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Speaker Smith Faces Dilemma With Income Tax Plan

House Speaker Shap Smith wants lawmakers to consider reforming the state's income tax code in the 2014 session.  But the problem he faces is this: He sees the plan as a way to provide a tax cut for middle income people, but he’s also concerned that some lawmakers will want to use the proposal to close a sizeable budget gap.

Democratic leaders at the Statehouse first tried to make key changes to the state’s income tax system at the end of the 2013 session.

Basically the proposal placed a limit on the total amount of deductions that a taxpayer could claim on their state return.  The plan was designed to lower tax rates without losing any tax revenue, and provide a small tax cut to middle income people.

Gov. Peter Shumlin strongly opposed the plan because it would have increased tax burdens on upper income Vermonters and Shumlin said that policy would discourage job growth.

The Democrats dropped their plan and vowed to revisit this issue during the 2014 session.  Speaker Smith is still interested in this approach:

“I think it is definitely something that we want to take a look at. Now we’re in a different context than we were at the end of last year,” said Smith. “We realized last year that we could balance the budget without raising any new revenue so we started to take a look at whether we would change the tax code in a revenue neutral way.”

Smith says the basic concept of the plan still makes a lot of sense.

 “So if the majority of people in the state of Vermont would benefit by lower tax rates and lower taxes because we were basically capping the amount that you could take for itemized deductions I think that’s a good way to go,” said Smith.

But Smith has concerns about bringing this issue to the House floor for a vote because the state faces a $60 million budget shortfall. He thinks some lawmakers may be tempted to tap into this new source of money.

“What I fear is if we put that on the table this year, and we have a budget gap, that people will look at that as a way to raise revenue, (and) not do it in a budget neutral way,” said Smith. “So I want to have a sense first, how we can balance the budget. And if we can do it without new revenue I think it’s worthwhile taking a look at changing the income tax code.”

And the proposal still faces  opposition from the governor because Shumlin wants to preserve all of his tax options to finance a single payer health care system in 2015.

“Since we have a real opportunity ahead to move to a publicly financed, affordable health care system my hope would be that the Legislature would focus on the prize which is affordable universal health care,” said Shumlin. 

It’s likely that both the House Ways and Means Committee and the Senate Finance Committee will take a close look at this proposal in January.