Shouldn’t we review existing tax breaks first?

Caught in the legislative logjam lawmakers are trying to clear before the end of the 2012 session are several bills containing tax breaks for individuals and businesses. The fate of the bills is still up in the air, but it’s safe to assume that many of the breaks will survive. This means another year of piecemeal tax policy. Meanwhile, the $200,000 report of Blue Ribbon Tax Structure Commission languishes on a shelf somewhere.
Waiting in the queue are:

• Extension of Vermont Employment Growth Incentive (VEGI). Despite numerous studies that challenge such tax-break programs and make the case that the money could be better spent elsewhere, the Miscellaneous Tax Changes (page 13) bill breathes five more years of life into VEGI. Nowhere in the bill can the average citizen—or average legislator—get a clue how much this will cost between now and 2017. The House has approved the bill; it’s pending in the Senate.
• Sales tax refunds. Since 2006, the Vermont Tax Department has been collecting the state’s 6 percent sales tax on prewritten software. Recently, some businesses complained they weren’t aware the tax applied to “cloud computing” software—that is, programs that aren’t installed on the purchaser’s own computers but are used remotely through an Internet connection. A bill in the House would give businesses a reprieve and refund the taxes collected on remotely accessed, prewritten software from January 2007 through June 2012. But the tax would apply going forward. The Shumlin administration wants to take the House proposal one step further and stop collecting the tax altogether. The House version would cost about $2 million. The governor’s plan would cost another $1.7 million in fiscal 2013—and grow about 20 percent a year. Either approach would seem to put the cart before the horse: Whatever changes the Legislature ultimately adopts this year, lawmakers want a special commission to study incentives for the software industry and report back next year.
• Broader tax exemption for manufacturing equipment. Certain equipment purchased by businesses is exempt from the state sales tax. The Blue Ribbon Tax Structure Commission raised questions about the fairness of the policy as it’s currently applied. Manufacturing equipment qualifies for the exemption—at a cost of about $320 million in annual lost revenue—but a software development company pays the sales tax on all of the computers it buys to “manufacture” its product. This dichotomy should be enough to trigger a thorough review of the exemption—the purpose and whether it’s achieving its end. But the bill that’s making it’s way through the Legislature adds a special interest exemption by expanding the definition of manufacturing equipment to include packaging equipment used by certain companies in Vermont.

The Legislature needs to do an analysis of existing tax breaks, which requires more than simply listing the programs in one place and estimating how much money the state forgoes each year. Any analysis should review the purpose of the tax breaks as well as who benefits, assess whether they’re achieving the desired effect,  and determine whether there would be more value in using the money for something else.

Adding more tax breaks only makes that task more urgent.