Recent reports, by Vermont legislative chief economists found the state could lose out on $430 million in tax revenue next fiscal year due to Covid-19. It is also projected the state will bring in $146 million less in the final months of the current fiscal year and that doesn't include another $166 million loss expected due to delays in tax due dates. It’s not sure if these figures included a possible increase in income tax refunds to Vermonters because of personal income loss. These are current projections and could increase or decrease according to how Vermont recovers from this pandemic. The federal government is helping to cover loses by providing Vermont with 1.25 billion dollars but it contains stipulations as to what the money can be used for. Vermont’s 2020 state budget was 6 billion dollars. So, if we are determined to keep the same level of services and programs in 2021, how can we do it given the projected loss of $596 million in revenues.
As the Vermont legislature and the administration look to solve this major deficit, they need to be aware that Vermont could have a tax capacity issue.
One economic study defines taxing capacity as the ability of individuals and businesses to pay taxes. It is not the ability of taxing authorities to raise revenue. It also points out that if a state were to provide for all the needs of its citizens, then in theory, it could tax away their entire incomes and taxable capacity would be 100 per cent. However, if people provide for most of their needs out of incomes they receive; a government can therefore take away only a certain percentage of their resources in taxation.
We all know that people have left our state for states with lower taxes. Higher income earners leave for states where there is no income tax. Younger middle-class workers have left for greener pastures where they can find better jobs, lower cost of living and keep more of their paychecks. According to the Joint Fiscal Office report, Vermont lost thousands of people with incomes of under $100,000 a year. Outward migration was particularly high among 45- to 64-year-olds earning $25,000 to $75,000. JFO also sites, high earners moving here saw their incomes decline 22% on average the year after the move.
For more than two decades the liberal democrats and progressives controlling Montpelier have shown us several things. First, they have never met a tax or fee increase they couldn’t fall in love with. Second, their education funding scheme creating a statewide property tax in an attempt to lower property taxes has failed miserably and their only solution to fix the problem is to raise more taxes to put into the dwindling education fund. Lastly, they have shown little to no interest is streamlining government, addressing waste, fraud and abuse or making cuts of any kind.
Consider a recent quote from Senator Mark MacDonald referring to the state college closings. For decades the state legislature has underfunded our state college system, one of the lowest states in the US. So, when asked why the legislature has created this problem MacDonald said, “Well we haven’t had a governor who wants to raise taxes to put into state colleges for ah…. eighteen years.” And there it is, the problem-solving mentality prevalent in Montpelier. If Vermont has a problem just raising taxes and fees or create new tax sources to fix it.
If the legislature responds to what could be Vermont’s largest fiscal crisis with the same old mentality, we could find out Vermont does have a tax capacity which could be breached and cause major long-term economic harm to our state.
Will the legislature finally get it? Time will tell.
Former State Representative from Grand Isle