Business leaders are mounting a campaign against proposed changes to the income tax code, and say the plan would deal a setback to the state’s fragile economic recovery.
House lawmakers have given approval to a plan that would limit the itemized deductions Vermonters can use to lower their tax bills. That means that people who customarily write-off major expenses like home mortgage interest, health care expenses or major charitable gifts, might have to pay more in taxes.
The plan would raise about $33 million in new revenue, mostly from wealthier filers, and allow lawmakers to avoid commensurate reductions in the state budget.
Tom Torti, president of the Lake Champlain Chamber of Commerce, says elected officials would come to regret it.
“Those things are going to unalterably affect the fiscal climate of the state in a way that’s not productive for growing a thriving economy,” Torti says.
The cap on deductions could be set at about $15,000 for individuals, and about $31,000 for families. Torti says the mortgage interest deduction is a critical variable in the equation young professionals use to determine whether to purchase a home.
"Those things are going to unalterably affect the fiscal climate of the state in a way that's not productive for growing a thriving economy." - Tom Torti, president of the Lake Champlain Chamber of Commerce
He says the proposed new caps are low enough to upset that equation in ways that would either discourage home buying, or prompt would-be residents to consider moving out of Vermont.
“Either you are stuck where you are and not very happy about it, paying rent and not building equity, or you begin looking at other places that frankly you could make a little bit more money and afford a lot more house,” Torti says.
Torti also says the wealthy people who would be affected most by the plan might simply decide to pack up and take their riches to a state with a friendlier tax climate.
“These people have wealth, but they also have opportunities and options for where to go in order to protect their wealth,” Torti says.
Torti also says the wealthy people who would be affected most by the plan might simply decide to pack up and take their riches to a state with a friendlier tax climate.
Not everyone is so alarmed.
Carl Davis is a senior analyst at the Institute on Taxation and Economic Policy, a Washington, D.C., based research group that analyzes federal, state and local tax policies. Davis, who lives in Vermont, says there’s no reason to think Vermont would suffer any competitive disadvantage if it goes through with the plan.
“Massachusetts, Connecticut and Rhode Island – these states don’t have any itemized deductions at all right now, or if you look at Maine, they have a very similar cap on their itemized deductions,” Davis says. “And that’s the way that a lot of other states are moving, North Carolina and Kansas and Hawaii.”
Paul Cillo heads up the Public Assets Institute, a left-leaning think tank in Montpelier that has proposed doing away with itemized deductions altogether. Cillo says the public priorities reflected by the House plan are sound.
"This idea that tax rates will drive behavior in this way is really shown not to be the case." - Paul Cillo, the Public Assets Institute
“It’s a question of fairness,” Cillo says. “And do we think that giving a deduction to people who buy a home is more important than having a court system that actually has reasonable waiting periods, or that Lake Champlain is clean and safe for children to swim in?”
Cillo also says that concerns about tax flight are unfounded, and that IRS data from the last 20 years suggests that people moving into Vermont have higher incomes, on average, than people leaving the state.
“This idea that tax rates will drive behavior in this way is really shown not to be the case,” Cillo says.
The House plan is now being debated in the Senate, where lawmakers are considering an alternate plan that would cap the mortgage-interest deduction at $12,000 annually.
