We can’t afford more giveaways to high-income Vermonters

Each year the governor and Legislature go through the handwringing exercise of closing a projected state budget gap. The projected General Fund gap for fiscal 2018 is about $70 million.

As usual, much of the conversation has been about reducing spending to get the budget to balance. This year the governor wanted school districts across the state to cut their budgets; he’d use the savings not to lower property taxes but to help fill the General Fund hole. The House would cut General Fund expenditures rather than put more pressure on school districts and property taxes.

But so far, the budget cutting by both the governor and Legislature has held harmless a whole category of state spending: tax expenditures. While so-called appropriated expenditures—actions by the Legislature to spend money—are subject to annual scrutiny by the House and Senate Appropriations Committees, tax expenditures do not require legislative action each year.

Tax expenditures are “statutory provisions which reduce the amount of revenue that would otherwise be collected in order to encourage a particular activity or to limit the amount of taxes collected from groups of individuals,” according to the Vermont Tax Department and the Legislature’s Joint Fiscal Office, in this year’s issue of their biennial tax expenditure report. “Tax expenditures have essentially the same fiscal effects as direct government appropriations.” That is, both reduce the amount of money in state coffers.

Yet year after year, the governor and Legislature have been choosing to pare back programs and services that benefit all Vermonters. Austerity budgeting has delayed the cleanup of Lake Champlain for decades; it reduces funds to take care of veterans or adequately fund public education. Meanwhile, the state gives away tens of millions of dollars in state income tax expenditures annually to the highest income Vermonters.

Gov. Phil Scott talks about how Vermonters are facing a crisis of affordability. That’s true for many. Most Vermonters’ incomes have been stagnant since 2000 even as the costs of essentials—health care, housing, child care, college—have increased by double digits. Officially, we’ve recovered from the Great Recession, but many Vermonters have not felt it. That’s because more than 40 percent of income gains since the bottom of the recession have gone to the top one percent. The recipients of those gains are doing just fine.

Most states with an income tax use federal adjusted gross income (AGI)—income before deductions and exemptions are applied—as the starting point for calculating their state taxes. Vermont is one of only seven states that start with federal taxable income—the amount left over after deductions and exemptions—which is substantially less than federal adjusted gross income.

Because higher-income people pay higher tax rates, those deductions and exemptions are worth a lot more for them—and cost the state more—than they do for moderate and low-income taxpayers. Furthermore, starting with a smaller tax base, Vermont has to apply a higher tax rate to raise the same revenue. Some argue that this makes the state less attractive to business.

The Blue Ribbon Tax Structure Commission’s 2011 report discussed this problem and recommended shifting to AGI. While the Legislature has slowly moved in this direction over the past several years, it’s time to finish the job. The state can reduce these unnecessary expenditures to help balance the budget and make Vermont’s income tax fairer and the state more competitive.