A showdown over taxes between the Democratic governor and lawmakers from his own party finally ended Saturday afternoon when a grand bargain eliminated the prospect of a veto, and paved the way for the fall of the gavel on the 2015 legislative session.
As recently as Friday night, House and Senate lawmakers appeared poised to move forward with a $30 million revenue plan that could have triggered a party-splitting veto from Gov. Peter Shumlin. Several hours of closed-door meetings however yielded a compromise that allowed both sides to declare victory.
“There will be a lot written about this, but here’s the deal: in the end, the House, the Senate and the governor have to all agree,” House Speaker Shap Smith said Saturday evening. “And we had to work together to get a plan across the finish line, and we all had to give a little bit.”
The “give” centered largely on the role that changes to the income-tax code would play in the generation of the new revenue needed to balance a $5.5 billion state budget for fiscal year 2016.
The House and Senate had sought to limit filers’ ability to deduct a broad universe of itemized deductions, including home mortgage interest, charitable contributions and heath care expenses.
Lawmakers said the plan would make the income tax code more progressive as the law now allows mostly wealthy filers to use those deductions to shrink their tax exposure.
Shumlin argued the proposal would discourage the economic activity and spirit of charitable giving that the tax code ought to encourage.
The compromise will limit the value of itemized deductions filers can claim, but exempt charitable giving and health care costs from the new cap. While Shumlin doesn’t like the cap on mortgage costs, he says it accounts for a relatively small amount of added tax liability for people affected by the new limits.
“I think that this cap was whittled down to be so small – we’re talking about $5 million or $6 million – that we are moving forward with a very smart bill that balances the budget and raises the revenue that was necessary to get the job done,” the governor said.
"We are moving forward with a very smart bill that balances the budget and raises the revenue that was necessary to get the job done." - Gov. Peter Shumlin
Shumlin said he was happy to fend off an attempt by lawmakers to increase marginal income tax rates. Lawmakers also abandoned a plan to increase penalties on employers that don’t provide health care benefits to their workers.
It was the third year in a row that legislative leaders had sought revisions to the income tax code. Having been rebuffed by the governor in 2013 and 2014, Calais Rep. Janet Ancel, chairwoman of the House Committee on Ways and Means, said it was satisfying to finally see reforms across the legislative finish line.
“I think because of the amount of money that we had to raise, we had to go where the money is, and that’s income,” Ancel said. “And I think that turned into a conversation about how to do it fairly.”
"Given the fact that we were making [budget] reductions that were going to be difficult for many of those who are less well off, we thought that those who have a little bit more should pitch in a little bit more." - House Speaker Shap Smith
Speaker Smith agreed the deal was a fair one.
“Given the fact that we were making reductions that were going to be difficult for many of those who are less well off, we thought that those who have a little bit more should pitch in a little bit more,” Smith said.
Smith, Shumlin and Senate President John Campbell cheered the budget and tax deal as a responsible solution to a $113 million shortfall in next year’s budget. House Minority Leader Don Turner said their version of fiscal restraint reveals how out of touch they are with Vermont taxpayers.
Combined with fees and revenue increases in a water quality bill that raises $10 million for pollution reduction measures, and a $3 million health care bill will raise taxes on cigarettes, lawmakers depart Montpelier this year having raised more than $40 million in new taxes.
The $1.47 billion general fund budget – a portion of government spending supported by state revenue – is up by 4.5 percent under the House and Senate plan. Turner said the growth in state spending outpaces Vermonters’ ability to pay.
“I think the story from the legislative session is that we came in with a large budget gap, we spent more money than we should have; we raised a lot of taxes,” Turner said. “And we go home knowing that when we come back in the fall, we’re going to be facing another large budget gap, and we’re going to start this process all over.”
Burlington Rep. Chris Pearson, leader of the House Progressive caucus, said the revenue bill doesn’t go far enough. Pearson said the inflationary cost pressures in state government mean that increased spending next year will nonetheless require cutbacks in programs and services that serve residents in need.
“It’s been consistent throughout the whole session of a lot of budget pressures and a lot of reluctance to really recognize the need to significantly raise revenue,” Pearson said.
The tax deal struck Saturday is perhaps most notable for the revenue mechanism it does not include. Shumlin back in January unveiled a $90 million payroll tax he said would rectify structural shortcomings in a troubled Medicaid program.
Shumlin said low reimbursement rates for the government insurance programs were restricting low-income patients’ access to care, while simultaneously inflating insurance plans sold by private carriers.
The payroll tax plan never gained any traction, however, and the various funding alternatives considered by lawmakers, including a 2-cent per-ounce tax on sugary beverages, also fell flat.
“I’m not totally surprised that the can got kicked down the road this year. Let’s face it, we’ve been kicking this can down the road for 20 years now,” Shumlin said. “But eventually we’ve got to deal with it.”
Smith said he agreed that issue won’t go away.
“I think that what this means is we leave the issue of cost shift and access to health care for another day, and that’s disappointing to me,” Smith said.
In a press conference late Saturday evening, House leaders gathered to extol what they said were the triumphs of the session.
A renewable energy bill will preserve the state’s ability to sell $50 million worth of renewable energy credits out of state, and avoid the rate shock that would otherwise befall ratepayers. The energy legislation also paves the way for the development of 400 megawatts of renewable energy between now and 2032.
The deaths of two infants last year spurred legislation that mandates increased collaboration between the law enforcement, courts, state agencies and the public.
A water quality bill raises $10 million – the bulk of the revenue comes from an increases in the property transfer tax – to fund 20 new positions at the Agency of Agriculture and Agency of Natural Resources. The bolstered staff will help farmers, developers and municipalities institute measures to reduce the flow of phosphorus into lakes and rivers.
And an education reform bill is projected to reduce school spending by $24 million over the next two years by instituting penalties for school budget increases that exceed new caps. Lawmakers say the bill will also improve academic opportunities, and deliver financial efficiencies, by creating strong inducements for smaller districts to merge with their neighbors.
“We’ve finally come up with a smart way of building partnerships with local communities to fix that (education system) problem,” Shumlin said. “I think this bill is much more significant than many people think.”
The revenue bill raises the lion’s share of the $30 million by eliminating an income-tax exemption that allows filers to deduction from their tax bill what they paid in state and local taxes the previous year. Shumlin and lawmakers had been in agreement on that provision all along.
The revenue bill also expands the sales tax to include soda, and raises financial penalties on people who withdraw their land from the Current Use program, which taxes land on its value as forestry and farming, rather than its development potential.
A separate bill will raise cigarette taxes to support $3 million in health care reforms.
