House Ways and Means Committee Testimony

March 19, 2013

Good morning Madam Chairman, members of the committee. My name is Jack Hoffman. I’m senior analyst for Public Assets Institute, a non-profit, non-partisan, public policy think tank in Montpelier.

First, I’d like to applaud the Legislature and this committee for recognizing the need for Vermont to make smart investments again. Policies of austerity, which Vermont has been following for the last six years, can’t move the state forward. We have the resources to make smart investments in people, programs, and infrastructure that ensure the well-being of all Vermonters, and it’s encouraging that this committee is looking for the revenue needed to make those investments.

That said, there are a couple of items on the Committee’s potential revenue list we would urge you to make because it’s simply good policy.

• First on that list is treating all capital gains as regular income. There is no justification for taxing unearned income differently than earned income. We would recommend you make this change and be done with it.
• Second, eliminate the domestic production deduction, an obscure federal business tax break that passes through to Vermont corporations. (I’ve sent you all a report from the Center on Budget and Policy Priorities making the case for ending this costly tax break.)

Those two changes would generate about $15 million, according to your projections.

As general rule, we lean toward tax policies based on people’s ability to pay, mostly income taxes. There are certain benefits to the sales tax. For one thing, it’s exportable, which is an advantage to a state like Vermont that attracts a lot of tourists. We don’t have an opinion about any of the specific sales tax changes you’re considering. However, if you do increase or expand the sales tax, we would urge you to look at increasing the Earned Income Tax Credit. One purpose of the EITC was to offset the effect of regressive taxes on lower income working families—such Social Security at the federal level or the sales tax, property tax, and fuel taxes at the state level.

With the personal income tax, however, we believe you could make changes to the treatment of itemized deductions, such as the ones we presented to the committee last month based on an analysis done for us by the Institute on Taxation and Economic Policy. A cap on mortgage deductions, which would fit in this category, is on your list of revenue options. I might also suggest eliminating the deduction for state income taxes from state income taxes.

Vermont currently limits the deduction to $5,000. But eliminating it entirely would have a small effect on taxpayers, and it would raise $16 million, according to the ITEP analysis. To give you a couple of quick examples:

• A married couple filing jointly with about $60,000 in taxable income—that’s nearly $80,000 in adjusted gross income—owed about $2,100 in state income taxes for last year. Eliminating the deduction would cost them about $75.
• My own Vermont income taxes were around $1,700 last year. If I didn’t have the deduction for state income taxes, I would have paid another $60.
• To have a Vermont income tax liability of $5,000, a married couple needs to have taxable income of just over $100,000—or at least $120,000 in adjusted gross income. The couple’s marginal rate is 6.8 percent, so losing the deduction for $5,000 in state income taxes would cost them $340.
• Finally, families that would pay the most as a result of this change would be those with taxable income of more than $388,000—AGI of more than $400,000. They have a top margin rate of 8.95 percent, so the loss of this $5,000 deduction would cost them just under $450.
• For comparison, for a family with three children, income of $13,000 a year, and eligible for the EITC, the administration’s proposal to cut the Vermont credit would have cost them about $1,200.

We think it makes sense to eliminate the deduction of state income taxes. Many states don’t allow a state income tax deduction for state income taxes. And this could help fund some of the important investments the Legislature is considering and that Vermonters need if we’re going to provide everyone the opportunity to succeed.