In recent weeks, tax commissions in Georgia and Vermont issued reports recommending a major overhaul of their states' tax systems. The recommendations share many things in common, including sensible proposals to broaden the bases of major taxes and to make the changes revenue-neutral. In fact, when ITEP staff testified before each of these commissions over the last year, our testimony highlighted the importance of base-broadening as a first step towards sustainable tax reform. However, it’s clear that only one commission was concerned about the general welfare of its low-income taxpayers while the other seemed to have little interest in ensuring that a major tax overhaul doesn't disproportionately impact working families.
Georgia’s Special Council on Tax Reform Releases Recommendations
Earlier this month Georgia’s Special Council on Tax Reform released its recommendations for how Georgia’s tax structure should be changed. CTJ has been following the Council's work closely over the past few months.
As anticipated, the recommendations are quite sweeping and deal with every major tax the state levies. Among the recommendations are broadening the income tax base by repealing the state’s generous pension exclusion and broadening the sales tax base by including more services and groceries. The Council also recommends replacing the state’s progressive income tax with a flat 4 percent rate, increasing the corporate income tax rate and increasing the cigarette tax. (Read the Council’s full recommendations.)
Unfortunately, no thought was given to how these sweeping changes impact low and middle-class working families. Broadening tax bases is sound tax policy, but base-broadening must be coupled with targeted measures to ensure that the brunt of this tax modernization isn’t borne by the most vulnerable.
Vermont’s Tax Commission Releases Final Report
On the heels of Georgia, Vermont’s Blue Ribbon Tax Structure Commission released its final report last week after more than a year of review, research, outreach and discussion about the state’s tax system. The report offers a clear path forward for Vermont to “strengthen its tax system for the 21st century” which means “questioning critically every assumption in the tax system.”
If enacted as a comprehensive package, which Commission members have requested lawmakers to consider, the recommendations would indeed make the state’s tax system more sustainable, adequate, and fair over the long run.
The Public Assets Institute issued a statement on the report, saying it “was badly needed and long overdue…a good first step in strengthening our revenue system so it can support the essential public services that all Vermonters deserve.”
The recommended income tax changes include basing Vermont’s taxes on federal adjusted gross income (AGI) and eliminating itemized and standard deductions.
The personal exemption would be replaced with a $350 non-refundable per-filer credit, plus an additional $150 for each spouse or dependent, which is capped at $800 and only available to taxpayers with AGI below $125,000.
The revenue gained from broadening the income tax base would be used to lower income tax rates.
The Commission recommended expanding the sales tax to most consumer-purchased services in order to bring their sales tax in line with current consumer patterns which favor services rather than goods. They also suggested that all consumer-based sales tax exemptions should be eliminated with the exception of food and prescription drugs. The revenue gained from broadening the sales tax base would be used to lower the sales tax rate from 6 percent to 4.5 percent.
Additionally, the Commission wants more scrutiny of the state’s tax expenditures and called for the state to develop the capacity to conduct tax incidence studies to better inform policymakers on tax policy changes.
One criticism of the Commission is that their recommendations were revenue-neutral, meaning the changes would not increase or decrease current state revenues. Given that Vermont must fill a $150 million budget gap next fiscal year, some advocates and lawmakers have suggested that the plan should raise some new revenue, at least temporarily, to fill the gap.
The good news, however, is that if taken as a comprehensive package, the recommended changes would maintain the state’s reliance on a progressive income tax and would use revenue gained from broadening the sales tax base to lower the sales tax rate rather than moving to a greater reliance on consumption-based taxes.
Commission members asked state leaders to give serious consideration to their findings and recommendations. There is a good chance their request will be answered, because Vermont policymakers are making tax reform a priority during this legislative session.