In any case, these sessions provide a great opportunity early in the process for Vermonters to both learn about how we finance health care now and to bring their ideas about needed reforms.

The listening sessions will lead to a February 1 findings report to the Legislature—meeting a requirement of Act 48, Vermont’s Health Care Reform law passed last session.  Here’s what the law says in Sec. 9 on pages 104-5:

(c) In developing the financing plan for Green Mountain Care, the secretary of administration or designee shall consult with interested stakeholders, including health care professionals, employers, and members of the public, to determine the potential impact of various financing sources on Vermont businesses and on the state’s economy and economic climate. No later than February 1, 2012, the secretary or designee shall report his or her findings on the impact on businesses and the economy and any related recommendations to the house committees on health care and on commerce and to the senate committees on health and welfare, on finance and on economic development, housing and general affairs.

(d) In addition to the consultation required by subsection (c) of this section, in developing the financing plan for Green Mountain Care, the secretary of administration or designee shall solicit input from interested stakeholders, including health care professionals, employers, and members of the public and shall provide opportunities for public engagement in the design of the financing plan.

There are three listening sessions scheduled:

November 29:  Marlboro College Tech Center, 28 Vernon Street, Brattleboro, 7:00 p.m.–9:00 p.m.

December 13:  Rutland Free Library (Fox Room), 10 Court Street, Rutland, 6:00 p.m.–8:00 p.m.

December 14:  Large conference room at the Department of Vermont Health Access, 312 Hurricane Lane, Williston, 6:00 p.m.–8:00 p.m.

An additional session in the Northeast Kingdom and possibly one in Montpelier will be scheduled for sometime in January.  More information here.

While he doesn’t frame it that way, Margolis points out that Gov. Peter Shumlin, in a speech at the University of Vermont last week, urged the school to focus on preparing students for business, without mention of the arts, culture, or philosophy. The governor didn’t use the word “citizen” once in his speech about the “better results” the state should expect from its university.

The governor’s remarks reflect a perspective that runs deep these days among members of both major parties—in the Vermont State House, in this administration, and in the last administration.  It’s a money-first, people-second view that underlies policies that affect Vermonters’ lives every day.  As we pointed out in a report last year and in an op-ed last month, the state budget process now focuses on doing what we can for Vermonters with available revenues, instead of starting with a vision of the kind of state Vermonters want and need and adopting fiscal policies to achieve that vision.

Tax policy has become a mindless mantra of “no new taxes” even in the face of greater human need, the greatest income disparity in 80 years, and a declining middle class in Vermont. Economic development has come to mean more business tax breaks rather than public investment in a society that produces widely shared prosperity. Now the governor wants to bring this thinking to education.

The irony is that Governor Shumlin’s liberal arts education did not have the narrow focus he is encouraging Vermont’s university to adopt. Buxton, where the governor spent his high school years, educates each of its charges “to live a fully conscious, responsible life” — not exactly job training.  And his alma mater, Wesleyan University, boasts “[f]reedom, rigor, intellectual experimentation and the desire to make a positive difference in the world” as the Wesleyan Experience.

These institutions are focused on developing human beings to be productive members of society.  While that might involve a life in business, it might also be in the arts or public service or politics, but always as a critical thinking, participating citizen.

Occupy Wall Street has rightly demonstrated to the world how the current focus on money is leaving people behind.  The balance between money and people is tilted toward money in Vermont as well.  And while philosophers still argue about it, we can be confident that the purpose of life involves a lot more than cash.

His point, which he laid out in a blog post a few weeks earlier, was that business views jobs as a necessary evil, a cost that reduces profits, not as a social responsibility.

It isn’t news that the goal of business is to make a profit, or that cutting costs helps do it, but the stark truth of Frezza’s statements may help to explain why prosperity isn’t reaching middle class Vermonters.

Over the 20 years from 1989 to 2009, while Vermont’s overall economy (income and gross state product) grew about 60 percent in real (inflation-adjusted) dollars, real median household income grew only 2 percent.  In essence, average Vermonters did not get ahead despite plenty of economic growth.

Business job- and cost-cutting strategies over those 20 years included new computer technology and offshoring–the practice of having manufacturing or services done less expensively overseas.  These strategies cut costs and boost profits, but they also boost unemployment.

While it’s not business’ fault, the fact remains that unemployment is a social ill.  People without jobs don’t have a productive role in society and don’t have the means to live.  So if it’s not the responsibility of the private sector to create jobs, whose responsibility is it?  The answer has to be the public sector.

But state government, chided to operate more like a business, has been cutting jobs, too.  So how does all this job cutting create jobs?  It doesn’t.

If the state wants to create jobs, it should take two steps based on the analysis in PERI economist Jeff Thompson’s August 2010 paper:

•  Reduce public money give-aways to business that supposedly create jobs.  Estimated at over $300 million each year in Vermont, these funds do little to create jobs; they simply increase profits for the lucky businesses.

•  Increase investment of public funds in public infrastructure and citizen education– both have the short-term benefit of job creation and both provide a solid foundation for the state’s economic future.

This simple shift in the use of existing public funds would have a profound impact on job creation and begin to restore Vermont’s middle class.

Warnings about tax flight are often used to oppose tax increases. Governor Douglas made the claim to fight additional taxes during the recent recession, and his successor has made the same claim.

“This claim is false,” said Robert Tannenwald, co-author of the report and senior fellow at the Center, a nonpartisan, nonprofit policy research organization. “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.”

Citing IRS data, the Vermont Blue Ribbon Tax Structure Commission challenged the tax-flight myth in its report to the Legislature earlier this year. Noting that people migrating to Vermont consistently have higher incomes than those who move out of the state each year, the commission said migration had resulted in a net gain in income for Vermont for at least the last 16 years.

The report released today by the Center on Budget and Policy Priorities cites numerous examples of research debunking the migration myth and, through case studies, shows how misinformation about the impact of taxes on migration can influence policymakers and the media. Those who support the migration myth often wrongly assume a cause and effect relationship, promote irrelevant findings, and inaccurately measure migration, the report found.

“As we focus on growing our economy and creating new jobs, it’s now crystal clear that we don’t need to be concerned about residents fleeing Vermont if we take a balanced approach that includes new revenues,” said Paul Cillo, president of the Public Assets Institute. “False claims like this shouldn’t deter our policymakers from making good choices for Vermont.”

Very few Americans move between states, according to the report. The little interstate-migration that does occur is more frequently due to job opportunities and housing prices than tax rates. Specifically, the report illustrates that housing costs may have a significantly larger impact on Americans’ finances than tax levels.

“It’s more important than ever that we invest in our state’s future, and that’s why it’s so dangerous to rely on flawed information about the effect of taxes on residents’ decisions about where to live,” Cillo said.  “As the Legislature prepares to address another budget gap for fiscal 2013, we need to make sure we have adequate revenue to support strong schools and the infrastructure we need help our economy grow.”

Jeffrey Thompson, an economist at the Political Economy Research Institute at the University of Massachusetts, published a paper last spring that found that people’s decisions to move were much more strongly correlated with job opportunities and affordable housing than they were with higher taxes.

Cristobal Young of Stanford University and Charles Varner of Princeton University published a study in June showing that a “millionaire’s tax” in New Jersey had little discernible effect on population movement. The New Jersey study also showed that any revenue lost because a few people left was more than offset by the new revenue generated by higher taxes on the vast majority of millionaires who remained.

The Center’s full report can be found at: http://www.cbpp.org/cms/index.cfm?fa=view&id=3556

.

Public Assets Institute is a non-profit, non-partisan organization that researches and analyzes state fiscal policy. It is a member of the State Fiscal Analysis Initiative (SFAI) coordinated by the Center on Budget and Policy Priorities in Washington, D.C. Jeffrey Thompson is a research economist based at the Political Economy Research Institute at the University of Massachusetts and funded, in part, by Public Assets Institute and the other New England members of the SFAI network.

For more information contact:

• Paul Cillo or Jack Hoffman, Public Assets Institute, 802-223-6677, paul@publicassets.org, jack@publicassets.org

• Shannon Spillane, Center on Budget and Policy Priorities, 202-408-1080 or spillane@cbpp.org

ATTENTION TV PRODUCERS: High-resolution video sound bites featuring the report’s co-author, Jon Shure, are available upon request.  Please contact: Shannon Spillane, Center on Budget and Policy Priorities, 202-408-1080 or spillane@cbpp.org.

Now that deficit reduction has been become the crisis du jour, most of the current reporting and discussion are focused on how much and how quickly to cut federal spending—few are questioning whether to cut.  National Public Radio, therefore, deserves credit for broadcasting one interview at least that challenges the conventional wisdom. What Stiglitz said wasn’t new or unusual for him. It just wasn’t the kind of thing you hear very often in the echo chamber that the mainstream media have become.

I don’t need to summarize the points Stiglitz makes; you can listen to or read the interview. I will say this, though: His comments at the end on the role of government are a refreshing change from the rhetoric of the last 30 years, which has only gotten more shrill.

During the current federal deficit reduction debate, as the deficit hawks grow more righteous, it’s important to remember that we had this problem solved 10 years ago. Clinton raised taxes during his first term—despite dire warnings that it would destroy the economy—and by 2000 the federal government had a record annual budget surplus of $236 billion. According to Congressional Budget Office forecasts at the time, the public debt was projected to drop from $3.5 trillion in 2000 to $1.2 trillion in 2009.

When George Bush took office, he evidently saw no problem with leaving our children and grandchildren saddled with debt. Never mind that we still owed trillions of dollars, he said a surplus meant the government was taking in too much money, and pushed Congress to cut taxes.

It’s also worth noting here that in 2001 Bush correctly concluded that cutting taxes would reduce the amount of revenue flowing to the federal government. A couple years later, when the federal budget was back in the red, he reverted to supply-side economic theory and called for more tax cuts—this time, under the delusion that it would increase federal revenue.

We surely have enough evidence by now that cutting taxes and starving government does not produce prosperity for the large majority of Americans. It’s time to start addressing the questions that Stiglitz poses: “[W]hat kind of society do we want to create and how do we get there? What is the appropriate role of government and what does that cost and how do we best finance that?”

There’s no doubt that Vermonters are moving to Florida. According to migration data from the IRS, just over 1,300 Vermonters moved to Florida in 2008 (while more than 1,000 Floridians moved here). But it’s likely that the weather, rather than taxes, influenced their decision, because more than 3,600 people from New Hampshire, which doesn’t have an income tax either, also moved to Florida that year.

But before Vermonters decide to take up residence in Florida for whatever reason, they might want to read the expose published recently by the Miami Herald. “Neglected to Death” is the result of a year-long investigation into assisted living facilities in the Sunshine State. It documents the decline in government oversight of these facilities and the shameful neglect and abuse of people who lived in them. When Florida Gov. Rick Scott released his budget in January, he put forward a plan to grow jobs in part by “reducing burdensome regulations.”

More than half of the US population now is under 40, which means all they have heard for most of their lives is that taxes are bad and government is the problem, not the solution. As the momentum to dismantle government services builds in places like Wisconsin, Ohio, and Florida—and assuming there are still a few news organizations like the Miami Herald—we can expect to read more stories like “Neglected to Death.” It’s a hard way to learn, but perhaps we’ll recognize the importance of the services government provides when they’re no longer available.

At the governor’s urging, the House passed a bill to increase taxes on health care providers. The House didn’t go quite as far as the governor wanted. He proposed raising the rate now paid by hospitals and nursing homes and extending the provider tax to cover dentists. After a lot of resistance from the dentists, the House dropped them from the plan.

The good thing about this particular tax is that the money will go to pay for health care services through Medicaid, which means it will be matched with federal money. For roughly every 40 cents in new taxes, Vermont will be able to provide $1 in additional health services.

The hospitals won’t actually pay the higher taxes, though. They’ll be passed through to the customer in the form of higher insurance premiums—and higher rates to those who pay their own hospital bills. According to the latest data from the Department of Banking, Insurance, Securities, and Health Care Administration (BISHCA), about 355,000 Vermonters have some form of private health care coverage, which means they will be paying the tax, either directly or indirectly. The rest of the population is either uninsured or covered through government-funded programs, like Medicaid or Medicare, which set their own payment schedules and therefore not affected by the tax. (However, some of the costs not paid by Medicaid or Medicare also get shifted onto private insurance premiums.)

While the House was increasing the provider tax, which affects more than half of the state’s population, the governor and House leaders beat back an attempt to increase income taxes on Vermont families with taxable income greater than $137,000. Those families represent about 3.5 percent of all resident tax filers. The idea behind raising taxes on upper incomes was to have the state recoup some of the windfall that the wealthiest Vermonters got when Congress and President Obama decided to extend the Bush tax cuts for another two years. Thanks to the extension, the wealthiest 5 percent of Vermont taxpayers will save $190 million in federal income taxes this year and a similar amount next year. The proposed rate changes—in effect, a surtax—would have reduced that windfall by about $27 million this year and roughly the same next year.

Broad-based taxes, as the terms suggests, are the taxes paid by a wide swath of people. The income tax clearly is a broad-based tax. But a targeted surtax on a narrow slice of income taxpayers—like the one defeated in the House recently or the temporary plan Vermont adopted 20 years to close an even bigger budget gap—doesn’t really qualify as a “broad-based tax increase.” Similarly, the provider tax may appear to affect just a limited number of taxpayers, but if it is passed on to a large segment of the population, it effectively becomes a broad-based tax.

Rather than using labels to determine which taxes to raise, the Legislature might want to consider who is in the best position to help the state maintain existing services as it digs its way out of the recession. The provider tax will hit some people who are able to pay more for health insurance, but mostly it will affect middle-class Vermonters, who already are struggling to afford their premiums. The surtax, on the other hand, was aimed that those who are doing better than most and who also just got a big break from the federal government.

We also hope the Legislature will follow through on the recommendations of the Blue Ribbon Tax Structure Commission. The commission proposed some sensible changes to the income tax, which should make it easier to understand. However, the rates recommended by the commission need to be adjusted to make sure the income tax, which is our fairest tax, continues to generate at least as much money as it does now.

The Legislature also should fix the sales tax by eliminating the exemption for services. Without this necessary change, revenue from the sales tax won’t grow with the economy because in Vermont, as elsewhere, consumers spend more on services than they do on taxable goods.

– Federal Tax Cuts Could Help Balance Vermont’s Budget
– A Solid Start for Tax Reform
– Digging Out from Recession, But Still in a Hole
– Shumlin Budget: Good News and Bad News
– Hogan Joins Public Assets Board

Continue reading February 2011 Update

My name is Jack Hoffman. I’m a policy analyst for Public Assets Institute, a non-profit, non-partisan organization in Montpelier that focuses on state fiscal policy. Thank you for the opportunity to comment on the report of the Blue Ribbon Tax Structure Commission. I first want to commend the commission for an excellent job. I don’t think I’m talking out of school by telling you that I was speaking with an analyst from the Washington-based Institute on Taxation and Economic Policy last week. She said the Vermont commission’s report was the best one she had ever read. As a former reporter who covered the Legislature for 20 years, I saw my share of “blue ribbon commission” reports that were clearly designed to stall action or diffuse policy conflicts that were politically inconvenient to address.

This was clearly not one of those “blue ribbon” commissions. The three commissioners took their work seriously and provided a frank and honest assessment of the tax policy choices that Vermont faces. They deserve our thanks, not only for their work, but also for enticing Michael Costa to Vermont to be the director and chief researcher for the commission. He did a lot of great work.

I’m especially grateful for the commission’s emphasis on fact-based decision-making, and I applaud the commission’s efforts to correct many of the myths and misrepresentations we’ve heard in recent years about Vermont’s taxes and tax policies. I appreciate that you all are asked to do a lot of work in a few short months each session, but I would urge you to follow the commission’s example and push the Tax Department and the Joint Fiscal Office to collect whatever data and do as much analysis as you need to thoroughly understand how our tax system is working and the implications of any changes.

To paraphrase the introduction to the commission’s report:

You can repeat the fictions and assumptions that reinforce your personal preferences, or you can address the facts about our tax system. You can insist that nobody lose in reform, or you can acknowledge that change means winners and losers. In short, you can appear to do something about the tax system, or you can do something about our tax system.

Now to the commission’s recommendations:

1. Personal income tax. In general, we support the commission’s recommendations. ITEP, the organization I mentioned earlier, did an analysis for us. It appears the new rates, coupled with the tax credits, will maintain the progressivity of the current system—that is, the share of taxes paid by each quintile will remain pretty closely the same. We agree that eliminating deductions and exemptions makes the system fairer because it treats taxpayers the same, and it eliminates suspicion that some taxpayers are getting a better deal than others.

a. We do question the revenue loss and would urge the Legislature to maintain revenue neutrality of any taxes that are changed. The commission estimates that the personal income tax changes will result in a loss of $13 million. The ITEP analysis done for us puts the loss at about $24 million. I’m not familiar with the models used by the Tax Department and ITEP to be able to explain the difference. I’m sure the analysts could have a conversation and either come to agreement or at least explain to you the bases for the higher and lower estimates.

b. Regardless of the amount, we don’t believe it’s good policy to reduce the revenue generated by the progressive income tax and make up that money through the regressive sales tax. We would recommend adding a fourth bracket to the Commission’s recommended three to make up for the lost revenue, but perhaps the discussion about how to recoup that money should wait until you know exactly how much more you would need to generate for the income tax reforms to be revenue neutral.

2. Sales tax on services. We support this change.

a. We appreciate that this will require an adjustment by both consumers and businesses, but the change needs to be made. Our retail sales base has failed to keep pace with economic growth for decades. The sales tax is one of the critical structural problems with Vermont’s tax system that makes balancing the budget increasingly difficult each year. Economic growth is one of the ways that the state can provide the additional revenue needed each year to cover inflationary and other cost increases of providing state services. The failure of the sales tax, the third largest state tax, to keep pace with the economy means that either rates need to be raised or the budget cut just to continue providing the same services. We need to modernize our tax system to reflect the fact that a smaller share of our spending is on retail goods and a larger share is for services. This change will mean that a broader base of consumers will contribute to the support of public services, the tax rate on retail goods can come down, and that sales tax revenues will grow as the economy grows.

b. We haven’t tried to do an analysis of this, so this is just an opinion, but it seems to me that a sales tax on services would create less of a problem with New Hampshire than the current retail sales tax. First, by lowering the tax rate on retail goods, there is less incentive for Vermonters to cross the border to make purchases. And, second, since you can’t take your lawn or your sink or your furnace to New Hampshire for servicing, the work covered by this tax would need to be done in Vermont. That still leaves open the possibility of people working for cash under the table, but that’s a matter of enforcement, and I suspect it’s not any more or less difficult than tracking people who fail to collect or pay the sales tax on things they sell here now.

3. Education finance. I realize the commission did not make a recommendation about education finance, but I love the way they framed the questions around income sensitivity. Whether you believe the people paying based on property are getting a break because they pay less than one percent of their income for schools, or that those paying based on income are taking advantage depends largely on your point of view and which group you’re in. We believe that dichotomy presents a perfect opportunity to have a broad public discussion on whether it still makes sense to use residential property as a measure of how much Vermonters should be contributing to the education of our children. I would argue that it doesn’t. Education is a fundamental responsibility of society, and therefore something we all should contribute to in some equal measure. When Vermont was a land-based economy, that equal measure was property. That is no longer the case. Today that equal measure is income. That’s at the heart of the case we would make for moving away from the residential property tax for schools. There are other reasons, too, but I believe we should have this discussion before we tweak and tinker with Act 68 anymore. Again, I would urge you to follow the example of the commission: do a thorough examination of how the current system is working and analyze fully the ramifications of any changes. The Commission is currently charged with taking a serious look at the education finance system and issuing a report later this year. If it does as good a job with education as it did with this report, that would be a great place for this committee to start its discussion.

Thank you for the opportunity to testify. I’ll be happy to answer questions.