How the Vermont House, Senate and Gov. Scott might reconcile three different plans to cut taxes
One of the big issues facing lawmakers in the final weeks of the session is how to craft legislation that would cut taxes. Gov. Phil Scott outlined his proposal back in January. The House passed its plan last month. And just last week, the Senate adopted their own approach.
A key element of the whole debate is if Vermont should tax Social Security benefits, and if so, to what degree.
VPR’s Mitch Werlieb spoke with senior political correspondent Bob Kinzel to discuss tax legislation. Their conversation has been edited and condensed for clarity.
Mitch Wertlieb: So, you know, I've heard you say, Bob, that you think the way that Vermont taxes Social Security benefits might be one of the most misunderstood tax policies out there. So why do you feel that way?
Bob Kinzel: Mitch, basically, because the current system is so confusing. Some people pay taxes, some people don't. So when someone says, “Vermont is one of about a dozen states that taxes a person's social security income”— that is both a true statement, and a somewhat inaccurate statement.
Now, here's why: First of all, since the federal government exempts the first 15% of a person's Social Security benefits from taxation, that exemption is passed along at the state level. So, that applies if your income is $50,000 a year, or if you have an income of a million dollars a year. It applies to every Social Security recipient.
So far, so good?
So far, so good, yeah, I'm with you.
OK, so let's look at the remaining 85% of the benefits. The Vermont tax system uses a person's adjusted gross income to determine if the person will pay taxes on Social Security or not. If a person has an income of $45,000 or less, they pay no state taxes on their Social Security. And for a couple the income threshold is $60,000. There's also a provision where you're taxed on part of your benefits if your income is above $10,000, above these caps. So your income makes a big difference if your Social Security benefits in Vermont are going to be taxed.
And my general idea about this, Bob, and you tell me if I'm right or wrong here, is that the effort here is to try to get people who make a lot more money to be taxed on their Social Security than those who make less.
That's absolutely it. Vermont has a progressive income tax system. And that same progressivity is used for Social Security.
Well, Bob, how then does this Social Security tax policy influence the Legislature's debate over their plans to cut taxes?
Mitch, it's at the center of the debate. And here's why. Back in January, Gov. Phil Scott announced a $50 million tax-cut plan. The centerpiece of that plan involves Social Security.
So, here's what Scott is doing. He's proposing a big increase in those income caps to determine taxation levels. The individual income cap under his plan would jump from $45,000 to $75,000. And the income cap for couples would increase from $60,000 to $90,000 a year, and the governor says this plan would make an additional 25,000 people exempt from state taxes of their Social Security benefits:
"With a surplus in our base budget, we can make changes that Vermonters will notice in their wallets," Scott said. "If you work with me to pass this package, [it] will help tens of thousands of Vermonters keep more of what they earn."
"With a surplus in our base budget, we can make changes that Vermonters will notice in their wallets. If you work with me to pass this package, [it] will help tens of thousands of Vermonters keep more of what they earn."
He does have some other elements. He has exemptions for military pensions. He allows the deduction of student loan interest. He increases Child and Dependent Care Tax Credits, and has $1,000 tax credits for child care workers and nurses. It has a lot of components to it, but the biggest one is Social Security.
OK, so that's the governor's plan. What about the House though? What are its tax priorities? How does it differ?
The centerpiece of the House plan is a child tax credit for families with children under 7. For each child, a family would receive $1,200 a year — it's modeled after the federal Child Tax Credit program. House Ways and Means chairperson Janet Ancel is the lead architect of this plan:
"It seems that if we want to encourage young families to live in the state and stay in the state, targeting any kind of tax reduction that we might do [for] those families makes a lot of sense," Ancel said.
"It seems that if we want to encourage young families to live in the state and stay in the state, targeting any kind of tax reduction that we might do [for] those families makes a lot of sense."
Now, Mitch, the House plan also addresses Social Security taxes, it increases those income thresholds by $5,000 — a very modest increase. But the whole package represents a very different approach from the governor's.
Bob, before we ask about the third tax-cut plan here that's under consideration — that was passed by the Senate last week — I do need to ask about how the governor feels about that House plan. You said they're very different approaches. Does the governor have a problem with what the House is doing in regards to that child tax credit?
Yes, it's that he has a higher priority. He feels the money would be better spent on his plan instead of the House plan.
Got it. OK, so let's talk about this third tax-cut plan under consideration. It was passed by the Senate last week. What are the highlights there?
Well, it's kind of a hybrid match between the House and the governor. It actually spends less money on tax cuts, it spends about $36 million, compared to the $50 million proposed by the House and the governor.
In terms of Social Security, it does exactly what the House does. It increases those income caps by $5,000 for individuals and couples. It then reduces spending on the House child tax credit program in half. It then uses the remaining money to allow folks to deduct student loan interest like the governor does.
It also includes money to retain and reward child care workers. And it increases tax credits for both child care services and dependent care services. Addison Sen. Ruth Hardy said the Senate approach is designed to impact a lot of people in Vermont:
"This is targeted support for Vermonters who need it most during a critical time of pandemic recovery," Hardy said.
"This is targeted support for Vermonters who need it most during a critical time of pandemic recovery."
And Mitch, very importantly, the Senate sunsets or terminates most of these tax cuts, after three years, just in case the state experiences an economic recession in the next two to three years.
Wow, Bob, you know, I know that crafting legislation can be messy. But this sounds like three very different plans — House, Senate, governor ... how does all this wrap up this session in the next week or two? How do you think this all gets settled?
Well, first of all, Mitch, it has to be settled. Quoting that famous phrase from the movie Apollo 13, "Failure is not an option."
The Senate's decision to sunset or terminate most of the tax cuts after three years actually gives lawmakers a little more wiggle room to adopt a package. And I think that final package will likely contain elements of all three plans that we've been talking about.
Well, what about the governor — if he threatens a veto over all this?
I don't think he will. I think that the House and Senate, when they're negotiating their package, will understand that there are certain elements that the governor feels very strongly about, and they're going to make sure that his priorities are met as well as the priorities of the House and the Senate.