Principles Underlying a Redesign of Vermont’s Tax Code
Bill Schubart serves with former Secretary of Administration in the Dean and Kunin Administrations, Kathy Hoyt, and the economist and radio commentator, Bill Sayre, on the Legislature’s Blue Ribbon Tax Commission.
It was not the job of our commission to either raise or lower taxes, but to review years of accrued legislative patchwork and create a simpler, more equitable code. But before considering any changes, we determined to seek agreement on the principles that would underlie such a system. We took testimony from tax professionals, think tanks and foundations and made the time to discuss and distill their input into a set of principles against which proposed changes could be measured.
The first principle was that any changes be “fair and equitable,” which means simply that Vermonters of similar means are taxed similarly. Under this principle, we also agreed to maintain a progressive tax system.
The second principle was competitiveness. This is vital to retaining and attracting both business and wealth. Currently, the narrower “taxable income” base on which our income tax is calculated unfairly measures our competitiveness against neighboring states that tax on the broader “adjusted gross income” and therefore can collect the same revenue with apparent lower effective tax rates.
The third principle was simplicity and predictability, both for the tax filer and the tax department, which must interpret tax law and process tax returns in a timely manner. Most Vermonters and business owners want to fully comply with the law, and the more complex and variable it is, the more expensive and difficult that compliance becomes; the cost of audits deficits both the taxpayer and the Department. The average Vermont filer should be able to compute his own return. and be able to accurately predict their tax liability.
Sustainability is the fourth principle. Does the overall balance of the taxes and fees that Vermonters pay make for a predictable and sustainable flow of revenue to fund state government? Certain taxes and fees are more volatile than others. At present, Vermont has a well balanced portfolio of taxes and fees and the commission did not want to upset that balance.
The fifth principle was ubiquity, ensuring that as many Vermonters as are able have “skin in the game” by contributing according to their ability to the social compact.
The sixth principle was “interoperability,” which takes into account the total tax burden on Vermonters, that is, the federal taxes they must pay and how Vermont taxes interact with one another, specifically, the income sensitivity program which correlates property and income taxes.
Finally, a dominating principle was government accountability and transparency. It is vital to the social compact that Vermont citizens understand how their tax and fee investments in government services are functioning, what they cost, and their effectiveness at addressing social safety net-challenges, education, the environment, transportation and the other responsibilities of government.
The commission reached solid agreement on all these principles. In practice, however, principles could and did come into conflict as we modeled various improvements in the tax code, leading to both agreement and dissent.
The commission recognizes that Vermont’s challenges will be met not only by improvements to our tax and revenue system, but also by Vermonters making similarly difficult priority choices on the expense side, and leadership managing both priorities prudently.
Guided by the principles on which we agreed, we hope that our recommendations will make for an improved tax code. Our final report will be issued on January 13th.