Vermont's Shadow Budget: It's Hard To Know If Tax Breaks Are Working
Some lawmakers in Montpelier are trying to call more attention to a very important, if dry, policy issue: Tax expenditures.
These are the standing policies that give up about $1 billion every year in revenues from tax breaks for various groups and activities. Key lawmakers want to bring more transparency and accountability to these expenditures.
But there are some fundamental questions that remain unanswered about these tax breaks. For every single tax expenditure on the books, lawmakers have yet to answer two questions:
- Is this even a tax expenditure, or is it part of the state’s tax policy?
- How do we know if this tax break is doing its job?
Before those questions are answered, lawmakers say, it’s impossible to take a critical look at how the state deals with forgone revenue.
This story is part of VPR's ongoing coverage of tax expenditures in Vermont. Find previous stories here:
- Vermont's Shadow Budget: How The State Forgoes $1 Billion In Taxes Each Year
- Vermont's Shadow Budget: State Tax Breaks Get Little Scrutiny
And as abstract and irrelevant as some of these issues might seem to Vermonters, Chittenden Sen. Tim Ashe says they’re really important to understand.
“I’m not sure there are many Vermonters who spent their free time studying the taxation sections of Vermont statutes,” he says. “But if they did, they may come away feeling very confused.”
And that’s not a comment about the intelligence of Vermonters. This stuff is complex.
“There are so many exemptions, deductions and credits in our tax code that – to the average citizen when they see them, they’ll have no idea why they exist,” Ashe says. “But it’s important that they know why they exist, because every dollar that someone doesn’t have to pay is a dollar that’s picked up by everyone else.”
That means it’s important for lawmakers to look closely at every dollar that isn’t paid into state coffers and make sure there’s a good reason for those exemptions.
"There are so many exemptions, deductions and credits in our tax code that, to the average citizen when they see them, they'll have no idea why they exist. But it's important that they know why they exist, because every dollar that someone doesn't have to pay is a dollar that's picked up by everyone else.” - Chittenden Sen. Tim Ashe
A 2011 commission looked at the state’s tax policy and recommended a major overhaul to tax expenditures. But Ashe and House Ways and Means Chairwoman Rep. Janet Ancel, the two key lawmakers in the state’s tax policy, say more work is required before those reforms can be implemented.
One of those recommendations was to enact a “statutory purpose” for each tax break, something that explains what lawmakers hope a given tax expenditure will accomplish. That was done last year. But the commission’s report went a step further.
The central recommendation of the 2011 report was for lawmakers to make tax expenditures easier to understand and scrutinize, and insert triggers that force lawmakers to examine and – if they choose to – vote to extend each tax break on a regular basis.
But Ashe says that would be premature if lawmakers don’t have the data they need to see if a given tax break is accomplishing its goals, and Ancel points out that not all lawmakers agree on which tax breaks are even expenditures.
Is It Really A Tax Expenditure?
In the state’s most recent report on tax expenditures, several major items that used to be reported were intentionally left out, including the biggest item: the tax break manufacturers get for raw materials and equipment they buy — for an estimated savings of more than $300 million per year.
The property taxes some Vermonters don’t have to pay, if their income is below a certain level, also was left out. So were the property taxes landowners avoid if their farms or forests are enrolled in Vermont’s Current Use (or Use Value Appraisal) program.
These and a handful of other tax breaks, lawmakers determined in 2014, are not tax “expenditures” but “alternative tax structures.” The difference may be subtle. It’s also very subjective.
Take the manufacturers’ tax exemption for raw materials and equipment, for example. The structure of Vermont’s sales tax is to tax products at the retail level, not at every step of production along the way. When lawmakers were updating the tax expenditure reporting requirements, they decided this “structure” made the manufacturers’ tax break different than other tax expenditures.
Tax exemptions for necessary expenses - like raw materials for manufacturers, or food for individuals - are considered part of the "normal" tax structure in some states, but classified as tax expenditures in others.
Vermont’s 2015 Tax Expenditure report explains that such alternative tax structures shouldn’t be counted as tax expenditures because they’re “provisions outside the normal structure of a tax.”
But, according to the National Conference of State Legislatures, that’s exactly what should be reported as an expenditure. The NCSL Task Force on State and Local Taxation adopted a set of best practices for tax expenditure reporting back in August of 2014. The first sentence defines a tax expenditure as “an exemption, deduction, credit, exclusion, or other deviation from the ‘normal’ tax structure.”
So, what’s a “normal” tax structure? That’s subjective, too. The national "best practices" document says debate over the answer is common. Tax exemptions for necessary expenses — like raw materials for manufacturers, or food for individuals — are considered part of the “normal” tax structure in some states, but classified as tax expenditures in others.
“It’s really a question of trying to be clear about what we mean, try to be clear about the revenue impact, be clear about the purposes, and then of course the next step is to look at measurements,” Ancel says.
Are They Working?
Once everyone agrees on what Vermont’s tax expenditures are, lawmakers and tax officials have the difficult job of figuring out ways to measure the effects of tax expenditures.
“For me, the most important undertaking as it relates to tax expenditures is to establish a framework for evaluating whether these exemptions and credits and deductions do the thing that they’re there for,” Ashe says.
Is the exemption for college savings actually increasing the likelihood that Vermonters will attend college? Are the financial incentives for job creators leading to increased job creation? Is the write-off for ferry boats leading to increased use of ferries for transport?
For some of these questions, it’s easy to come up with an answer. Others are nearly impossible. Others still aren’t even designed for have any sort of financial return - they’re on the books because they reflect social values.
"The exemption for food from the sales tax, for example. I don't know how you do a metric on that exactly. But tha's not a tax expenditure that I want to eliminate." - House Ways and Means Chairwoman Rep. Janet Ancel
“The exemption for food from the sales tax, for example. I don’t know how you do a metric on that exactly,” Ancel says. “But that’s not a tax expenditure that I want to eliminate.”
But for tax breaks like the Vermont Economic Growth Incentive (VEGI), which is supposed to help business that create high-paying jobs, the whole point is economic prosperity. Ashe and Ancel want those things measured so Vermonters can decide what’s worthwhile and what isn’t.
“That would then allow citizens to say ‘Okay, there’s this particular credit because we want people to save for college. Are we having any better luck here than in states that don’t have this tool at their disposal?’” Ashe says. “Those are the kinds of things that currently everyone’s a little hamstrung to be able to do.”
Ashe says he’s proposing language this year that would call on legislators and state financial analysts to work on a set of metrics to answer these questions, which could be approved as soon as next year.
Once these questions are answered, lawmakers will finally have the tools they need to accomplish what they set out to do when they formed the Blue Ribbon Commission six years ago: Make Vermont’s tax policy as fair, simple and effective as possible.
While some judgments may be simple once the numbers are clear, making changes to tax policy isn’t.
“Every section of the tax code has a constituency,” Ashe says. “And that constituency isn’t cheating, they’re not breaking the rules, they’re not trying to get something for nothing. They’re just availing themselves of the laws of the land. Any time you try and change something in the tax code, a constituency usually emerges to defend the status quo, and that’s to be expected and it’s a fair play on their part.”
"Any time you try and change something in the tax code, a constituency usually emerges to defend the status quo, and that's to be expected and it's a fair play on their part." - Sen. Tim Ashe
One such constituency that emerged last year was an unlikely one: Fraternities and sororities. Their properties are currently completely exempt from property taxes. Last year when Ashe’s committee proposed removing that exemption, Greek life organizations showed up in numbers to lobby against the change. Ultimately Ashe’s committee settled for a compromise: the exemption will sunset in 2016 if the legislature doesn’t intervene.
Ancel says fraternities and sororties have already approached her this year to try to get the tax break securely written back into statute. So far, she hasn’t given in, but their tenacity shows how much a given lobby is willing to fight for its benefits.
“As soon as you put something like that out there, people who are enjoying the benefits of it, just like anyone who’s enjoying the benefits of an appropriation, are not surprisingly not going to want it taken away,” Ancel said. “I don’t think that’s a bad thing, but that’s probably something that we ought to expect and we ought to be able to have a conversation about what we’re doing with that particular tax expenditure and whether it’s serving its purpose.”