MONTPELIER — On a dry-erase board affixed to a wall inside the House Committee on Ways and Means, a lawmaker has scrawled a short excerpt from Article 9 of the Vermont Constitution.
“And previous to any law being made to raise a tax,” the passage reads, “the purpose for which it is to be raised ought to appear evident to the Legislature to be of more service to community than the money would be if not collected.”
The constitutional maxim has been there since the beginning of the session, but will be especially instructive this week as the House’s top tax committee narrows its search for $20 million in new revenue.
A parade of executives, lobbyists, administration officials and advocates took turns in the witness chair Tuesday to argue for and against a slate of funding streams still under consideration. The committee has until Friday to decide which special interests will be asked to pony up more money next year to fund the child-care subsidies, thermal-efficiency programs and renewable-energy incentives for which House lawmakers will earmark the revenue.
The short list includes:
The elimination of the sales tax exemption on soft drinks, candy, bottled water, dietary supplements, vitamins, car washes and items of clothing that cost more than $50.
The elimination of a “production deduction” that reduces the tax bills of manufacturers and farmers.
Assessing higher tax rates on capital gains.
Capping the dollar value of the home mortgage interest deduction.
Requiring top earners to pay higher tax rates on the first $50,000 of their income.
Adding a percentage point to the rooms and meals tax.
Increasing the tax rate on earners in the highest income bracket.
Increasing the excise tax on cigarettes by $1 per pack.
Upping bank franchise taxes by 25 percent.
Imposing a 5-percent excise tax on satellite television service.
Some proposals generate more money than others. Assessing the 6 percent sales tax on soda would generate $3.5 million; doing the same thing for car washes nets only about $800,000.
Capping the home mortgage interest deduction at $10,000, meanwhile, would raise somewhere in the range of $5 million. And taxing capital gains as ordinary income — the tax code currently gives special treatment to investment income — would raise an estimated $10.7 million.
That oxen will be gored is now a foregone conclusion. Members of the committee this week are sizing up the herd.
Secretary of Commerce Lawrence Miller on Tuesday cautioned the committee against adopting two measures that might deal a disproportionate blow to wealthier residents.
Miller said eliminating special rates for capital gains would “feel hostile” to the business owners he said would be affected most directly.
Miller, himself an entrepreneur, said business owners often plow gains from sales of their ventures into new businesses.
“I’d rather they keep the capital to do that,” Miller said.
The committee has another option at its disposal with regard to capital gains, the first 40 percent of which are, under current tax code, exempted from taxes altogether. Reducing that exemption to 20 percent would raise an estimated $5.2 million.
Miller, however, said lawmakers would be ill-advised to go there. Capital gains, he said, often result from the sale of a business asset that an entrepreneur may have spent years building. Subjecting people to higher tax rates on a one-time transaction, he said, will compel many to relocate to more tax-friendly states.
“We do know advisers, in situations where it’s meaningful, are going to recommend to clients that they move before they see something with a substantial capital gain,” Miller said
Miller also advised against increasing rates in the state’s highest income bracket, which kicks in for earnings in excess of $373,000.
Lawmakers might be able to generate a few million to help solve their fiscal problem, Miller said. But he said the cost to the state’s image would outweigh the benefits of the revenues.
“Every single one of those studies that comes out naming Vermont as a lousy place to do business... is because of the top marginal rate,” Miller said.
“And we can argue that the top marginal rate doesn’t have much to do with the business climate, and we can argue that Vermont has a progressive tax structure,” he said, “... but it’s still a banner headline.”
Asked how he’d propose raising the money, Miller suggested going back to the plan put forward in January by Gov. Peter Shumlin. That plan would raise a total of $34 million by reducing the earned income tax credit and assessing a 10-cent per-ticket tax on “break-open” tickets. Neither concept has gone over well in the Legislature.
Lawmakers will have to weigh the advice from people like Miller against testimony from people like Jack Hoffman, senior analyst at the Public Assets Institute, a Montpelier think tank that champions the merits of heightened spending on services provided by government.
Hoffman on Tuesday urged lawmakers to consider a range of options that would have the effect of collecting more revenue from wealthier residents. Among the proposals is new limits on the dollar value of the deductions filers can claim on their income taxes. Specifically, the committee will consider capping home-mortgage interest deductions at $10,000.
Peter Tucker, head of government affairs for the Vermont Realtors Association, said doing so would inflict an undue toll on homeowners. Of the 123,000 mortgage holders in Vermont, tucker said, more than 73,000 list interest on the home loan as an itemized deduction on their income taxes.
“It would be financially detrimental to existing and potential Vermont homeowners who depend on the deduction to make home ownership affordable,” Tucker told the committee.
Of the people who claim the deduction, however, only about 13,000 households — many in higher-value homes — would see their tax bills affected by the imposition of the new cap, according to data provided by Tucker.
In order for homeowners to run into the new limits, they would, at 4.6 percent interest rates, need to have bank financing in excess of $215,000.
An exchange sparked by Tucker’s testimony highlighted the often contentious nature of the tax debate. Rep. David Sharpe, the committee’s ranking Democrat, said he had heard that morning a realtor using a paid radio advertisement to “slam this proposal because it was going to affect all mortgage deductions in the state.”
“It really irritates me when people either deliberately or inadvertently put misinformation out there that gets homeowners all riled up about losing their deduction when in fact that’s not the case,” Sharpe said.
Revoking the sales tax exemption on certain classes of consumer goods also drew opposition. Tasha Wallis, head of the Vermont Retailers Association, said exposing clothing to the sales tax would only exacerbate a flight to the Internet that has already cost bricks-and-mortar retailers business. The proposal would generate an estimated $5.2 million if applied to items that cost more than $50, and $2.2 million if assessed on items more than $110.
Daniel Felton, vice-president of government affairs for the International Bottled Water Association, said imposing a sales tax on bottled water could increase expenses for what is for many a necessity. Assessing sales tax on bottled water would generate about $1.2 million a year, according to preliminary data.
Felton said the state ought to be sensitive to the prospect of increased costs on a product that is of heightened importance during natural disasters.
“And Vermont is not immune to that, as you know from Irene,” Felton said.
Lawmakers spent a good deal of time Tuesday examining the merits of eliminating the production deduction tax credit, a move that would generate about $4.5 million in fiscal year 2014.
Aside from Rhode Island, Vermont is the only state offering a state version of this federal tax credit. And a recent analysis by the Center on Budget and Policy Priorities found that states aren’t reaping any jobs benefits from the giveaway.
Michael Leachman, director of state fiscal research for the CBPP, testified that companies with a presence in multiple states can claim tax deductions in Vermont for manufacturing that occurs somewhere else.
“We’re concerned that for individual states... it could actually be a net drain on the state’s economy,” Leachman said.
But the tax credit, which benefits about 2,400 filers annually, can be claimed by dairy farmers, most of whom could ill afford the cut, according to opponents of eliminating the deduction.
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