Commentary: The Great Tax and Spending Deadlock Ends (July, 2018)

By John McClaughry

The great tax and spending deadlock of 2018 is now over. Governor Scott, after a hectic month of thrust and counterthrust with the Democratic House and Senate, got most of what he wanted.

The battle was triggered by the discovery of unexpected revenues resulting mainly – though the Democrats are loath to admit it – from the economy spurred by the tax bill enacted by Republican Congress last December.

The governor was eager to use the new revenue to freeze school property tax rates at current levels for the next two years, and spend more on universal preschool and state colleges.  Commendably, the Democrats objected to using a likely non-recurring revenue windfall to artificially depress school property tax rates for one or two years, after which, absent some structural reforms, the state would face annual $35+ million holes and no revenues to fill them. They insisted (eventually) on using $15 million to strengthen the Vermont State Teachers Retirement System, which has an unfunded pension liability of $1.225 billion.

The final act, which the governor didn’t agree to but didn’t veto, used $20 million to freeze the homestead school property tax rate at $1.50 per $100 FMV for the coming school year, but let the non-residential rate crawl back up by 4.5 cents, to $1.58. The act also slightly reduced income tax bracket rates, created a credit for charitable deductions to stimulate giving by taxpayers who will no longer itemize their Federal deductions, and exempted lower income beneficiaries from taxation of their social security payments.

The act also repealed the once-sacred Act 60 General Fund transfer to the Education Fund. In its place, all of the revenues from the sales and use tax plus 25% from the rooms and meals tax will go to the Education Fund, starting with an estimated $403.9 million in the coming fiscal year. This is a fiscal gamble that depends on steady increases in taxable sales, and may result in shortfalls in future years.

The governor scored a victory in his demand for a statewide teacher health insurance program. This was made possible when the Vermont-NEA teachers union surprisingly reversed its frantic opposition to a statewide benefit (example: “the governor wants to take power away from working women!”). The benefits will now be negotiated, not by the State, as the governor had unwisely proposed, but by a ten-member Commission, five from school boards and five from the unions.

The unions can’t strike, the districts can’t impose contracts, and school districts will collectively vote on ratification of the Commission’s recommendation. If the Commission can’t agree, the terms will be determined by arbitration.

The legislature  wouldn’t buy the governor’s highly speculative plan to keep school property tax rates flat for five years, during which the State would instruct school boards how they must reduce spending. A Student to Staff Ratio Task Force will thrash over this sensitive subject over the next year.

A major initiative that both sides agreed upon is the creation of a Vermont Tax Structure Commission, composed of five experts and similar to the Blue Ribbon Tax Commission of 2011. If the Commission can summon the imagination to seriously consider, and sell, a consumed income alternative to income and retail sales taxation, it would stimulate economic growth and attract national attention.

Another useful study will focus on Universal Pre-K. It will unfortunately stop short of addressing the important question of whether UPreK has any lasting  educational benefit beyond custodial care for four year olds (minimal at best).  It will however seek “to identify ways that the prekindergarten education system may create undesirable outcomes for prekindergarten students, their parents or guardians, or providers of prekindergarten education services or child care services and steps to mitigate them.”

The special session’s final days saw possibly the most chaotic finale ever. The House leadership’s erratic behavior caused a great deal of partisan bitterness, and certain regrettable remarks from the governor’s office made the end game less congenial.

The buydown of the homestead property tax rate will create a $35 million Education Fund hole to fill next year, and that much or more for years to follow. That’s not a paragon of fiscal responsibility, but sometimes that’s the best that divided government can do.

John McClaughry is the founder and vice president of the Ethan Allen Institute

 

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