilemma: We care about schools, but we also care about our pocketbooks.
Financing education would be simple if both running a school and raising the money to pay for it were controlled either by towns alone or by the state. But a system of locally run schools funded by local taxes ends up treating children and taxpayers unequally across the state. And one that lets the state run the schools using state revenues strips communities of local control.
Act 68, signed by Gov. Douglas in 2003, is a complicated law because it addresses this complicated problem. Like its predecessor, Act 60, it provides equal educational opportunity to all of Vermont’s children, it does so in a way that is fair to taxpayers, and it keeps control of schools in local hands.
Most people would agree that these are good goals. They are proud of Vermont’s schools and want to keep them excellent. They want all of our children to have a shot at a successful future. And they know that local control is not only the best way to manage a public education system, it is also central to the cohesion of our communities. Still — understandably — they are concerned about increasing taxes. But is all the news bad? The answer is no. Here’s why:
***
School taxes as a percentage of personal income is dropping. Yes, school costs have gone up significantly, and with them taxes. But so has personal income — and it is growing faster than those taxes. The result:
School taxes as a percentage of personal income in Vermont have gone down over the past 10 years. From 1996 — the year before Act 60 – to 2006, that percentage has dropped from 5.4 percent to 4.8 percent.
***
Most Vermonters are not getting hammered by rising property taxes. That is because most households — 60 percent of taxpayers in owner- occupied homes — are paying school taxes based on their incomes, not on the value of their homes. That’s what the income-sensitivity provisions of Act 68 do. As property values go up, if their incomes are stable, or even if they drop, Vermonters don’t have to fear losing their homes because of rising school taxes.
***
The confusing system is about to get a little simpler. Unfortunately, many people don’t know how much they are paying in school taxes, or on what basis. The system requires that those who want to pay based on income must first pay their property taxes, then wait for a check from the state. These taxpayers do not connect the two parts of the system, so they feel as if they are paying a huge property tax bill. In fact, the amount they’re paying is the bill to the town minus the amount of the refund (or “prebate”). To solve this problem, the Legislature got rid of that two-step process. Starting this summer towns will bill taxpayers the actual amount they owe.
***
There’s more money due from state coffers for education than is being spent. Under Act 68, money is transferred from the General Fund to the Education Fund each year. The law requires that the amount of the transfer grow at the same rate as General Fund base spending (anticipated year-after-year spending). Over the past two years, however, the General Fund transfer was $25 million less than required by law. To make up the difference, property taxes grew. If Montpelier plays by the rules, the burden on property taxes will be lighter.
Every state has wrestled for decades with funding public education. They all know the money has to come from somewhere — and schools in every state continue to rely on property taxes. Act 68 is fairer and more sustainable than an all-property-tax system. It balances the needs of all of Vermont’s children with those of its taxpayers, and it trusts local communities to manage their schools best. Our system needs refinement. But the bottom line is, Vermont’s Act 68 is still the best school financing law in the nation.
The writer is president of the Public Assets Institute, a nonprofit that analyzes state tax and budget issues (www.publicassets.org). He is a former majority leader of the Vermont House and co-authored the Equal Educational Opportunity Act, also known as Act 60, in 1997.
Taxes are not the biggest burden
published Nov 1, 2006, Rutland Herald
By Paul Cillo
Is Vermont affordable? The Public Assets Institute calculated expenses for different Vermont families to find out. The answer? For some Vermonters it is, for others it is not.
Why is the state unaffordable for some? Governor Jim Douglas says state income and school taxes are the culprits. They are not.
If living in our state is unaffordable, it’s basic living expenses – necessities – that are eating up our budgets. Adding to the problem, many Vermonters can’t pay their bills because they aren’t earning enough. That’s the affordability crisis.
If you ask the Vermont couple with one school-age child living in the median-value Vermont house if they can afford their lives, the answer is probably no. The median house value – half of homes are higher in value and half are lower – is now $176,000. State income data show that a family living in that house earns about $52,000.
So what is this middle-class family spending its money on? Mostly, the necessities: housing, transportation, food, and health care. These four add up to more than half their household budget.
The mortgage accounts for 14.9%. With the cost of a home increasing at double-digit rates, the portion of the budget required to pay for it also goes up. According to the Vermont Housing Finance Agency, almost three-quarters of Vermonters can’t afford a median-value house.
Another big cost is a reliable car, which most Vermonters need to get to work. And cars, maintenance, and fuel don’t come cheap. In fact, fuel costs are double what they were five years ago. Transportation eats up 14.6% of this household’s budget.
Food takes the third-largest bite: 13.6%.
And finally — no surprise – there’s health care. It weighs in at over 10% (assuming employer assistance) and premiums continue to increase.
After all the bills are paid, this family has nothing left for savings, never mind luxuries.
So what about that supposed big budget-buster: taxes?
State income and school taxes combined amount to only 4.3% of this household’s expenses: less than a third of housing, transportation, or food; less than half of healthcare costs.
If you ask another three-person family with one school-age child whether Vermont is affordable, they might say yes.
This family’s income equals the average of the top 5% of Vermonters: $357,934 a year. For them, the federal income tax is 20.7% of their budget and state income taxes 5.3%. The four essentials – half the median-income family’s budget – amount to just 13.4% of this family’s budget. Still, after all the bills are paid, they have about $143,000 (40% of their income) left for discretionary uses including investments, vacations, or savings.
For this family, income taxes are by far the biggest expense: more than one-quarter. If they had complaints about their expenses, taxes would be at the top of the list. But affordability? With 40% discretionary income, Vermont appears to be providing them a good life at a great price.
Nobody likes to pay taxes. But just because taxes are an annoyance to the wealthiest, we shouldn’t pretend that they’re a big problem for everybody.
Nor should we be fooled that “solutions” offered by people representing the highest-income earners are good for all of us. For instance, a recent report by the conservative Tax Foundation suggests that Vermont could improve its business climate by raising income taxes on low- and middle-income Vermonters while reducing them for the state’s wealthiest.
Who benefits from that policy? Certainly not the ordinary Vermont family that is already strapped.
If we want to address the crisis of affordability, we need to be honest about what average Vermonters can’t afford and why.
Wages are part of the problem. Vermont has the second-lowest median hourly wage in the Northeast. Those promoting an affordability agenda talk only about what this wage can buy. They seem resigned to Vermont’s low-wage status.
Maybe we should be talking about a prosperity agenda. Rather than focusing on taxes, we should work to stem the loss of good-paying jobs in Vermont and make sure all of us can afford decent housing and good health care.
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