Tax Breaks: Why and for Whom?
Common sense names don’t work for politicians. What you or I would call “tax exemptions,” they call “tax expenditures.” Let me explain.
The government needs a defined amount of money to operate. This is called the budget. The tax code is intended to raise most of that money. If certain taxable items become exempt, politicians call it a “tax expense.” We taxpayers understand is as an increase in what we’ll have to pay to meet the fixed budget. Put simply, every taxpayer pays for everyone else’s exemption.
Many things are exempt from taxation, some with good reason like libraries, cemeteries, and state colleges, but others like railroad property, fallout shelters, Vermont Yankee, ski lifts, whey processing plants, and college fraternities, perhaps less so.
The debate is always whether or not the tax code should be used to encourage or discourage certain personal and business behaviors or whether it should be agnostic on policy matters.
Legislative Commissions are chartered by the legislature which asks volunteer citizens to analyze and recommend improvements to some aspect of government.
I served on the Blue Ribbon Tax Commission with Kathy Hoyt and Bill Sayre. We were asked first to recommend improvements to the Vermont tax code. Then to review how Vermont funds public education using the property tax. We published our Part I report early in 2011. The second task was cancelled and given to a California consulting firm to complete. Our work remains mostly on the shelf, while the legislature debates the second part.
We made clear that tax expenditures or exemptions comprise a shadow budget that demands more scrutiny. This year the total value of tax expenditures was on a par with the total general fund portion of the budget, or about a billion dollars. That means that if all tax expenditures went away, the available government budget would almost double.
As I said, there are valid reasons for certain exemptions. The legislature has done good work on rationalizing, quantifying and reviewing many current exemptions – a wise alternative to just cutting the budget. Just as the state budget is scrutinized for waste, so too must the growing list of tax expenditures be reviewed annually to quantify the current value of foregone tax revenue from the exemption and its offsetting value to society and the economy. Put simply is the exemption achieving its intended purpose? Is it a net contributor or simply a perk to special interests? By comparison, federal tax expenditures amount to $1.4 trillion, half of which directly benefits the top twenty per cent earners.
More importantly, does it further bifurcate the two Vermonts? At the time of our Commission report, Vermont had the second highest polarity of wealth in the country.