He had it right the first time

In his State of the State Address in January 2008, Gov. Jim Douglas made a persuasive argument for changing Vermont’s policy of excluding 40 percent of capital gains from state income taxes:

“Today, I am proposing to close another tax loophole—one that penalizes working Vermonters.

“Our current tax structure taxes earned income—that is, your hourly wage or salary—at a higher rate than it taxes unearned income.

“What this means is that a working man or woman in Vermont making $50,000 a year pays nearly 50 percent more tax than someone who does not work and simply lives off investment or trust fund capital gains income in the same amount.

“Our state is one of only a few that has such an unfair penalty for doing an honest day’s work. This is grossly unfair. We must close this loophole and eliminate this working tax penalty.”

The Legislature didn’t change the captial gains tax that year, but in 2009, recognizing the need for additional revenue, lawmakers decided that most—although still not all—of capital gains should be subject to the income tax. Governor Douglas didn’t like the change, and in his Budget Address last week, he called for the loophole to be restored. Here’s the governor’s current view on capital gains, as explained in his budget book, “Our Commitment to a Stronger Tomorrow”:

“Favorable treatment of capital gains income encourages entrepreneurship and investment, protects the retirement income of seniors, and eases the transfer of small, family-owned businesses from one generation to the next.

“Governor Douglas proposes to sunset the capital gains tax changes made by the Legislature last year.

• Effective January 1, 2011, long-term capital gains will again be eligible for the 40 percent exemption, as they were in tax year 2008.
• The individual income tax rate decreases effective in 2009 and 2010 will remain in effect.

“Removing the capital gains exemption could be justified if all the revenues were used to lower tax rates for working Vermonters. However, using a sizable portion of the proceeds to support spending, as the Legislature did, amounts to a tax hike on already over-taxed residents.”

Two years ago, the governor recognized that Vermont’s treatment of capital gains amounted to “an unfair penalty for doing an honest day’s work.” Whether the money raised from closing this loophole is used for tax relief or covering the cost of services that Vermonters need doesn’t change the essential fairness of the policy. The Legislature did the right thing last year and shouldn’t reinstate a loophole that is, as the governor’s so aptly put it, “grossly unfair.”