Vermont Tiger

Downward Spiral or Downtown Revival

comes down to the taxes

by Tom Pelham

The Montpelier City Council voted ballot items last week for Town Meeting Day that raise the meals and rooms, the alcohol and the retail sales taxes to 10%, 11% and 7% respectively, amounting to increases of  10% to 16.7%.  The Times Argus reports the “passionate objections of Montpelier’s business community” to this proposal. The business community’s opposition is more than justified. Further, the City Council could choose a viable alternative that helps, not hurts, Montpelier’s struggling downtown.

In this era of big box shopping malls and internet retailing, Vermont’s traditional downtowns have stiff competition.  As evidence, residents need only recall the turnover and vacancies in Montpelier’s storefronts in recent years. The owner of Bear Pond Books and Rivendell Books, who expressed opposition to the Council’s tax increase proposals, today must worry about Kindles and Nooks and iPads. Now, their worries include the actions of their City Council. How many sales will be lost because of higher Montpelier taxes than at competitors or on the internet?

In addition to the Council’s proposed new taxes, retailers must worry about municipal property taxes, which are on the rise if voters approve the budget, as well as school property taxes, which are also heading higher.

The Romney Reforms?

could Mitt fix the mess that is our tax system without even getting the nomination. 

by Tom Evslin

The President's own National Commission on Fiscal Responsibility and Reform recommended a much flatter tax structure and elimination of most tax deductions and credits in its draft report. The President – and almost everyone else – ignored this recommendation. Ex-candidate Herman Cain made a 9-9-9 flat tax almost famous before he sunk from view. Ron Paul advocates a very flat income tax – zero . The other Republican candidates have advocated flatter taxes without much fervor. But Mitt Romney's incredible political miscalculation in attempting to withhold the fact that he pays only 15% of his income in taxes may have actually given us a leg up on tax reform.

The fact is that we do have a somewhat progressive federal income tax. The 40% of families with the lowest incomes don't pay any income tax at all as a group. The rich AS A WHOLE pay a higher rate than the rest of us. But the statistics obscure huge individual variances in taxes paid because of a tax system riddled with loopholes and special exceptions – like the so-called carried interest deduction and concessionary rate for capital gains, which probably are the reasons why Romney paid such a low rate (see a great post by my friend Fred Wilson who benefits from these concessions but argues they should be eliminated).

Follow the Money: Part Three

on the trail of carve-outs, wealth transfers, ed fund raids, and rainy day spending

by Tom Pelham

 

TIF Me Once, then TIF Me Twice, then TIF Me Once Again – Question 5

Context: A Tax Increment Finance (TIF) District is an area designated by both the municipality and state to encourage redevelopment.  Property taxes on the value of the land in place at the time of state designation of a TIF district continue to be paid to the municipality and education fund as usual. However, property taxes attributable to new grand list growth after the date of designation over the next 20 years can stay with the municipality to support infrastructure costs within the TIF District.

The City of Burlington has been TIF’d twice, plus a bit more. The first TIF, called the “Waterfront TIF”, was approved in 1996 and included the Burlington Square Mall up to Church St. You can read about this TIF here.

In 1996, the listed value of the land in the TIF district was $42.2 million. Today, the listed value is around $140 million for an increase of almost $100 million, or 8.3% annually, over the past 15 years.  In 2009, the state legislature granted Burlington the right to finance additional debt with taxes from this TIF district for an additional 20 years. I call the legislatures action “TIF me twice”.

In June of this year, the state approved and designated another “downtown TIF” district for Burlington that essentially surrounds and expands the “waterfront TIF”.  Here’s a map showing both TIF districts:

The grand list value of property within this TIF district at the time of designation was $170.8 million. Current state law allows 75% of the taxes attributable to grand list growth to be retained by the City of Burlington. Combined, the “waterfront” and “downtown” TIF comprise around 10% of Burlington’s taxable grand list. Burlington planners estimate that the new “downtown” TIF alone will divert $35.4 million from the education fund over the next 20 years on top of the millions diverted due to the “waterfront” TIF.

Further, education property taxes across Vermont are destined to rise. Because of the recession, property values are declining (see recent analysis here):

Furthermore, the legislature’s efforts to constrain education spending have been weak and ineffectual. Finally, during the last legislative session, the Governor recommended and the legislature agreed to reduce permanently by $23.2 million the transfer required by law from the general fund to the education fund.   You can see this here on Line 4 (b):

Question: Are Burlington’s TIF districts a “raid” on the Education Fund or a reasonable diversion of funds to support Burlington’s development projects?

 Tropical Storm Irene was a “Rainy Day” – Question 6 

Context: Throughout this recession, some have advocated spending Vermont’s “Rainy Day” fund to support on-going state programs. Among these advocates were Senator’s Ashe, Racine and Pollina. The opposing view included Senators Bartlett, Brock and Snelling. Governor Douglas also opposed dipping into the “Rainy Day” fund. You can read about one instance of this kerfuffle here:

Vermont’s Rainy Day fund is technically not a fund, but a reserved balance in the general fund in an amount greater than the general fund budget passed by the legislature. Think of it as the balance in your checking account that you’ve promised yourself not to spend, but save for a “rainy day”. Vermont’s “Rainy Day” fund equals 5 percent of the prior year’s budget. This reserve also allows the State to avoid borrowing money to pay current bills as the state borrows cash from the “Rainy Day” reserve to pay bills and repays the reserve when tax revenues are high, say during the April income tax season.

Then came Tropical Storm Irene, washing roads and bridges and downtowns and homes downstream, with the latter two aka as the property tax grand list. For some communities, covering even the short term costs of clean-up was an impossible task, so the State reached out a helping hand.  Because of the “rainy day’ reserve, the State could make advanced payment to communities on state grants (say Town Highway Grants) owed the community and allow for the delayed payment by communities on money owed the State (say property taxes to the Education Fund). This maneuver provides communities hit hard by Irene a bit of help in covering the immediate costs of clean-up left by Irene. Absent the “Rainy Day” fund, it’s likely these near term bills could not be paid without either the state or municipalities taking out loans.

Question: With 20/20 hindsight, whose position was more responsible, the Ashe, Racine and Pollina team or the Bartlett, Brock and Snelling team?  

 

Follow the Money: Part Two

continuing along the money trail, we encounter the following questions: should we raise taxes?  whose?  and by how much?

by Tom Pelham

Looking Forward – Question 3:

Context: The Budget Gap projection is a relatively new way to provide context to the budget process. It is developed by a free ranging (by accounting standards) agreement of budget staffers working for the legislature and the Governor.  Here is its most recent profile.     

The Budget Gap focuses only on the general fund which accounts for about 40% of all state non-federal spending.  At the top of the first numeric column is the amount $1,235.9 million, which is the general fund budget approved by the legislature for the current fiscal year, FY 2012. You can also find this same amount here under the column FY12 CofC  (Committee of Conference). This table includes a profile of all spending across state government during this current recession.

Note that the FY 12 general fund amount of $1.2359 billion is a 7.3% increase over the FY 11 amount of $1.152 billion. The 7.3% increase was supported in part by new taxes passed in prior legislative sessions as well as one-time revenues. From the Budget Gap projection, we can see the “gap” between the current fiscal 2012 amount and the projected 2013 amount of $1,361.5 million is $125.6 million, amounting to a 10.2% increase. However, the “official” general fund revenue estimate for fiscal 2013 is only $1267.2 million.   The “official” estimate can be found here, on page 16:

Question:  In view of the fiscal year 7.3% general fund increase, should the Governor recommend and the legislature agree to raise taxes to fund fiscal year 2013 at $1,361.5 million for a 10.2% increase over fiscal 2012.

 

Ringing the Dinner Bell – Question 4:

Context: This link will take you to an excel spread sheet profiling income tax filers and receipts for calendar 2009, the most recent data available. Click on “Income Statistics- State” and then hit the “excel” button and click on the “Statdol” tab and you’ll be ready to gorge, as some say, on OPM, better known as “other people’s money” or give definition to your principled view of a “fair share”.

The important columns to focus on are AGI Income Class, Returns, and Net Vermont Tax.  From these you can calculate “effective” tax rates for each income group. You’ll note that only half the phrase “millionaires and billionaires” applies to Vermont, as the cumulative income of all our 292 highest income earners amounts to less than one billion. Also note that of the 353,858 filers, those over $200,000 AGI comprise 6,094 or 1.73% of the total. I draw a line at $200,000 as these are the folks the President has in his sights for the repeal of the Bush tax cuts. The Bush tax cuts for everybody else will remain in place. In 2009, this group paid 5.8% or $156.6 million of their AGI to the state of Vermont.  This made up 31% of all state income taxes.

IRS data, found here, indicates these filers also pay 24% of their AGI in federal income taxes. These taxpayers also pay sales, meals and rooms, property and all the other taxes levied by local, state and federal government. It’s also of note that about 33% of these filers are 65 or over.

Question:  Should Vermonters pay more income taxes to either, or both, the state and federal government? If so, which income groups among us should pay more and how much more should they pay?

On Following the Money

Tom Pelham has done time in Montpelier in several capacities, most recently as Tax Commissioner.  He understands state finances and is at ease with the numbers and undaunted by the complexities.  Which is a good thing, since so few of the rest of us are.  Also, because those complexities are often not a mere byproduct of careful legislating but the intent of legislators who'd just as soon most people did not fully understand their handiwork.

Mr. Pelham has endeavored, many times, to enlighten the rest of us.  His latest effort is currently running on this site in three parts, under the title, Follow the Money.

We urge you to read all three parts.  Twice, if necessary.

Many will, undoubtedly, still have questions about some of the details in Mr. Pelham's analysis.  To clear up your confusion, we suggest that you:

* Submit comments, where appropriate to Mr. Pelham's posts to stimulate more discussion by readers and Mr. Pelham, himself.

* Ask your rep in Montpelier for an explanation.  Certainly those who write the laws and pass the budgets ought to be able to explain them.

* Sign up with Campaign for Vermont which has made the promotion of transparency one of its essential missions.

This isn't a partisan exercise.  Or shouldn't be, at any rate.  Before we can have an honest debate about policy, we must at least agree on the terms of the debate.  At the very least, it seems, we ought to be able to distinguish between a spending cut and a spending increase.

Under present conditions, however, even that seems impossible.

 

Follow the Money

... and the taxes, the cost shifts, the spending increases that magically become cuts, and all the other wonders of Vermont's budgeting process.

by Tom Pelham

Vermont’s blogs and news media will soon be filled with stories about the state budget. It’s sure to be an engaging, if not entertaining, few months following the Governor’s budget address in January. Fiscal 2013 is likely a pivotal year, equivalent to the late ‘80’s, when a few wrong turns traumatized the state budget well into the 1990’s.

To sharpen our collective knowledge base, if not our wits and possibly spears, crafted below are six leading questions for consideration.  (We'll take them two at a time, over three days.) The purpose here is not to determine right answers but to lead readers a few paces into the forest of the state budget by providing context, information and links to key sources of information. The links embedded below will help inform the conversation as we seek to bridge divides on fiscal matters and keep Vermont on a fiscally responsible path.

Warm-up - Question 1: 

Context: As Vermont struggled to regain its financial footing following the fiscal adventures of the late 1980’s (extra points if you name the then Governor and Chief of Staff) and the resulting $65 million general fund deficit, Governor Richard Snelling embarked on a path of temporary tax increases and substantial budget cuts to stem the flow of red ink.

Althought Governor Snelling died in the first year of his new administration,  Lt. Governor Howard Dean took charge, with the promise to stay the fiscal course crafted by Snelling. Dean’s first budget for fiscal 1992 was a 2.1% increase, his second a 2.15% cut (as in less money, not a slower rate of growth), and his third a 2.07% increase. Essentially, Dean’s 1994 budget was about the same level as his 1992 budget and not much higher than Snelling’s 1991 budget. During these same years, Dean also set about the hard-nosed task of insuring that the “sunset” provisions associated with Snelling’s temporary tax increases were honored.  By 1996, they had been.   

Question:  Was Howard Dean’s choice to follow the Snelling path the best choice for Vermont?

Follow the Money:  Question 2:

Context: I know a cut when I see one, having cut a few budgets myself along the way. The impression I get from the newspapers, TV news, and some blogs – and from the pleading of special interest advocates and the hand ringing of legislators – is that the state budget has been cut repeatedly during this recession.  But then I click this link and find the total Budget has increased by $585.6 million since 2008, or 3.4% annually.  Hard to call that "cutting the budget."

Then, when I click here (Scroll to Section B.345), I find that the AHS (Agency of Human Services) has seen its budget grow by $235.4 million over the past three years, or 4.3% annually. Further, since fiscal 2000, the AHS budget has increased at the rate of 7.15% per year. How these spending increases become "cuts" in the eyes of the media is a wonder, especially in the context of minimal population growth and a declining population of young folks.

Question: Given flat population growth and a declining child count, by how much does a budget have to rise before it is considered "increasing?"  And how large can a budget increase be and still be considered a "cut?"

(tune in tomorrow when our topics will be "Showdown at Budget Gap" and "Ringing the Dinner Bell.")

Pay Up

 

You're Local ...

but we're in control ... and don't you forget it

The season for debating school budgets and property taxes is upon us and, as usual, the discussion is murky.  And that is putting it charitably.  But, then, the system is not designed for clarity.  Quite the other thing, in fact.  The system is intricate and complex beyond the ability of the average taxpayer to understand it.  Intentionally so.  It is easier to rig the game when only you understand the rules. 

The best available one-stop tutorial on the byzantine workings of education funding and property taxes in Vermont can be found in the adjacent column under the heading Unraveling Ed Spending: A Countdown.  The five-part series is the product of exhaustive research by Mr. Hugh Kemper who unlocks the mysteries of Acts 60 & 68 and explains such arcane concepts as "equalized pupil count," "common level of appraisal," and "phantom students." 

But one does not have to be as expert as Mr. Kemper – or even to have studied his work – to grasp the essentials of what is going on right now with regard to school spending and property taxes. 

These are still tough times and nobody in elective office wants to be the one to raise taxes.  Also, there is an election year coming (and isn't there always?), so nobody wants to stand in the way of the teachers' union juggernaut.  Which is to say, nobody wants to vote to cut school spending.

Tax Man

by Art Woolf

With the Supercommittee's recommendations due out any day now (unless the committee punts, which it may very well do), our junior Senator has chimed in with his views:

Senator Bernie Sanders says Democrats should reject any deficit reduction deal if it cuts Social Security, Medicare or Medicaid.

According to the Peterson Foundation (using CBO data) if no actions are taken by Congress (along with the President, of course), by 2025 spending on Social Security, Medicare, Medicaid, and interest on the national debt will absorb more than 100% of all projected federal revenues.

Of course, Senator Sanders would like to solve that problem by raising taxes on the rich.  In order to get enough tax revenues to pay for the rest of federal spending (defense, environment, transportation, Senator Sanders' salary, housing, fuel assistance, etc.) the government would need to raise the equivalent of 9% of GDP in taxes.  That's the equivalent of about $1.4 trillion today.   Total personal income tax revenues from all taxpayers in 2009 was $866 billion.  (Granted 2009 was not a good year, but even in the peak year of 2007 total income tax revenues were $1.1 trillion, still not enough to yield sufficient revenues.)

After the Storm Passes ...

the rebuilding begins.  And must be paid for.

The federal government will pick up a big part of the bill for rebuilding Vermont's infrastructure, especially roads  and bridges.  But deep in John Gregg's excellent and detailed Valley News account of the funding issues face some Vermont towns, there is this:

    State Rep. Margaret Cheney, a Norwich Democrat, yesterday said she has asked for bill to be drafted for an “Irene gas tax” that would raise money for state and local recovery funding.
    Motorists currently pay 26.5 cents a gallon in various state taxes at the gas pump in Vermont, and each penny raises $3.3 million in revenue, said Cheney, who noted that the gas tax was raised temporarily to pay for roads and bridges damaged in the Flood of 1927 in Vermont.
    “It makes sense because it's a use tax,” said Cheney, who warned of “crushing increases in property taxes” in some towns otherwise.

This is true.  But it is also true that, since the advent of Act 68, 1/3 of the revenue generated by the purchase and use tax – 6% on, essentially, the price you pay for a car – does not go to the transportation fund, which was the original, legislative intent.  It goes, instead,  to ...

The education fund.  Where else?

Last year, the amount so diverted was about $26 million.  The amount generated for the transportation fund by the gas tax was about $60 million.  An additional $15 million was generated by taxes paid on diesel fuel. 

So, say $75 million from the taxes people pay to fill up their cars and trucks and tractors going into the transportation fund.  That could be raised by 1/3 using tax machinery already in place as it was designed to be used before the state became enslaved by an out-of-control K-12 education funding scheme that takes ever larger slices of tax revenue from any and every source to pay for the schooling of fewer and fewer students.

This, as Hugh Kemper (whom we miss) pointed out, again and again, is the crux of the state's financial woes. 

Finally, one could safely bet that any "temporary" increase in the gas tax would:

a) quickly become permanent

and

b) eventually be used to shore up the ed fund.

Because that is how we roll.