When is a broad-based tax not a broad-based tax?

Gov. Peter Shumlin has been clear in saying he doesn’t want to raise broad-based taxes, and for the most part Democratic leaders in the Legislature have supported him. But in light of some of the bills passed by the Vermont House recently, it’s understandable if a lot of people are confused.

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.