The Practical Realities of Taxation

The following commentary is appearing in media outlets throughout the state. It was authored by CFV co-founder Tom Pelham.

The United States Constitution says this about Washington D.C.:

“The Congress shall have power … exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of Particular States, and the Acceptance of Congress, become the Seat of the Government of the United States……..” Article 1, Section 8, Clause 17

In other words, Congress, including Vermont’s two Senators and Congressman but excluding our President, has supreme power over the governance of our nation’s capital. Yet, Washington D. C. has the worst level by far of income inequality among the 50 states and District of Columbia.

The “gini coefficient” is a widely used statistical measure profiling income inequality and calculated annually by the U.S. Census bureau.  A score of zero means that all income is equally distributed while a score of one means that one person holds all the income. For 2013, Washington D.C. had the worst score at .532 and Alaska the best at .408. Vermont ranked 14th best with a score of .454 – better than the national average of .481. It seems that income inequality, while always an issue, is worse in thirty six other states.

One reason Vermont has a relatively favorable gini coefficient is that Vermont does not enjoy a deep bench of upper income filers. For 2012, the IRS reports that the national portion of all tax returns greater than $200,000 was 3.64 percent. As with the gini score, Washington D.C. (where it appears lobbying our Congressmen has its rewards) had the highest portion of $200,000+ filers at 6.6 percent with West Virginia the lowest at 1.76 percent.  Vermont stood at 2.59% while our northeast neighbors profiled as follows: New Hampshire – 3.79 percent, Massachusetts – 5.69 percent, New York – 4.47 percent, Maine – 2.24 percent, Connecticut – 6.02 percent and Rhode Island – 3.09 percent.

If in 2012 Vermont had the same proportion of $200,000 plus filers as the national average, the net gain in income tax revenues would have been $90.2 million. Vermont is surrounded by greater wealth but not as much of it has chosen to reside here in Vermont.

Further, Tax Department records show that Vermont’s upper income filers had a wild ride through the recent recession.  Adjusted Gross Income (AGI) for the top 10 percent (those with AGI greater than $116,270) dropped from $7.19 billion in 2007 to $5.94 billion in 2009 and then return and pass the 2007 level in 2013. For the top 1 percent, their AGI dropped from $2.86 billion in 2007 to $1.42 billion in 2010 and has yet to return to its 2007 level.  However, both these income groups now pay a higher proportion of the state’s total income tax, likely attributable to changes in the capital gains exclusion passed in the 2010 budget bill.

For all Vermont taxpayers, AGI income in 2007 was $16.7 billion and dropped to $15.1 billion in 2009 and then grew to $17.1 billion in 2013.

Last week Vermont’s House of Representatives passed a budget increasing general fund spending by 4.8 percent, or $67.8 million, and accomplished this in part by raising income taxes by $33 million. In the media, there was much talk about $53 million in “cuts”, but few found it ironic, nor did they explain, how a 2016 budget increase of $67.8 million over 2015 could simultaneously be cut by $53 million.  To many, a “cut” no longer means a reduction in amount. Now it means a reduction in hypothetical increases that in reality never existed and were never subject to any act of the legislature. With this new logic, legislators can claim that a budget increase of say, 8 percent, was actually a “cut” because the increase might have been 10 percent.  The new era of “messaging” and “branding” is upon us.

With regard to the $33 million tax increase, words and deeds don’t match.  VT Digger wrote this profile of the thinking of Rep. Janet Ancel, Chair of the House Ways and Means Committee regarding the tax increase.

““I think it’s more equitable,” she said, and makes an already progressive income tax structure more so. People at all income levels itemize deductions, but they tend to be most valuable for high earners, Ancel said. As wages have stagnated for middle-income people, the deductions have further “skewed” toward high-income people, who have seen their wages grow, she said.”

As the Tax Department data above reveals, the wages (income) of high-income filers stagnated, for some dramatically, right along with those of the rest of Vermonters. Further, the tax bill that Rep. Ancel sponsored and the House passed is a big hit to both high income taxpayers as well as middle income taxpayers.

Those earning between $500,000 and $1 million who itemize will pay more, amounting to an 11 percent tax increase and a 19.6 percent increase for filers who itemize above $1 million. These increases total $7.4 million and will certainly put a dent in charitable giving as deductions for mortgage interest, property taxes and medical bills will take precedence over more optional charitable gifts.

Further, filers who itemize between $25,000 and $150,000 (it’s estimate there will be 67,700 of these) will also feel the tax bite with increases ranging from 8.4 percent to 9.5 percent and totaling $13.3 million.  That’s $13.3 million that Vermont’s middle class won’t spend on middle class priorities.

The structural problem here is clear. With state general fund spending growing in recent years at near 5 percent, revenues driven by underlying economic growth in the 2 to 3 percent range can’t keep pace.  The result is that legislators and the Governor need tax increases to plug the gap; this year and likely next year as another “budget gap” is already predicted for fiscal 2017. Unfortunately, Vermont is not as well populated with high income tax payers as other states.  Thus the pockets of the middle class, including those of state employees, need to be picked as well to pay for the budgets of our legislators and Governor.

This commentary is by Tom Pelham, formerly finance commissioner in the Dean administration, tax commissioner in the Douglas administration, a state representative elected as an independent and who served on the Appropriations Committee, and now a co-founder of Campaign for Vermont.

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