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From Governing’s
”I’ve lived here all my life,” says Janet Ancel, Vermont’s former tax commissioner, “and taxes may seem relatively high, but they don’t feel that high to me. We invest money in health care, conservation, environmental protection. People value their local schools. These are all investments that make living here a good thing.”
Vermont’s taxes, while not low, have been constructed to avoid overtaxing poorer residents. The income tax is graduated, the sales tax exempts food and other necessities, and even the property tax is means-adjusted. Although it’s a state tax, it’s collected at the local level and provides nearly a quarter of Vermont’s revenue. It is capped at 2 percent of personal income up to $75,000. It’s geared toward the owners of relatively modest homes: Only the first $160,000 of value qualifies for the subsidy. ”Other states have property tax rebate programs,” explains Sean Campbell, former commissioner of finance and management. “But I don’t think anybody has one that’s as broad as ours.” The graduated property tax was put into effect as part of the controversial Act 60, which is designed to equalize school funding. After property tax receipts are collected by the communities, they are distributed to Vermont’s communities to spend on schools, averaging about $5,600 per student statewide. If towns want to spend more than that, they can vote to institute a local property tax, which is also means-tested, so people with big houses that have escalated in value and small incomes that have little chance of growing don’t get hit too badly. As with similar equalization plans in a variety of other states, Act 60 effectively redistributes money from wealthy towns to poorer ones. To say that this has been controversial is to understate the point. It has been the fundamental issue in state politics ever since its passage in 1997. “When you start telling Park Avenue that they have to pay for the kids in Harlem, they’re not very happy with that,” says Peter Shumlin, former chair of the state Senate Finance Committee and a supporter of the law. “But in Vermont, we’re saying that all 100,000 kids in the state’s schools belong to all of us.” While those may be noble sentiments, the state is now being tested to see the degree to which it is willing to pay for them. Back in 1999, awash in surpluses, the state cut its income tax and eliminated the sales tax on clothing and footwear priced under $110. Since then, as the economy has suffered, caseloads for corrections, mental health and Vermont’s extensive network of social services have grown. The state had to close a $39 million budget gap last year, and a deficit of similar size is projected for next year. Vermont editorial writers talk about this situation as a “major fiscal crisis,” although that may simply mean that they don’t visit many other places. Forty million dollars is about 3 percent of the state’s total budget. At least 40 other states would love to have problems of that magnitude. So there’s no need to enact a huge tax increase just to keep the lights on in the capitol. If Vermont wants to raise taxes in order to maintain its school finance generosity, it can probably do that without too big a stretch. “You can argue that Vermont would be better off if it had that tax cut money back now,” says Shumlin. “But Vermont has a long tradition of raising taxes when we needed money. In the last 23 years, we raised and lowered the tax rates some eight times.” It’s by no means clear, however, that Vermont will choose to go that route. The new Republican governor, Jim Douglas, doesn’t seem inclined toward a tax increase. He’s looking at cuts to the state workforce to make up the gap. One part of the workforce he might think twice about cutting is the revenue-collection team. For years, the state has been weak in this category, relying almost exclusively on IRS auditors to catch tax avoiders. But the IRS is hardly the gold standard for tax auditing. What’s more, state income taxes were decoupled from the federal code in 2001 to avoid losing money from the Bush tax cut. What Vermont needs is more resources of its own. “Our auditing system is pretty thin,” says Shumlin. “If the federal government doesn’t catch you in Vermont, then the state isn’t going to. If you can make a deal with the federal auditors, this is a great state to be a tax cheat.” Unfortunately, the state has stopped accepting direct online income tax filing. Its new computer system for income tax collections has become acceptably efficient after a disastrous first year, but the technology is still a little shaky. Corporate taxes are done manually. The data the state uses to catch tax avoiders are months out of date. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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isitors to New England don’t always notice when they’ve crossed the border between New Hampshire and Vermont. There was a time, in fact, when New Hampshire thought it owned Vermont. But to cross the river that divides them is to step into an entirely different fiscal universe. New Hampshire residents pay less in state taxes, as a percentage of personal income, than anybody in the country. Vermonters pay more than citizens of all but two states.