The administration has proposed a mix of painful budget cuts, and some new revenue, to close Vermont’s $112 million current services budget gap. Unfortunately, the governor’s budget “balance” between new revenue and devastating cuts is heavily skewed toward the latter, with less than $30 million in new revenue being dedicated to funding current services budget gaps. The administrations preference for budget cuts will result in devastating reductions to programs supporting vulnerable Vermonters and will accelerate the decline of Vermont’s middle class. However, the Governor’s revenue proposals offer a critical opportunity to debate whether the budget proposal is meeting the crucial needs Vermonters and if not; how do we raise revenue to address these needs?
The revenue plan has been crafted to address the budget cuts included in the Governor’s FY16 budget proposal. Furthermore, these revenue sources will make Vermont’s tax code less regressive and more sustainable. The administration’s talking points frequently include mention of a “structural deficit” in state government, as state spending exceeds revenue growth. On the contrary, recurring state government deficits are directly attributable to growing income inequality; particularly because Vermont’s revenue streams rely on consumption and property taxes while incomes for most Vermonter’s have stagnated. The growth in state revenue can be increased by targeting new revenue sources at the wealthiest residents, who have enjoyed disproportionate income growth over the past decade.
Vermont State Employees’ Revenue Plan
1.) Tax Capital Gains Like Wages – $11.5 million
- Capital gains = profits from sale of assets (i.e. stocks, bonds, investment real estate)
- Eliminates $5000 OR 40% Capital Gains income exclusion raises $11.5 million.
- Vermont is one of eight states offering this kind of tax break for capital gains income.
- In 2013, 83% of the capital gains tax breaks went to Vermonters earning over $150,000 and out-of-state tax filers.
- Currently, fifteen of 41 states who assess a state income tax limit or disallow mortgage interest deductions.
- Income tax deductions disproportionately benefit wealthy tax payers, as the value of the deduction is based on the top marginal income tax rate paid by the tax filer.
- The mortgage interest deduction further exacerbates inequality by providing preferential tax treatment to homeowners, while generally lower-income renters do not receive a tax break.
- Capping the mortgage interest deduction at $15,000 would raise $3.1 million.
- Capping the Mortgage Interest Deduction would affect 6,800 Vermonters and 1,700 out-of-state tax filers.
3.) The Hotel Occupancy Fee – $17 million to $18 million
- A new revenue idea which imposes a $3 nightly fee per hotel room occupied
- The fee would be well targeted, raising revenue predominantly from out-of-state tourists.
- Vermont’s tourists have more disposable income due to unprecedented income inequality and low gas prices.
- $6 million of the revenue generated by this fee should be split between the grossly underfunded Vermont State Colleges and Higher Education Trust Fund, with the remaining revenue offsetting General Fund budget pressures.
4.) Minimum Income Tax on High-Earners – $1.5 million
- Due to Vermont’s loophole-ridden income tax code (largely income tax deductions) some high-income earners paid no income tax at all.
- Vermont’s average effective income tax is 3.35%
- In 2013, 139 Vermont income tax filers with incomes above $125,000 paid no tax
- In 2013, five of 422 Vermonter’s with income above $1 million paid no income tax
- A minimum tax of 3% on tax filers earning over $125,000 would yield $1-$2 million in revenue.
Here is what you can do to take action!
- Call and/or email your legislator directly. You can find their contact information by clicking here
- Write a letter to the editor to ask elected officials to respect state employees. You can learn more by clicking here.
For more information about the campaign and what you can do to help, please contact our organizing department at email@example.com or call 802-223-5247 and ask to be connected with one of our organizers.
Stop The Cuts! Fund State Services & Jobs!
Employment Impact of Alternative Vermont state Government Policies
By Gerald Friedman,
Professor of Economics and Department Chair, the University of Massachusetts at Amherst
Compared with revenue increases, a policy of budget cutting through state-employee layoffs will cost Vermont an additional 11.4 jobs for every $1m of deficit reduction.
1.) Context: State budget balance and state employment.
While tradition and pressure from bond holders mandate an annual balanced budget, there are different ways to achieve this goal. States can reduce spending, raise taxes and fees, draw down savings, or find new sources of outside revenue. While the bottom line of a balanced budget can be the same, the effects on state income and employment can be dramatically different depending on whether balance is achieved with revenue enhancements or spending reductions. By taking money out of the community and reducing disposable income, all budget balancing policies reduce state income and employment, and the effects are magnified by a “multiplier” where others lose their jobs when spending is reduced by people laid off by the state or facing higher tax bills, and reduced state income than lowers state revenues and requires higher state safety-net spending that forces further action to achieve budget balance.
2.) Employment impact of alternative policies.
While all budget balancing policies hurt, different state policies can magnify or mitigate the effects on Vermont employment. The issue is that alternative policies allocate the costs of balance differently between Vermont residents and those living elsewhere. The different employment impact of state policy comes in the initial decision whether to spend the money in state or to give it to households who will either spend it in-state or out-of-state.
Consider, for example, the effect of cutting state spending on employment by $1 million. State layoffs immediately reduce the income of Vermont residents, laid-off state employees, and then income and employment in businesses serving them. This reduction in income then has a further induced effect through the multiplier mentioned above when reductions in income lead to further reductions in spending in Vermont restaurants, shoe stores, etc. Together, using the IMPLAN program at the Political Economy Research Institute at the University of Massachusetts at Amherst, these direct, indirect, and induced effects cost a total of over 21 jobs for every $1m reduction in state spending.
The multiplier effects of a reduction in household income from taxes or fees are similar after the first round but tax changes do not have the same immediate effect that state layoffs focused on Vermont residents. Tax or fee increases reduce employment on the multiplier side when households reduce spending by the amount of the tax or fee increase but much of this is felt outside Vermont because residents (of course, including state employees) spend much of their income outside Vermont. By missing that first round of cuts targeted at resident Vermont employees, Tax changes have a smaller effect on income and employment. The same million dollars of budget balance therefore leads to a reduction in employment of only 10 jobs if in the form of revenue enhancements, half the effect of state layoffs and spending cuts. (The effects are even smaller, of course, if they are targeted at visitors to Vermont, through an increase in the gas tax or hotel occupancy tax, for example.)
In short, compared with revenue increases, a policy of budget cutting through state-employee layoffs will cost Vermont an additional 11.4 jobs for every $1m of deficit reduction.
This estimate is very similar to that presented by Tom Kavet to the Legislative Joint Fiscal Committee. In a memo dated November 18, 2008, Kavet reported that “A cursory analysis using the State REMI economic model shows that a $2 million dollar increase in consumer spending coupled with a $2 million reduction in state government spending actually results in a net loss of about 15 jobs on an annualized basis.” His estimate of a net job loss of 7.5 for every $1m of budget reduction through state spending cuts is less than our estimate of 11.4 but within an order of magnitude.
3.) State budgets chasing the economy downhil
The greater employment cost of state spending cuts has further effects on the state budget by lowering tax revenues and increasing the demand for state services. With nearly 10% of state personal income going to state and local spending, we might expect an additional job loss for every 11 layoffs. This adds one further job loss for every $1m of budget balance achieved through state spending cuts.
The employment cost of state spending cuts is in addition to the loss in services due to spending cuts. To the degree that these services support the well-being of Vermonters, they are reductions in real welfare. To the degree that they support market activities, by keeping the roads clear of snow, maintaining infrastructure, providing educated and healthy workers for business, state spending cuts will reduce employment further. Finally, to the extent that state employment is used to attract Federal grants to the state, cutbacks in employment lead to further reductions in state revenues, requiring further action to reduce budget deficits.
To the extent that state revenue can be enhanced through taxes or fees targeted at out-of-state households, the negative employment effects of revenue enhancement for Vermont are diminished and the comparative advantage of budget balance through revenue enhancement is increased.
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