Legislative Notebook: Imagine honest taxes and control of spending
HONEST FINANCES - The official Vermont state budget for 2012 totals $4.7 billion. There are also about $1.2 billion in what are called "Tax Expenditures" (TEs), which are not included. These are exemptions, credits, and deductions that provide special treatment for certain groups within the tax code. Many TEs have worthy policy goals, but they are a shadow budget of pre-allocated spending that escapes the scrutiny given official budget lines. So the true complete budget is really around $5.9 billion.
Such extensive use of special tax provisions generates a vicious cycle.
A group gets a tax exemption because the tax rate is too high. Then tax rates have to be even higher on other taxpayers to raise the same revenue. Others ask for exemptions, and the cycle of higher tax rates and more tax expenditures continues. The resulting tax code is neither honest nor fair, and the true level of spending is not under control.
We could reverse this cycle by lowering rates using revenue from reducing tax expenditures. Even those losing special treatment would likely benefit from the lower rates. We could establish programs in the official budget to achieve the most important policy goals of the TEs, and those programs could cost less.
I will illustrate this approach with the income and property taxes.
There are about $550 million in TEs in these two taxes. I would use about 80 percent to reduce rates and 20 percent to finance the new programs. The true complete budget would be reduced by $440 million to $5.5 billion.
INCOME TAX - We must apply state income tax rates to federal adjusted gross income rather than taxable income. This eliminates Federal tax exemptions, credits, and deductions, so that tax rates could be lowered while collecting the same level of revenue. We could reduce rates further by eliminating some special state exemptions. We could retain particularly important provisions, like those for capital gains or for low income working Vermonters, or create separate budget programs if needed. But the justification for many of the special provisions would be greatly reduced since tax rates are so much lower. (All of the special Federal provisions would still be available on federal income taxes.)
EDUCATION PROPERTY TAX - The base property tax rates could be lowered by 20 cents if some $200 million in property tax expenditures were reduced or eliminated.
Anything within the Education Fund that is not directly related to public education or public property would be removed from it. This means that programs like Current Use and Income Sensitivity would still be financed, but within the General Fund budget. The first supports agricultural and forestry and the second subsidizes housing. These transferred programs would cost less because the tax payments to be offset have come down with the rates. There would also be clear eligibility criteria, performance standards, and cost controls.
CHALLENGE - Our current systems of taxation and spending violate principles of efficiency, equity, effectiveness, transparency, and accountability.
Democrats talk about tax reform and fairness. Republicans talk about lower tax rates and spending control. I challenge both to look at the approach outlined above, as it might achieve all of those goals. I challenge all of us to think about whether we would be willing to relinquish whatever special tax provisions we take advantage of in return for lower rates, and special support programs as needed. What is honesty and control worth to us?
Cynthia Browning is the state representative for the Arlington, Manchester, Sandgate, and Sunderland Districts. She can be reached at 802-375-9019 or firstname.lastname@example.org.
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