Firm News
March 13, 2015

DRM Legislative Update | 03-13-2015

In a normal year, committee rooms throughout the Statehouse would have been humming with activity this week with the Crossover deadline looming.

That’s the date by which most bills must pass out of committee to be considered that year. But the deadline came and went on Friday with most committees strangely quiet, with two big exceptions: House Appropriations and House Ways and Means. The state’s fiscal year 2016 budget gap of $112 million seems to have eclipsed virtually all other legislative activity.

Lawmakers in the two House money committees spent the week scrambling for roughly equal amounts of money ($29 million in cuts and $33 million in revenue) and both were finding the challenge extraordinarily difficult. The state’s budget challenges may be the worst the state has experienced in more than two decades.

Until yesterday, the Ways and Means Committee was focused primarily on a payroll tax proposed by Gov. Peter Shumlin and a sugar-sweetened beverage tax offered by health advocates, but the committee made a dramatic shift on Thursday to a proposal to cap itemized deductions at 2.5 times the standard deduction. That plan would, conveniently, raise about $32 million.

The proposal is politically compelling for lawmakers since nearly eighty percent of the new tax would be paid by Vermonters earning more than $100,000 per year. Eighteen percent would be paid by the 300 or so residents who earn more than $1 million per year. A tax increase on upper-income Vermonters is politically appealing to Democrats who are concerned about reports of growing post-recession income disparities. The cap on deductions has the additional appeal of being an indirect tax hike with a widely dispersed impact, making it less likely to generate focused constituent opposition.

Tax Commissioner Mary Peterson was nonetheless cool to the idea, telling the committee just how few Vermonters exist in the upper-income echelons, and how fluid that population is. Only 582 Vermonters reported incomes above $300,000 in each of the years 2003-12, and only 156 reported incomes over $500,000 every one of those years. Half of the filers with those incomes were at those levels for only one year. Peterson also emphasized the fact that Vermont’s tax code is already one of the most progressive in the country.

Vermont’s charitable organizations began lining up in opposition to the proposal, arguing that it will result in fewer private contributions. The state relies heavily on donations, since it has the most non-profit organizations in the country on a per capita basis. At the same time, Vermont ranks 48th in per capita charitable contributions, suggesting that the state has a lot to lose if large donations dry up.

While the Ways and Means Committee focused on tax increases to fill the state’s budget hole, other committees were looking at revenue for other purposes. The House Health Care Committee approved both a 0.3 percent payroll tax and a two-cents per ounce tax on sugar-sweetened beverages, which together would raise about $71 million annually. Those taxes would be used to help offset the Medicaid cost shift, increase health care subsidies for low-income Vermonters, increase funding for the Blueprint for Health and subsidize primary care provider loan repayments.

The Senate, meanwhile, was engaged in its own search for money, looking for funds to pay for the clean-up of Lake Champlain. The Agriculture Committee is likely to propose a statewide $25 per parcel fee, plus $1 for every acre above 25, which would generate about $11 million annually.

Lawmakers started the session with an apparent voter mandate to cut spending, reduce school property taxes, and avoid other tax increases. Midway through the session the response has been mixed. Many programs are facing dramatic spending cuts, the fate of a proposed cap on school spending increases is unclear and substantial new tax hikes are likely. The response legislators receive from constituents will indicate whether a shift in voter sentiment has occurred.

View the full DRM Legislative Update for March 13, 2015

To receive Downs Rachlin Martin's full Legislative Update hot off the press when it is issued on Friday evenings during the Vermont legislative session, please contact John Hollar or Joe Choquette.

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