Shumlin: Tax plan will send rich away
By Peter Hirschfeld
Vermont Press Bureau | March 28,2013
MONTPELIER — Gov. Peter Shumlin on Wednesday took aim at a revenue package adopted by House lawmakers, saying rich people will flee the state if proposed increases in the state income tax are allowed to become law.
The House gave preliminary approval Wednesday to a miscellaneous tax bill that replaces revenue proposals offered by the Democratic governor with funding streams that would target mostly the wealthy.
The changes wouldn’t do much in fiscal year 2014, the period for which lawmakers are budgeting now. But a suite of revisions to the income tax code, including capping itemized deductions, would by fiscal year 2015 begin generating more than $27 million a year, the bulk of it from the highest-earning Vermonters.
Shumlin said wealthy Vermonters already pay a higher proportion of state revenues than their counterparts in other states. Asking more of them now, he said, will send them packing for friendlier jurisdictions.
“Income taxes are portable,” Shumlin said. “We know that Vermonters already migrate to Florida, New Hampshire and other states to avoid paying income taxes. ... The higher your rates, the more they migrate.”
Shumlin said the tax flight would cause revenue to evaporate and darken the state’s economic outlook.
Vermont’s 1,237 highest-earning filers, the governor said, now account for more than 20 percent of all income tax revenues.
“We’re asking the wealthiest to pay the most,” Shumlin said. “But you can’t ask them to pay twice. You just can’t, because they won’t.”
In dismantling Shumlin’s original revenue proposal, House lawmakers criticized him for making life harder for the poor. Shumlin found $34 million for new initiatives via two sources: diverting $17 million from a tax credit program that provides cash benefits to low-wage workers, and imposing a 10 cent per-ticket tax on “break-open” gambling tickets.
The proposed cut to the earned income tax credit never gained traction in the House, where it was pilloried as a tax increase on poor people. (Though the mechanism is called a tax credit, the majority of recipients get benefits in excess of their actual tax liability.)
While the chief complaint on the break-open ticket proposal was that it wouldn’t raise anywhere near the $17 million Shumlin claimed it would, many lawmakers also voiced concerns that it would harm the lower-income Vermonters who tend to account for a disproportionate chunk of lottery consumers.
Tuesday, Rep. Janet Ancel, a Calais Democrat and chairwoman of the House Ways and Means Committee, cited the House’s focus on wealthy filers as an asset, not a liability.
“I think the bill is balanced and I think it’s fair and I think it’s equitable,” Ancel said. “And it doesn’t make our system more regressive. If anything, it makes it more progressive.”
Ancel said the House’s use of the income tax to raise revenue also allowed it to eliminate the so-called Catamount assessment, a component of Shumlin’s original proposal that would have collected more than $15 million from businesses in fiscal year 2015.
“That’s gotten lost in some of these discussions,” Ancel said. “But it’s pretty important to businesses, and I think it’s pretty important in terms of what we’re doing in health care for the future.”
Shumlin’s claims about tax flight run counter to the findings of a three-person panel he helped create. The Blue Ribbon Tax Structure Commission, created by the Legislature when Shumlin was still Senate president back in 2009, spent two years and $200,000 to examine the macroeconomic impacts of the tax code. Its review included an examination of a “tax flight” theory based largely on anecdotal evidence from the same people who would be affected by tax hikes on the wealthy.
While the panel didn’t reach any definitive conclusions, it found data to “counter the mythology of persistent tax migration among high income taxpayers,” according to the final report, released in January 2011.
According to data from the Internal Revenue Service, the panel found, tax filers moving into Vermont make on average 18 percent more than those leaving for other states.
“All the Commission can say is that the conventional wisdom is not supported by the data,” the report said. “Furthermore, the Commission encourages Vermonters to abandon the discussion of what wealthy Vermonters are doing based on their taxes.”
The panel also visited the question of whether rich people actually pay more in taxes in Vermont than they would in other states. While Vermont’s top marginal rates are among the highest in the nation, the panel found, its effective rates — the percent of income that higher earners finally end up paying — are competitive with the rest of New England.
Tom Torti, executive director of the Lake Champlain Chamber of Commerce, said he doesn’t need data to confirm what he already knows: that rich people will leave Vermont if they feel their taxes are getting too high.
“Every one of these folks who have affirmatively chosen to stay in Vermont can tell you about five of their friends of huge wealth who have decided to move their wealth out of state,” Torti said Wednesday. “Call the accountants at Gallagher Flynn, or KPMG, that represent people of significant wealth. Call folks at Manchester Capital, who manage wealth that begins at $20 million, and they will tell you, every one of them will tell you, that they are advising their clients to move out of state.”
Bill Driscoll, vice president of Associated Industries of Vermont, said the income tax changes would hit small businesses that would otherwise reinvest the revenue into commercial ventures.
“The overall majority of Vermont businesses are small businesses, and most small businesses are S-corps that pay taxes under the personal income tax code,” Driscoll said. “So this is a big tax increase on that initial income from most Vermont small businesses, so that’s going to be a concern going forward.”
Driscoll and Torti are members of a business lobby that will be urging the Senate to scrap a House tax plan that would also eliminate existing sales tax exemptions on purchases of soda, candy, bottled water, dietary supplements and items of clothing costing more than $110. Revisions to the sales tax code would generate an estimated $8.3 million annually.
The House plan would, taken together, generate $23.1 million in fiscal year 2014 and $32.3 million in fiscal 2015. It also adds half a percentage point to the meals tax and increases taxes on cigarettes by 50 cents per pack.
Shumlin scolded House lawmakers on those fronts for resorting to funding streams he said are too regressive.
“Low-income Vermonters need food, low-income Vermonters drink soda, low-income Vermonters buy cigarettes,” Shumlin said.
Torti offered a solution to the problem that he said won’t require any new taxes. Shumlin and lawmakers want to use the revenue to fund child care subsidies, low-income heating assistance, renewable energy incentives and increased appropriations to state colleges and the University of Vermont.
“The discussion to have is how are we going to live within our means … in order to fund the things we think are worthwhile,” Torti said. “If you think something is worthwhile, then within a $5 billion state budget, we ought to be able to fund it.”