Public Assets Institute > Policy Areas > Education > House Ways and Means Committee Testimony

House Ways and Means Committee Testimony

January 26, 2011

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.

Posted by Sarah Lyons on January 27, 2011 at 9:50 am

2 Responses to “House Ways and Means Committee Testimony”

  1. John Bloch says:

    Jack a wonderful short course for the committee. However maybe I missed the section of the report that dealt with financial services I did not see any revenue being derived from that sector of the economy. I should think that a 6% tax on on the stock and bond trading would yield a smart sum.


    The state needs to raise taxes and ask the wealthy to give back 5% tax cut they are getting as a result of the Obama tax cut deal. Its time for the wealthy to pony up and help protect the state safety net for disability community. Developmental Services is tired of getting cut after cut. Tax beer, cig, junk food, and expand the sales tax to services.