Public Assets Institute > Policy Areas > Vermont Budget > Clouded judgment on the sales tax

Clouded judgment on the sales tax

The Vermont business community missed an opportunity this week to make a positive difference, serving not just the public good but their own good as well. Instead, the business representatives on the Sales and Use Tax Study Committee did the predictable thing: they voted to oppose a tax.

In a narrow sense, opposing a tax—in this case, voting to permanently exempt cloud computing from the state sales tax—may seem like a good move for business. In theory, money that would have gone to the state can now go to their bottom lines. It won’t help that much, since state taxes account for a very small percentage of most businesses’ operating costs, and this tax doesn’t affect many businesses.  Still, under the banner of “job creation,” every little bit counts.

But to take this limited view is to miss the bigger, more important, picture. State taxes pay for the public services businesses need, such as highways, public safety, an educated workforce, employees’ health care, and—most pertinent to cloud computing companies—telecommunications infrastructure. To take revenue away from state government, already anemic after aggressive budget cutting by both the Douglas and Shumlin administrations over the last six years, seems more than narrowly self-serving. It is self-defeating.

Businesses are part of the Vermont community. It is good for business to help that community thrive. Adding another sales tax exemption does the opposite.

First of all, making this exemption permanent only worsens the deficit projected for fiscal 2014, making cuts to essential services or increases in other taxes more likely.

Second, the sales tax already has serious structural problems, which this decision exacerbates. The sales tax currently applies to a narrow base of purchases: for the most part, goods rather than services. But Vermonters’ purchases are moving away from goods and toward services. Cloud computing is a great example of a service that replaces a product, software. Because tax policy isn’t keeping up with the marketplace, sales tax revenue growth is not keeping up with state costs. This decision only increases the prospect of future state deficits.

Finally, the argument that cutting this tax will attract young people and software business investment doesn’t hold water. According the Legislature’s economist, Tom Kavet, state investment in universal broadband is a better way to stimulate Vermont’s information technology sector than cutting state revenue by granting a cloud computing sales tax exemption.

It could have been different had the business representatives on this committee been willing to engage in a serious conversation about adequately funding essential state services and taxing Vermonters, including Vermont businesses, fairly to accomplish that. Instead, we heard the same tired arguments from both the business representatives and the Shumlin administration.

We hope the Legislature will follow the lead of the three legislators on this committee who had the foresight to oppose this exemption.  It should embrace the greater good and collect this badly needed revenue.

Posted by Paul Cillo on December 20, 2012 at 1:10 pm

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