How to Close the Budget Gap—Fiscal 2016 and Beyond
Vermont’s elected leaders face another projected budget gap as they work to fund state services for fiscal 2016. They blame the gap on structural problems: a mismatch between the growth in revenues and the growth in spending. The prevailing response has been more budget cuts, which is mostly how they’ve addressed budget gaps for the past decade.
But cutting the budget year after year does not address the underlying causes. It simply shifts costs—onto property taxes or health insurance premiums, for example—and leaves more and more Vermonters without needed state services. But there are two things the Legislature can do this year both to close the projected budget gap and begin to address the underlying structural problems.
1. Adopt the governor’s payroll tax
The governor’s proposed 0.7 percent payroll tax would begin to create a rational way to pay for health care for the increasing number of Vermonters who rely on the state rather than private insurance coverage. This will reduce the upward pressure on the property tax and private health insurance premiums and stem the continuing cuts to state services.
2. Reform income taxes
Vermont is one of six states in the country that uses federal taxable income rather than adjusted gross income as the base for the state income tax. Because this base is lower, the state must set its top marginal rate higher than necessary to raise the needed revenues. Additionally, tax breaks that primarily benefit upper-income taxpayers unfairly burden lower-income taxpayers, while also reducing the amount the entire tax system raises. The state can lower marginal rates, increase revenue, and improve the progressivity of the tax system by eliminating itemized deductions and replacing personal exemptions with a refundable tax credit.
The Institute on Taxation and Economic Policy (www.itep.org) in Washington, D.C., prepared the analysis and revenue estimate of the tax reform plan for Public Assets Institute. The revenue projection and estimated tax effects for taxpayers in various income brackets are for calendar year 2015.
1 Data source for governor’s budget gap proposal is a Joint Fiscal Office document dated February 11, 2015: http://www.leg.state.vt.us/jfo/appropriations/fy_2016/Major%20Components%20of%20Gov’s%20$94M%20Gap%20Close.pdf
2 Public Assets Institute is a member of the One Vermont coalition and prepared this analysis for the coalition (onevt.org).
3 Revenue projections for fiscal 2016 were lowered a week after the governor presented his budget recommendations in January. The administration and legislative committees are working to close the remaining gap.
© 2015 by Public Assets Institute
This research was funded in part by the Annie E. Casey Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the Foundation.