It is not surprising that the Vermont House leadership has grown lukewarm about pursuing tax reform involving expansion of the sales tax.
A blue-ribbon commission had previously issued a report saying that tax rates could be lowered if the tax base were expanded by extending the sales tax to a variety of services. You would pay the new services tax if you hired a lawyer, a landscaper or an auto mechanic, or went to get your hair cut. By spreading out the tax, the rate could be lowered.
This is a reasonable idea that House Speaker Shap Smith had said he supported. But it is also a politically radioactive idea that did not excite much enthusiasm anywhere along the political spectrum. Then during the past election campaign, a conservative super PAC used the proposal as a weapon for bashing Democrats as ďout of control.Ē Smith and others have now backed away.
The issue demonstrates the difficulty of effecting comprehensive tax reform. Any attempt to reform the tax system will inevitably involve raising some taxes and lowering others. Thatís what reform is all about. The idea is to ease up where a particular tax has become too burdensome and to make up the difference from areas that may be undertaxed.
Thus, the radical right makes true tax reform impossible when it insists that no tax will ever be raised under any circumstance. Then again, extremists on the right are not interested in tax reform. They are interested in cutting taxes as a way of attacking the government. This rigid stance has paralyzed Congress, and it found expression in Vermont in attacks on the services tax.
Then again, the new tax was always going to be vulnerable to attack because of how it seemed like an invasion by the stateís taxing authority into uncharted areas. Taxes on a haircut? Is nothing sacred? Itís the kind of intrusion that gives rise to an understandable resentment about government interference. The reasonable response is that, yes, the haircut would be taxed, but the sales tax would be lowered. It is likely few Vermonters would see that as a worthwhile tradeoff.
The need for reform of the sales tax, nevertheless, remains. Thatís because a greater percentage of consumer spending has shifted from retail purchases to the purchase of services. The sales tax is also losing out to online retailers, which collect no sales tax. A U.S. Supreme Court ruling established that a state could not tax Internet business unless the online company had a physical presence or affiliate in the state.
Last year the Legislature sought to pass a so-called Amazon.com tax bill, but Amazon has threatened states considering such a tax, saying it would end all affiliations within the states if the tax passed. So the Legislature passed a bill establishing that it would levy the tax only if 15 other states do so also. Bills are pending in Congress allowing states to levy the tax, but itís anyoneís guess when such a bill might pass.
And that leaves Vermont with a shrinking sales tax base, which puts pressure on other sources of revenue, such as the property tax and the income tax. The blue-ribbon commission was supposed to produce a recommendation that was comprehensive enough that it would be understood that tax hikes in some areas would be countered by tax reductions in other areas. But itís still a hard sell to try to impose a tax on a haircut or an oil change.
The difficulty in achieving tax reform plays out in other ways. It is widely believed that one of the best ways to address the problem of climate change and dependence on fossil fuels is by means of a carbon tax. It would encourage conservation and would encourage the development of alternative forms of energy. It would create a large new source of revenue that could be offset with tax breaks for low-income citizens. There is no reason not to pass a carbon tax, except that it would drive up the price of gasoline, which is one of those sacred indexes of our economic condition.
A recent proposal to tax fuel oil in Vermont in order to fund home-energy improvements is a carbon tax that would be useful. But placing a new tax on fuel oil, which is already a costly burden to many Vermonters, is probably a harder sell than a tax on haircuts or oil changes.
We await the magic wand that might be swept over the tax landscape to bring rationality to the tax system, while easing our tax burden and igniting economic growth. So far the magic has been elusive.