Legislature looks at new school taxes, ignores performance review

By John McClaughry

The Vermont Tax Structure Commission has delivered its report, and its recommendations should trigger an intense debate. Switching public education support to the income tax and expanding the sales tax to include services will be very controversial. It’s regrettable that the legislature didn’t begin with a performance review, to decide what state government should be doing with $4.5 billion a year, and then address the tax structure needed to pay for it.

            Last month the three-member Vermont Tax Structure Commission delivered a well-written, informative, and conscientious report.  The legislature will now need to come to grips with some very large taxation change proposals.

John McClaughry

            The longest part of the report deals with our complex property tax financing of education. It recommends replacing the education homestead property tax with an income tax. Non-residential property would continue to be taxed for education at a statewide rate.

            The report argues that the present tax is regressive: it claims a greater part of the income of lower income homeowners, than their higher income neighbors. The present system offers a choice of paying education tax based on income and receiving a credit the following year, or based on property value. Thus “there is no longer a clear link between the budget voted and the voter’s tax bill, [and] the cost control and accountability of the budget process is weakened.”

            The Commission’s proposed Education Income Tax would resolve this timing disjunction. Voters in each school district would set the rate applied to each resident’s previous year Adjusted Gross Income to raise the funds to meet the coming year’s budget. The state would collect the tax. The Commission believes this will be an improvement. What economic effect it would have by driving up the income tax rate schedule remains to be seen.

            The Commission wants the sales tax to fall on the widest possible range of goods and services. It proposes that consumers pay the sales tax on scores of service transactions, other than business to business exchanges, casual exchanges, and – the big one – health services. As a sweetener it says that the sales tax rate could be lowered from 6% to 3.6%.

            It’s hard to imagine a single tax change that would produce a more politically potent reaction from thousands of Vermonters faced with collecting and paying the tax over to the government. The report lists 121 services that could be covered. A sampler: attorneys, architects, accountants, engineers, plumbers, electricians, excavators, truckers, taxi drivers, barbers, cosmetologists, auto repair, and investment counselors.

            Most if not all of the groups targeted by the services tax will clamor to be exempted, like “health care”. As the exemptions mount, the promised 3.6% tax rate creeps up to 4%, then 5% and maybe further, to raise the same amount of revenues as today’s 6% rate.

            The Commission recommends some mechanism to hold low income persons harmless from the effects of the tax on services and goods (notably food) not now taxed; but people with incomes above the lower-income line would of course pay the full freight.   

            The legislature that commissioned the report was eager to force everybody to contribute to the campaign to defeat the menace of climate change. So it’s no surprise that the Commission addresses taxation as a technique for exacting that contribution.

            The Commission obligingly recites the horrors (Gov. Shumlin’s characterization) of the coming climate change end times, without asking whether that mantra is scientifically defensible. Their report avers that ‘when accounting for the environmental and health benefits, all options considered by the decarbonization study commissioned by the legislature would result in net benefits.” Actually the decarbonization report found that the only way decarbonization of Vermont could produce enough “climate benefits’ to overcome the conceded loss of economic welfare was to include undefined global benefits enjoyed by the whole world.

            The Commission did however, stop short of urging a carbon tax or cap-and-trade system to make motor fuel and heating oil so expensive that Vermonters can’t afford them anymore. As usual, it noted that revenues from any carbon tax should be used to diminish the burden on lower income families caused by… the carbon tax. It did lamely “support the use of tax credits and exemptions to reduce the upfront cost of some investments that will make the transition [away from fossil fuels] possible, even though in general the commission strives to keep the tax base as broad as possible.”

            On the brighter side, the Commission rejected two bad ideas, an unenforceable wealth tax and a value-added tax hidden in the price of goods in place of the visible sales tax. The report will appall the climate movement by recommending an add-on registration fee for the electric vehicles that taxpayers are paying millions to subsidize, but which don’t pay a dime of motor fuel taxes to maintain the roads and bridges.

            Alas, the politicians who created the Commission didn’t dare to address the most important question: “what do Vermonters get for being taxed $4.5 billion a year?”  Once that is agreed upon, a tax structure commission can recommend efficient and equitable ways to bring in the needed revenues without killing the golden goose.

But answering that question requires a full-blown performance review.  Democratic leadership in Texas invented the gold standard performance review in the 1990s, saving billions of dollars. But Democrats here, though they endorsed the idea in their 2014 platform, will never do it. And neither will Republicans.

John McClaughry is vice president of the Ethan Allen Institute.

15 replies »

  1. #1 will they tax the Worlds Oldest Profession The same as they tax EVERYTHING ELSE we do? What happens when We Have NOTHING LEFT TO GIVE? ALL of my disposable income WILLNOW GO TO THE TAXFREE STATE OF NEW HAMPSHIRE. CUT the BS and THE SPENDING.

    • When your disposable income disappears, because education is funded by property taxes, they will take your property.

      New Hampshire is better. While NH property taxes are just as high as Vermont’s, that there is no NH sales or income tax makes a big difference.

  2. Oh boy ! I’m going to put my foot in it now but, I’ve got a feeling that no matter how this ends, we loose ! Personally I have never had children, but have paid to educate other people’s kids since I started working after graduating from high school in 1974. Currently I pay over $4,000 a year in property tax to educate other people”s kids. I’ve heard the argument that I am the product of and benefited from this system. Yup, and I heard my parents argue against a system that they supported for 40 years after their children were out of school, and were paying for their own children. As my mother (and I suspect other parents) used to say, “just because little Johnny jumped off the bridge, does that mean you should” ? I am a firm believer in a person being responsible for their own actions, and that includes procreation. If you can not afford to have children without relying on a social welfare system, maybe you should not have children. I am a firm believer that almost every social, economic, environmental, and even political ill that we have today could be lessened if not eliminated if more responsible family planning was exercised, and less social support was available for those that choose to be less responsible for their own actions.

      • No, I don’t want to argue. I was just wondering what you meant by taxes, and who you were addressing as the tax payer.

        Do you mean the bill you receive from a healthcare provider for services rendered or the bill you receive for drugs you buy from the pharmacy shouldn’t include a sales and use tax?

        If the doctor buys a stethoscope or the pharmacy buys aspirin to resell, should they pay sales and use tax on those purchases?

        Should the stethoscope manufacturer or the aspirin wholesaler pay a value added tax on their products?

        Or should the doctor who is paid for the healthcare services rendered or the pharmacy that earns a profit selling aspirin not pay income tax?

        Or should the owner of the doctor’s office or the owner of the pharmacy building not pay property tax?

        Or should the ambulance company not pay gas tax or vehicle registration tax?

        Or, one last possible permutation – if you do pay taxes for healthcare services rendered, or drugs purchased, or the doctor does pay tax on the stethoscope, or the pharmacy does pay property tax, etc., etc., should those expenses be tax deductible when filing annual income taxes?

  3. Re: “I’ve heard the argument that I am the product of and benefited from this system.”

    Mr. McClaughry hits the nail on the head when he addresses ‘performance’. It’s otherwise known as a cost/benefit ratio assessment. How much does a service cost, what are the expected outcomes for the investment, and how close did the investment come to meeting its projections?

    Just consider education. Costs per student have virtually doubled over the last 20 years. Have academic outcomes improved too?
    No. Performance outcomes, based on the Agency of Education’s performance data, show that student performance is declining. In fact, while students tend to come to school with reasonable academic skills in early grades, those skills decline the longer the student attends the public school system.

    What’s with that?

    Vermonters spend almost as much in annual per student costs to send their children to public K-12 schools as they would to send a student to Vermont’s Castleton University for a year… with one glaring exception – the Castleton University costs include room and board.

    What’s with that??

  4. How the heck does a 2nd grade education equal a college year??? $16,000 for grade school per student
    Especially when the 2d grader is supposed to sit in front of a 12 inch screen, watching a person he’she has never met, talk and show pictures.

    Are we adults so nuts, so dumb, to accept these taxes and demands???

    But it IS homes which produce students, not jobs/ income.

    If $chool $pending was realistic, this whole conversation would go away, PERIOD !!!

    • In my district (Windham Northeast Supervisory Untion) , we’re paying $22,268 per student for K-6, $24,155 per student for 7th & 8th graders, and $22,802 for grades 9-12.

      Castleton University charges $25,000 for one full year of college courses, including tuition, student association fees, student resources fees, AND room and board.

  5. The Education system NO LONGER Teaches youngsters from Kindergarten on up, IT has Become an INDOCTRINATION SYSTEM TO Brain wash our Children. Into LEFTIST leaning SHEEP.

    • The essential skills taught in Early school have been important to the existence and the progress of this country. But many children aren’t even fully literate after graduating 8th Grade. There should be a way to both cut costs and improve education. Something is wrong.

      • FYI: According to the Vermont Agency of Education Performance Data, 60% of the 7th graders in my district don’t meet grade level proficiencies in Math and Language Arts.

      • FYI: In my district, according to the VT Agency of Education Performance Data, more than 60% of our 7th graders don’t meet grade level standards in Math and Language Arts.

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