Herald/Times Argus Editorial: Shifting to Neutral

From the Rutland Herald/Barre-Montpelier Times Argus
May 12, 2013

As the legislative session headed into its final days and hours, the Legislature was poised to pass a tax reform plan that could benefit the majority of Vermont taxpayers. Oddly, Gov. Peter Shumlin continued to stand in the way even though legislative leaders had devised a way to make the tax package revenue-neutral.

Tax reform became possible after stronger-than-expected revenues eliminated the need for the Legislature to pass tax increases. They had already passed an increase in the gas tax, made necessary by the decline in gas consumption. In order to balance the budget, legislators had turned to a variety of taxes on other goods and services, including bottled water, satellite TV and restaurant meals.

But a rumble of complaints from across the countryside had started to make Democrats nervous. After revenue showed unanticipated strength, the Democrats were happy to back away from the new taxes and the inevitable criticism that would have been theirs.

Even so, the tax-writing committees in the House and Senate had been looking at more than new taxes. They had labored hard to bring new fairness to the tax system. Vermonters have become increasingly conscious of the fact that the tax system includes special loopholes and benefits that make the tax burden on middle class taxpayers greater than it is on wealthier taxpayers. And that is not the way it’s supposed to be.

Progressive taxation is not designed to be punitive; it is designed to be effective. Rather than drawing money away from taxpayers who need it for the ordinary expenses of day-to-day living, the idea is to take a higher percentage from wealthier taxpayers who have plenty for day-to-day living and who are likely to stash away their extra money where it is doing little for the economy.

Progressive taxation is meant to allow middle-class taxpayers to hold on to enough money so that their spending stimulates the economy. It was the great economic advance pioneered in the early 20th century: Pay auto workers enough so they, too, can buy cars. Likewise, apportion taxes so the middle class still has money to spend.

Our income tax rates are progressive, except that loopholes and tax breaks sometimes allow wealthy taxpayers to cut back their income tax liability to an extremely low percentage or to nothing. Further, middle class taxpayers must pay a larger share of their income in regressive taxes such as sales, property and gasoline taxes. That is how it has happened that wealthy taxpayers have gotten accustomed to paying a lower percentage of their income than others do. Their howls of protest when their tax breaks are threatened suggest they even feel entitled to special treatment.

The Legislature gets this. They developed proposals including a 3 percent minimum income tax, limits on the mortgage interest deduction, or limits on total deductions that would have targeted the special breaks that have given privileged treatment to wealthy taxpayers.

Because the revenue recovered from closing those loopholes would no longer be needed to fill a budget gap, the money committees realized they could use the closing of loopholes to create tax fairness. This is how tax reform happens. Gov. James Douglas had proposed something similar in 2008 when he suggested ending preferential treatment for capital gains in order to lower rates. It’s what happened with Reagan-era tax reforms.

It’s a mystery why Shumlin has been reluctant to embrace the cause of tax fairness. In the end, as the session draws to a close, he may feel he must bow to the inevitable. His opposition suggests an unwillingness to let the Legislature take credit for a reform that might have been his initiative.

The only other reason for his intransigence is that he believes that protection of the prerogatives of Vermont’s wealthy taxpayers is a higher priority than lowering taxes on the great majority of taxpayers.

Legislators have been scratching their heads this year at the anti-populism of the Shumlin program this year. He has been unwilling to raise taxes on anyone except the working poor. It has been up to the Legislature to stand up for the interests of ordinary Vermonters. Lost along the way have been the grand plans that depended on finding new funding sources. Major initiatives in energy and child care have been left by the wayside because of the fiscal crunch.

It remains to be seen whether tax reform designed for the benefit of the majority of Vermont taxpayers makes it through the final rush to adjournment.