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McClaughry: Our Tax Capacity

(Host) As a long-time conservative observer of fiscal policy in government, commentator John McClaughry expects that debate about our tax capacity will dominate the coming session of the state legislature.

(McClaughry) Very soon now, Vermont's 2013 legislature will convene, and as usual a large question will be where will we get the money to pay for everything?

Five years ago Senate President, now Governor PeterShumlin, repeatedly declared We are spending too much, and have used up our tax capacity... There is no more money in the bank.... We are tapped out.

Since then, in an effort to expand General Fund tax capacity the legislature has proposed or enacted a number of new taxes. Here's a partial list: Higher taxes on hospitals, nursing homes, and visiting nurse services; tobacco; electric bills; health insurance claims; and the $21 million diverted from the CVPS ratepayers to finance renewable energy subsidy programs.

In turn, there's plenty of pressure to accelerate General Fund spending. Vermont's labor movement and allied organizations, united under the banner of Put People First,are vocally demanding that state government increase spending to meet -quote - every person's need for health, housing, dignified work, education, food, social security and healthy environment.

This is clearly impossible, but the Governor himself has committed to single payer Green Mountain Care in 2017. This will require $3 billion from somewhere, and any new Federal funds will surely fall far short of that amount. In addition, Vermont's two state-managed retirement funds show an alarming $3 billion gap between promised benefits and expected revenues.

So where can the Governor go to find the money to fuel all the state's current and future obligations?

Raising income taxes on the rich is not a good option. The Tax Foundation reported last month that Vermont in 2010 had the 13th highest state and local tax burden, a finding that the Shumlin administration concedes is pretty close to the truth. Further taxing the incomes of people who make a lot of money would seem to be an obvious stimulus for them to make and spend it somewhere else.

So would a new wealth tax, as advocated by the Vermont Workers' Center.

The  short list of potential new taxes comes down to some form of carbon taxon fossil fuel energy (proposed by Shumlin in 2008), extending the sales and use tax to services (offered earlier this year by Speaker Shap Smith), and a General Fund penalty tax of up to $276 million on the Education Fund, that translates into higher school property taxes. Green Mountain Care, if and when it happens, will almost certainly require stiff new payroll taxes, so that source can't be tapped now to meet other demands.

A month from now we'll learn what the Governor has in mind for us.

John McClaughry is founder and vice president of the Ethan Allen Institute, a Vermont policy research and education organization.
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