The House and Senate have roughly agreed on a number for the tax bill — $35 million to $36 million — but they have yet to iron out differences over the details of how they’re going to get there.
In all, the Legislature is looking to raise between $50 million and $60 million in new fees and taxes. Gov. Peter Shumlin’s revenue plan, which has been rejected by lawmakers, would have raised $105 million in payroll and income taxes.
The Senate has yet to vote on the other so-called “money” bills, including the property tax rate and health care revenues.
A plan to pay for the cleanup of Lake Champlain is also in limbo in the Senate Finance Committee. The House wants to raise $8 million through an increase in the property transfer tax, which is paid by people purchasing new real estate, while the Senate is looking at a per parcel fee for all property owners. While the legislation isn’t technically must-pass, the EPA has mandated that the state find funding for the cleanup plan as soon as possible.
The areas of disagreement in the tax bill include the satellite tax, extending the sales tax to candy and changes to the income tax. The Senate is looking to tax bottled water and increase the employer assessment for large companies. Neither item is on the House new tax list. Both the House and Senate want to put the 9 percent meals tax vending machine purveyors.
House Speaker Shap Smith, D-Morristown, says the satellite tax isn’t particularly popular in his community because people in rural areas don’t have access to cable and satellite TV is the only option.
“If we were in a situation where there was a level playing field throughout the state I think the conversation would be a lot different,” Smith said.
The Speaker takes issue with the notion that a tax on soda is acceptable to the Senate, but a sales tax on candy is not. “We exempt food from the sales tax — that is rational,” Smith said. “Candy is not food.”
The income tax increases from both the House and Senate limit itemized deductions. The House wants to put a cap on all deductions that are more than 2.5 times the value of the standard deduction. The Senate proposal is more “surgical,” as Sen. Tim Ashe, D/P-Chittenden, puts it. Mortgage deductions would be capped at $12,000, and contributions would be limited to in-state nonprofits.
Smith said the broad cap on all itemized deductions gives taxpayers the option to choose which deductions they want to use; Ashe says he doesn’t want limit deductions for Vermonters with high medical expenses.
Smith questioned the constitutionality of the in-state mandate for charitable donations. A judge struck down a similar requirement in Minnesota that offered deductions to donors who only give in-state. A local court ruled that the state statute violated the commerce clause, a federal law that prohibits states from placing an undue burden on interstate commerce.
“While there may be some constitutional concerns, I think it’s a legitimate question to ask whether we should be subsidizing out-of-state charitable contributions,” Smith said.
But he wonders whether Vermont should subsidize charitable donations at all, “given that other states do not.”
Both income tax proposals, Smith said, move the state toward a tax on adjusted gross income. Vermont’s tax base is on taxable income. Taxpayers are allowed to claim deductions before they are assessed a tax rate. Most states tax on AGI, not taxable income.
Smith has long advocated for a shift to AGI, but he says it would require a “transition period.”
“I think you could look at this [the House proposal] as a step down to AGI,” Smith said. “I think we should in the long run move to AGI. I think taking this step where you limit deductions lessens the impact of the final move to AGI.”
Smith also supports extending the sales tax to services. In the long run, he says, the state will have to move in that direction in order for the tax system “to reflect the economy that we live in.”
“The question in my mind is whether we’ll pick off service by service or whether we’ll do it more broadly,” Smith said. “I think doing it more broadly makes more sense because you can at that point lower the rate, but I don’t think the groundwork has been done to move in a direction either this year or next year. I think it’s going to take some time. If it’s done in the context of a more grand bargain around taxing and spending that might do it as well.”
The Senate tax bill includes an alternative minimum tax of 3 percent for Vermont residents who make $150,000 or more and currently pay very little in state income taxes.
House and Senate conferees for the tax bill will be announced on Tuesday.