Balancing Self-interest and Community Interest

All tax codes have winners and losers. Overtime, different classes of taxpayers advocate steadily for self-serving changes that eventually complicate and corrode the tax system. Legislators call these various deductions and exemptions  “tax expenditures,” because any revenue sources exempted from taxation must be made up somewhere else. Eventually tax codes become a complicated mishmash of arcane and often inequitable exceptions.

Since there is no intrinsic system for tax code maintenance, legislators periodically ask citizens to review the entire code and suggest both broad architectural changes as well as specific amendments. It is in this spirit that the Legislature appointed the Blue Ribbon Tax Commission. It was understood that the Commission’s job was not to raise or lower taxes nor to set the stage for legislators do so, as the Free Press hinted in an editorial last week. The job was to redesign the code and re-rationalize or eliminate all the accumulated and complicating amendments. The agreed upon modeling would presume revenue neutrality.

The Legislature subsequently amended the charge of the Commission, asking for it focus directly and solely on the education-funding model that is driven in part by the statewide property tax. This will explain why the Commission does not address the property tax in its recent findings. That report is due out this fall.

The Commission first sought agreement on the principles of a good tax code. It would have to be transparent to taxpayers; equitable, with similar earners paying similar taxes; simple and predictable from a compliance standpoint; competitive with regional states; produce a non-volatile source of state revenue; and maintain Vermont’s tradition of progressivity.

The Commission then moved into the research stage, taking relevant testimony from other states, think tanks and interested parties. The tax department provided voluminous data and change modeling analyses that are available on our website for citizens and legislators to review.

Many of the political claims about the tax code could not be substantiated by real data.

There are two ways of looking at the final work of the Commission. One is to ask if the recommendations follow the principles on which the commissioners had forged initial agreement? The other is to ask, “How’s this effect me?”

It is the hope of the Commission at large that Vermonters will look first at the overall work and ask themselves, “Do the Commission’s recommendations make for a better overall tax system for Vermont?” before assessing their own self-interests.

I asked one high-net-worth friend, “Would you rather have a 40% reduction in your top marginal income tax and forego deductions as they do in many neighboring states, or would you prefer to pay the higher rate and preserve your deductions?” He answered, “Well, I was sort of hoping for both.”

As Vermonters we have an obligation to balance self-interest with community interest. So far the response to the Commission’s report has been remarkably deliberative and thoughtful. There will always be those who will read any proposed change document for elements that they deem disadvantageous to their parochial interests and will react negatively to the whole. Vermonter’s responses, however, have been characteristically thoughtful.

I recently spoke with a large group of non-profits brought together by the Vermont Community Foundation, seeking a deeper understanding of the potential loss of the charitable deduction at the state level. It was a productive dialogue, which went well beyond the deduction itself to the greater opportunities for the non-profit community in a world with shrinking state resources.

The extension of a sales tax to consumer services has also generated substantial discussion and, in some quarters, dismay. When the sales tax on goods was first implemented, consumers spent, on average, 70% on goods and 30% on services. That ratio has inverted as we have become a service economy. The commission is recommending that the 6% you paid when you bought your lawn mower now be applied to the landscape service that may mow your lawn. As we become more of a service economy, this balances out the revenue from loss of sales. Business-to-business transactions were not included, just as they aren’t in sales, to preserve competitiveness. The much greater concern should be the lack of a national system for collecting sales taxes on e-commerce sales. Vermont is conservatively losing $35-40 million on Internet sales on which Vermonters in fact owe, but may or may not pay the tax.

A critical recommendation of the Commission is the automatic sunsetting of all tax expenditures. This does not mean or imply that many do not have social or economic benefit to Vermonters, but it calls on the Legislature to define, review and measure those benefits periodically with an eye towards better tax code maintenance and greater taxpayer transparency and understanding.

Principles are not absolutes and different people may apply them differently, and commission members did in a few cases. I have presented here comments on the majority opinion, but the few dissents are important as well and are available on the Commission’s website.

It has been and honor and an education working on the Commission and I look forward to our next phase.

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