December 11, 2007
Tax Foundation Experts Tell Vermont Legislature: Smarter Tax Policy Will Best Help State
Proposed tax reforms built on bad assumptions, policy ideas
For more information, contact: Bill Ahern at (202) 464-5101.
WASHINGTON, December 11, 2007 - Two tax policy experts from the Tax Foundation, the nonprofit, nonpartisan tax policy research group in Washington, testified today on tax reforms before Vermont's Ways and Means Committee. They told the legislators that the state should enact more sound tax policy if it seeks to increase revenues and better distribute the tax burden among its citizens.
"If Vermont is going to use the income tax, they should do it right—with a broad base and few deductions," senior economist Gerald Prante said in his testimony. "If you are going to remove the education portion of the property tax, it may be beneficial to simply eliminate the property tax altogether. It's clear that the current statewide education property tax needs to be fixed and enacting sound tax policy is the best way to go about doing so."
Vermont's legislature is currently discussing a proposal to change its funding mechanism for education from the property tax to an income surtax. The surtax is based on adjusted gross income (AGI), which is a positive in terms of tax policy as it allows for a lower rate and has fewer economic distortions. Prante urged legislators to hold firmly to AGI, despite the lobbying attempts which will almost certainly come against it. Doing so would allow Vermont to impose a lower income tax rate overall.
The property tax change would only apply to residential property, leaving an even more complex property tax structure that would raise limited revenue at the same fixed administrative cost of implementing the former, "full" property tax. Because Vermont funds all schools from the state level, removing the education portion of the property tax would result in a hollowed-out property tax that would raise comparatively limited revenue. For that reason, under such a plan, Prante suggested that it may make more sense to simply eliminate the property tax.
Prante concluded with a policy suggestion: keep education funding in the property tax, remove the special income-based provisions from it, and, if so desired, help the poor in more effective ways, such as through the income tax, by lowering the sales tax or some combination thereof. The resulting flat-rate property tax and progressive income tax would accomplish the same ends Vermont appears to desire through more effective means.
"Vermonters are paying the highest taxes in the nation this year, 14.1% of total state income," testified communications director William Ahern. "Any tax reform should focus on making the tax system simpler and helping Vermont become more competitive. The education property tax is the most nightmarishly complex property tax I've ever seen."
Ahern added, "Vermont's legislators would be well-advised to plot a course for somewhat lower tax rates."
Vermont's income tax is especially hard on high incomes with a top rate on wages of 9.5%, third highest nationwide. It is also hard on the upper-middle: the 7.2% rate on couples' taxable income between $50K and $120K is only exceeded in six states.
Ahern added two policy suggestions as well: first, Vermont has a 6% sales tax, ranking 25th highest nationally, and it shares its border with New Hampshire, which has no sales tax. Vermont collects so little in general sales tax revenue that it might consider scrapping the tax entirely, both for progressivity and to compete with New Hampshire retailers along the river.
Second, Ahern asserted that there was no progressive logic whatsoever to Vermont's corporate tax structure, and recent corporate tax improvements haven't gone far enough to give Vermont a competitive advantage. He recommended enactment of a one-bracket 7% corporate tax rate so that Vermont could start getting the word out that it has the lowest rate in the Northeast.
Read the testimony here: http://www.taxfoundation.org/publications/show/22797.html.
The Tax Foundation is frequently requested by state legislatures to testify and offer advice on proposed tax policy changes. The Tax Foundation will continue to monitor Vermont's legislation and offer analysis as events warrant.
The nonpartisan, nonprofit Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization.
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