The Vermont Statehouse this week became the front line in an ideological battle over the role of state government after Democrats in the House of Representatives approved $131 million in tax increases that Republicans derided as “off the rails and out of control.”
The fiscal environment in Montpelier this year is by all accounts the tightest it’s been in recent memory. Brattleboro Rep. Emilie Kornheiser, the Democratic chair of the House Committee on Ways & Means, said if Vermont wants to expand access to housing and health care, and improve public safety, then state government will need to increase taxes in order to support the new spending.
“A community where those things are happening, a Vermont where that’s happening, which seems to me to be essentially the basic functioning of government, is worth paying for,” Kornheiser told Vermont Public.
Approval of three bills that would see taxes and fees go up by more than $130 million annually in the coming years drew swift rebukes from Republican Gov. Phil Scott and the 38 members of the minority caucus in the House.
“People are stressed about housing costs. They’re stressed about issues around public safety, the cost of health care going up ... and we need to act."House Speaker Jill Krowinski
Existing revenue streams that support government spending, according to St. Johnsbury Rep. Scott Beck, have increased faster than the rate of inflation over the past 10 years.
“And yet, we’re being told that we still don’t have enough money,” Beck said.
Beck, a Republican, said the “budgeting by addition” approach favored by Democrats threatens to overwhelm Vermont’s tax base. And he said if the supermajority wants to make room for additional programs and services, then it needs to find commensurate reductions elsewhere in the $8.6 billion state budget.
“Clearly, we do not have a revenue problem,” Beck said. “We have a spending problem.”
New Spending
The spending bills, approved largely along party lines this week, would target tax increases at high earners and corporations. And they seek to advance progress on three of Democrats’ top priorities heading into the 2024 legislative session — housing, health care and public safety.
One bill, H.829, sets forth a 10-year affordable housing initiative that includes more than $50 million in funding in fiscal year 2026 to subsidize, among other things, the construction of shelter beds, rental units and housing for refugees.
H.721, meanwhile, would increase Medicaid income eligibility limits for 19- and 20-year-olds and pregnant people, and bring an estimated 2,400 residents onto the government-subsidized insurance program next year. The legislation would also significantly increase subsidies for low-income seniors on Medicare.
The third bill, H.880, allocates about $7 million to fund dozens of new positions in the criminal justice system. South Burlington Rep. Martin LaLonde, the Democratic chair of the House judiciary committee, said lack of human resources has contributed to a court backlog that’s preventing prosecutors and judges from holding offenders accountable.
“I think it’s pretty critical that — I’ll use old cliches — that we put our money where our mouths are, that we walk the walk and not just talk the talk about public safety,” LaLonde said. “What we need most is for our courts to function more effectively.”
House Speaker Jill Krowinski said the House deliberated intently before moving forward with the proposed spending bills. She said it became clear in recent weeks that the current revenue forecast won’t be enough to support the needs Vermonters are counting on state government to address.
“People are stressed about housing costs. They’re stressed about issues around public safety, the cost of health care going up,” she said. “We’re hearing this, and we need to act. And we need to have a plan.”
The governor responds
Phil Scott used his weekly media briefing Wednesday to denounce tax increases that he said will put “our economy and [Vermonters’] livelihoods at risk.”
Scott said his administration faced the same difficult decisions that lawmakers did when putting together his fiscal year 2025 spending plan. But he said he had the fortitude to make “tough decisions based on our fiscal reality.”
“I believe we owe it to Vermonters to have the courage to make these hard choices, instead of asking them to pay more,” Scott said. “Unfortunately, the supermajority in the Legislature is talking about a different approach.”
Scott’s guest of honor Wednesday was a Williamstown business owner named Amanda Shangraw. Shangraw told reporters she grew up in poverty in East Calais and is now looking to revive the central Vermont community she grew up in by starting a manufacturing operation that produces high-quality leather goods.
She said seven-day workweeks and 16-hour workdays haven’t been enough to offset the financial drain of Vermont’s tax landscape.
“The taxes that our business is seeing monthly to the state, biweekly in payroll, built into every transaction we take, on top of increasing property taxes and the endless permitting and fees to upgrade our building to meet current state code and fire code and make sure that it’s safe for people to come, is bankrupting our small business,” Shangraw said.
Shangraw said many of the elected officials in Montpelier earned her vote in the last election. But she said the latest push for yet more taxation has left her “feeling really let down.”
“And I’m hurting, and I’m feeling really defeated,” she said. “I want you to see me and know who I am. And when you go to vote for these bills, picture my face and the hundreds of others just like me.”
Democrats say their proposed tax increases won’t have any impact on the working class Vermonters Scott says he’s worried about, or small business owners like Shangraw.
Proposed new revenue streams include a new tax bracket for personal incomes over $500,000; an increase in the corporate income tax rate; and an increase in the property transfer tax involving the sale of homes, properties or businesses worth more than $600,000.
“It’s making sure that Vermonters who are living here ... are all paying the share of taxes that matches their ability to earn,” Kornheiser said.
Scott, however, said Democrats’ proposals will erode Vermont’s tax base over time by creating a hostile environment for the wealth and economic activity he’s trying to attract.
"Raising taxes on high earners and raising the corporate income tax are just not competitive policies.”Manish Bhatt, the Tax Foundation
Manish Bhatt, a senior policy analyst at the Tax Foundation, a national tax-policy think tank, said the proposed corporate tax hike would give Vermont the distinction of having the highest top marginal corporate income tax rate in the country. The proposed tax increase on personal income in excess of $500,000 would put Vermont second in the country, behind California.
“The thing that I would be very concerned about is, what signal is Vermont sending to those who may be considering moving to the state or considering investing in the state?” Bhatt said in an interview with Vermont Public. “And raising taxes on high earners and raising the corporate income tax are just not competitive policies.”
Cristobal Young, an associate professor at Cornell University, delivered a presentation to the House Committee on Ways & Means earlier this year called “The Myth of Millionaire Tax Flight.”
Critics of tax increases on high earners often point to anecdotal evidence of wealthy residents fleeing to friendlier tax jurisdictions. While some people of high income or wealth may change residencies in order to avoid tax assessments, Young wrote in his presentation, “they are happening at the margins of social and economic significance.”
“In the United States, millionaires move less than the general population: Their migration rates are lower than the middle class and much lower than the poor,” he wrote. “The rich are more grounded in place than are lower income earners.”
Joyce Manchester, a fiscal analyst for the Legislature’s Joint Fiscal Office, said the 3,560 tax returns that reported adjusted gross income of more than $500,000 in 2022 accounted for about 30% of all the income taxes paid in Vermont that year.
She said a well-known academic study that tracked the effects of an income-tax rate increase on high earners in New Jersey found little effect on behavior among the targeted population. But she said lawmakers should keep in mind that “tax-induced migration” is higher among populations that are disproportionately represented in Vermont, including people of retirement age, and people living on income from investments.
Kornheiser said it’s possible that Democrats’ plan may induce tax flight, but she said the testimony her committee has heard to date has convinced her that the benefits of the proposal outweigh the risks.
“And we know that over the last few years, we’ve seen more wealth move into this state and more folks with low incomes move out, and so the evidence thus far does not point to that,” she said.
Next steps
Senate President Pro Tem Phil Baruth told Vermont Public this week that there’s no appetite in his chamber for the level of new spending favored by the House. And he likened Democratic leaders in the House and the Republican governor to opposing poles on the fiscal-policy spectrum in Montpelier.
“And I believe the Senate finds itself somewhere in this middle,” Baruth said. “We have various crises that we are managing in the wake of the decline of federal dollars, so raising revenue is going to be a part of that. The question is the level that is necessary, and what that extra revenue is going to pay for.”
One proposal the Senate won’t look favorably upon, he said, is the plan to create a new tax bracket for high earners, which the House is using to pay for its affordable housing initiative. Baruth said he understands the desire to maintain the level of housing investments that were possible with federal aid during the pandemic. But he said Vermont doesn’t have the financial wherewithal to keep that momentum going with state funds alone.
“We can’t afford the level of investment that we were doing during the pandemic. We can’t afford that now,” he said.
For Scott and House Republicans, the focus is less on the end game in the Legislature this year than on Election Day 2024.
House Minority Leader Pattie McCoy and Scott say they think voters are going to rebel against Democrats’ latest round of tax increases. And they say they’re preparing now to capitalize in November.
GOP leaders say they’re recruiting high-quality candidates to challenge competitive House seats, and Scott said Wednesday that he’s taking a hands-on approach to the process.
“I’ve talked with people, talked with people who have approached me about running,” he said. “And they’re viable candidates. And they’re not all Republicans.”
The Vermont Republican Party has shown minimal ability to capitalize on Democrats’ perceived political weaknesses in the recent past. And Republicans’ dismal showing in House and Senate races over the last two election cycles has led to a dynamic in which Democrats can use their supermajorities to pass bills no matter how the Republican governor feels about them.
Scott will find out in November whether the GOP finally has the juice to reclaim enough seats in the Legislature to restore the power of his veto pen, and force Democrats to the bargaining table when it comes to budgeting and tax issues.
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