Vermont’s Shadow Budget: How The State Forgoes $1 Billion In Taxes Each Year

1302 words, 7 charts / Vermont Public Radio

Data-driven exploration and explanation of Vermont’s $1 billion annual tax expenditures that remain on the books with little scrutiny.

By Taylor Dobbs (Vermont Public Radio) and Hilary Niles (Niles Media), with web production by Angela Evancie (Vermont Public Radio). Illustration by Aaron Shrewsbury. Graphics by Hilary Niles, based on data from Vermont Tax Expenditures Reports, 2006-2015. 

As the Vermont Legislature works to overcome a $100 million budget gap for fiscal year 2016, one of its largest fiscal liabilities remains outside the reach of the annual budget bill. The state gives up about $1 billion in tax breaks annually through policies that have remained largely unchanged in recent years, even as lawmakers struggle to balance budgets.

Vermont isn’t alone on that front. Robert Zahradnik is the director of state fiscal health for the Pew Charitable Trust, and he says the majority of states don’t tend to keep close track of these tax breaks or measure their efficacy.

Additional related reporting:

Vermont’s Shadow Budget: State Tax Breaks Get Little Scrutiny // Feb. 9, 2015 // by Taylor Dobbs

Vermont’s Shadow Budget: It’s Hard To Know If Tax Breaks Are Working // Feb. 12, 2015 // by Taylor Dobbs and Hilary Niles

Known as “tax expenditures,” the impact of these tax breaks is the same as money spent. Think of it like an instant rebate: Instead of accepting the revenue and then handing it back out in the form of subsidies or payments, the state simply never collects certain revenues. The effect is the same.

A special commission in 2011 referred to this foregone revenue as a “shadow budget” that lacks sufficient transparency. And Zahradnik says tax expenditures don’t typically get the same level of scrutiny as the annual budget.

“We looked at this issue back in 2012 and released a report called Evidence Counts that found that most states really weren’t producing the kind of information that can ensure tax incentives – those tax expenditures focused on economic development … And since that time, we’ve been working with states to put in better practices,” he said.

Tax expenditures come in the form of policies and programs such as tax credits, exemptions, deductions or modified tax rates. Common at both the state and federal levels, they’re designed to encourage certain activities or lower the tax burden for certain populations. Such tax breaks are available for individuals and businesses, and virtually everyone in Vermont enjoys at least a few.

Common at both the state and federal levels, tax expenditures are designed to encourage certain activities or lower the tax burden for certain populations. Virtually everyone in Vermont enjoys at least a few. (Data: Vermont Tax Expenditures Reports, 2006-2015. Graphics: Niles Media.)
Common at both the state and federal levels, tax expenditures are designed to encourage certain activities or lower the tax burden for certain populations. Virtually everyone in Vermont enjoys at least a few.

Vermont is one of many states, Zahradnik says, that has taken a renewed interest in tax expenditures in recent years.

“There wasn’t always an opportunity for them to be reviewed in the same way that other programs are,” he said. “And I think on top of that, when you had the Great Recession and the fiscal crisis, our sense is there was just much more attention being paid to every dollar that state governments spend, and how do you make sure you’re making decisions that are based on evidence and that are based on an actual review of which programs are working and which ones are not?”

Vermont is ahead of some other states, he said, in that the state has defined measurable goals for all of its expenditures. But the state has not yet put significant effort into measuring progress against those goals or modifying policy to better reach them.

These tax “preferences,” as they’re also sometimes called, are divided into five broad categories based on which tax revenues are foregone: sales and use, income, property, motor fuel and vehicle and banking and insurance.

And unlike state spending, most of the tax breaks are permanent – unless they’re amended. They’re not voted up or down annually like the budget. But every two years, the state tallies how much money it’s not collecting. Here’s the latest glimpse of who gets to keep it.

Sales and Use

Vermont manufacturers don't have to pay taxes on their input materials or equipment. For individuals, there's no tax on most groceries, residential energy purchases or clothing.
Vermont manufacturers don’t have to pay taxes on their input materials or equipment. For individuals, there’s no tax on most groceries, residential energy purchases or clothing.

Sales and use taxes are the most visible form of taxation in the state. Virtually every time someone pays for goods or services, the state gets a small piece of that money. This category is also where the state gives up the most revenue in tax breaks each year, most of it (an estimated $339.1 million* in FY 2014) to manufacturers and other producers.

Manufacturers, including just about any company that produces tangible goods, don’t have to pay taxes on their input materials or equipment. So if a sock manufacturer is expanding its factory, it won’t have to pay for taxes on all the new fabrics or machines it buys. Manufacturers also don’t pay taxes on the energy they use in the manufacturing process.

The state does this to make it easier for manufacturers, which employ about 31,700 Vermonters, according to most recent estimates, to operate in the state by reducing overhead costs.

Tax breaks for individuals make up a significant portion of the sales and use expenditures as well. There’s no tax on most groceries, residential energy purchases or clothing, and those tax breaks make up $174.7 million of FY 2014’s foregone revenue from sales and use taxes.

Property

  • Total Expenditure (FY 2013): $281,080,500*
  • Portion of overall tax xxpenditures: 28 percent
  • Largest tax break: property tax adjustments for income sensitivity ($146,850,000*)
Including land such as church grounds, parcels in Current Use, and government-owned properties, property tax expenditures total about a quarter of the state's tax breaks.
Including land such as church grounds, parcels in Current Use, and government-owned properties, property tax expenditures total about a quarter of the state’s tax breaks.

Income sensitivity adjustments on statewide property tax bills also save Vermont taxpayers big, lately to the tune of about $145 million* a year — and that’s not counting tax breaks for public, religious and charitable organizations, or for landowners whose farm or forestland is enrolled in the state’s Current Use.

Including land such as church grounds, parcels in Current Use, and government-owned properties, property tax expenditures total about a quarter of the state’s tax breaks.

It’s also one of the few categories of tax breaks that’s made its way into the latest round of budget discussions. In Gov. Peter Shumlin’s third inaugural address in January, he proposed revoking farmers’ Current Use status if they repeatedly fail to comply with state water quality standards.

Income

  • Total expenditure (FY 2013): $59,744,000
  • Portion of overall tax expenditures: 6 percent
  • Largest tax break: earned income tax credit ($26,884,000)
The personal exemptions and standard deductions individuals claim on their annual income tax returns add up to more than half of all income tax breaks in Vermont. Note: Income tax expenditures from one tax year are reported for the following fiscal year.
The personal exemptions and standard deductions individuals claim on their annual income tax returns add up to more than half of all income tax breaks in Vermont. Note: Income tax expenditures from one tax year are reported for the following fiscal year.

It’s people, not companies, who find the most savings from income tax expenditures. The personal exemptions and standard deductions individuals claim on their annual income tax returns add up to more than half of all income tax breaks in Vermont.

Vermonters get income tax breaks for a wide range of things, from low income families’ spending on daycare ($61,000 in FY 2013) to saving for college ($1,777,000 in FY 2013).

Corporate tax breaks make up a much smaller portion of this category, though they vary dramatically year to year. Note: Income tax expenditures from one tax year are reported for the following fiscal year.
Corporate tax breaks make up a much smaller portion of this category – just $5,238,000 in FY 2013, though they vary dramatically year to year (they totaled less than half a million dollars in FY 2009). Note: Income tax expenditures from one tax year are reported for the following fiscal year.

Corporate tax breaks make up a much smaller portion of this category, though they vary dramatically year to year.

Lately, most savings for corporations comes from either the Vermont Employment Growth Incentive (a cash incentive for high-paying job creation) or the Research and Development Tax Credit (designed to encourage innovation in Vermont).

Banking and Insurance

  • Total expenditure (FY 2013): $29,231,800
  • Portion of overall tax expenditures: 3 percent
  • Largest tax break: hospital and medical service organizations ($14,070,800)
Most tax savings available for the banking and insurance industry go to hospital and medical service organizations in an effort to keep down the cost of health care in Vermont.
Most tax savings available for the banking and insurance industry go to hospital and medical service organizations in an effort to keep down the cost of health care in Vermont.

Most tax savings available for the banking and insurance industry go to hospital and medical service organizations in an effort to keep down the cost of health care in Vermont. And for about $10 million, some annuity considerations are exempted for insurance companies.

Banks pick up less than $4 million through other tax policies, including an incentive to invest in affordable housing.

While tax breaks in this category are expected to top $30 million in the coming fiscal year, overall they account for a small portion of total tax expenditures in the state.

 

Motor Fuel and Vehicle

  • Total expenditure (FY 2013): $28,420,000*
  • Portion of overall tax eexpenditures: 3 percent
  • Largest tax break: trade-in allowance ($24,700,000)
The vehicle trade-in allowance ensures vehicles are only taxed once (when they're bought) rather than twice (if they're traded in). Note: Diesel tax expenditures for FY2009-12 are excluded from these calculations due to unreliability of previously reported data.
The vehicle trade-in allowance ensures vehicles are only taxed once (when they’re bought) rather than twice (if they’re traded in). Note: Diesel tax expenditures for FY2009-12 are excluded from these calculations due to unreliability of previously reported data.

The vehicle trade-in allowance ensures vehicles are only taxed once (when they’re bought) rather than twice (if they’re traded in). This accounts for virtually all of the tax breaks in the motor vehicle and fuel category. Other tax breaks limit the costs of certain vehicles for religious and charitable organizations, veterans and people with disabilities.

There is also a tax break for diesel fuel used for farm equipment and other off-road uses. That tax break has been inaccurately reported in past years, but the accurate figure came in around $333,000 in FY 2013.

Editor’s note: The data presented here reflect state estimates reported by Vermont’s Joint Fiscal Office and Department of Taxes in annual or biennial tax expenditure reports since 2006. Some tax expenditures are not estimated due to unavailable data. Additionally, methodologies for estimating these values have evolved, and the details of several tax expenditures have been amended in the intervening years. As a result, the comparison over time cannot be exact, but is presented here as accurately and fairly as possible with the best available data.

* Beginning with the state’s 2015 Tax Expenditures Report, certain items are no longer reported as tax expenditures. Some FY2013 values have been estimated as an average of prior projections for Fiscal Years 2012 and 2014.

5-cent education property tax increase needed

801 words / VTDigger.org

Statewide base property tax rates might increase again — by a nickel in 2015 — to meet the rising cost of education. But in recommending the rate bump, Tax Commissioner Mary Peterson also suggests looking for a way to get schools to curb spending.

Peterson issued her official property tax recommendation Tuesday afternoon: Base homestead property tax rates should go from 94 cents to 99 cents, she said; non-residential property tax rates should increase from $1.44 to $1.49. Peterson recommended no change to the homestead income tax rate of 1.8 percent.

The Legislature, which ultimately sets statewide tax rates, will consider Peterson’s recommendations when it reconvenes in January.

Lawmakers also might respond to Peterson’s urging that they consider ways to limit the growth of education spending from year to year. Her message echoes one she delivered to the House Ways & Means Committee at a recent pre-session meeting that focused on education finance.

Gov. Peter Shumlin on Tuesday also appealed to school boards to keep their budgets lean.

// Read More

Shumlin celebrates broadband progress, though target is missed

930 words / VTDigger.org Despite conceding that Vermont will miss his target of statewide broadband and cellular coverage before year’s end, Gov. Shumlin Wednesday gathered top telecommunications executives to celebrate how far they’ve come.

20131120_Guite-VTel-610x428
VTel president Michel Guité addresses a roundtable of telecommunications executives and press assembled by Gov. Peter Shumlin in Montpelier Wednesday afternoon. Photo by Hilary Niles/VTDigger

About 3,000 homes still lack high-speed Internet service — representing less than 1 percent of residences in the state. Of those homes without service, solutions have been identified for the vast majority, though connection dates remain elusive. Five or fewer locations still remain without any solutions figured out. Administration Secretary Jeb Spaulding said the effort has been largely successful. “I think (the governor) is excited and thankful and gratified for the progress we have made, and I think for all intents and purposes, we have hit his target.”

// Read More

Unfunded health care obligations threaten teacher pensions

916 words / VTDigger.org

State Treasurer Beth Pearce might soon run out of metaphors for the chronic funding shortfall in Vermont’s teacher retirement system.

It’s a “monster,” she told the House Appropriations Committee on Wednesday. “It’s at a tipping point,” she said. It’s like a credit card that charges 18 percent interest, when a 2 percent deal sits idle on your desk. “It’s taking the wind out of the sails of (the pension system’s) recovery.”

The Vermont State Teachers’ Retirement System (VSTRS) encompasses pensions and other retirement benefits of retired teachers. It’s one of three pension systems managed by the state treasurer — the other two being state and municipal employees.

The teacher pensions have been consistently funded by the state Legislature in recent years, Pearce says, but the health care benefits have not. The state is falling about $20 million short each year, she estimates, based on the current cost of healthcare and demand for services. The health care is getting paid for, Pearce emphasizes, but in a very expensive way.

// Read More

Should Vermont loggers be licensed?

3041 words / VTDigger.org

Beverly Grout suspects a neighbor may have told the loggers that she and her husband Fred would be in the market to sell some timber.

She said the loggers, Ken Bacon Jr. and Ken Bacon Sr., knocked on the door of their home on a hill overlooking Barre back in June. Within days, the Grouts signed a contract.

“We didn’t realize who they were,” she said.

Fred, Beverly and Luke Grout (left to right) forced loggers off their property, and now must repair the damage that was left. Photo by Hilary Niles/ VTDigger

Left with 20 acres of damaged forestland and a blocked stream in Barre Town the Grouts wish they had known more about the Bacons’ track record.

The father and son logging team have a long legal history with Vermont environmental and criminal courts. Both men are under order to notify the state of when and where they’ll be cutting, but officials were not informed they were working at the Grout property.

“Unfortunately, they didn’t clean up thoroughly when they left,” Barrett said. Now two stream crossings are blocked, landings and fields that weren’t properly seeded are muddy, and knee-high ruts from machinery further contribute to soil erosion.

Attempts to reach the Bacons were not successful. A woman who declined to give her name, but identified herself as their secretary, said in a phone interview Thursday night that the father-son team from Barton are loggers who want to do the best timber management possible.

After asking the Bacons to leave several times, the Grouts say, they finally called the police in late August to force them off the property.

The Grouts say the Bacons harvested timber they weren’t supposed to, didn’t pay for all the loads they took and improperly dammed a stream with skidder bridges, which they subsequently left in place. The Grouts are left to clean up the mess or pay someone to do it — prospects they hardly can afford.

The Bacons’ secretary says the Grouts had initiated the relationship — not the other way around — but never informed the Bacons that the land was in Current Use. She says the men did nothing that wasn’t agreed to, paid the Grouts for every load, can’t be blamed for not completing a job they were kicked off, and are preparing to sue the Grouts for breach of contract for not being allowed to finish.

The Department of Environmental Conservation has launched an investigation.

// Read More

State announces ‘open data’ pilot project

1220 words / VTDigger.org

As Vermont’s state government takes its first baby step into the giant world of open data, the state’s civic hackers are lining up to help.

Harry Bell of Vermont’s Department of Information and Innovation announced Tuesday that the state would be stepping out of its website shell and into the “open data” movement — a growing international trend toward making government data more available to the public.

20131008_Open-Data-610x324In line with principles of “proactive disclosure,” which makes public information freely available before anyone has to ask for it, open data is the product of a systematic methodology that seeks to catalog, structure, unify and publish as much government data as possible.

At an Open Data Consortium in Montpelier Tuesday afternoon, coordinated by the Vermont Center for Geographic Information, Bell described his job as using the Internet to facilitate communication between the state and the rest of the world. To date, that communication has consisted of a hodgepodge system of websites, most cut off from each other by separate back-ends and proprietary formats.

“The rest of the state’s interaction with open data kind of starts with last week on Tuesday,” Bell said.

And he wasn’t kidding.

// Read More

Unemployment Trust Fund tapped for fraction of potential relief

2276 words / VTDigger.org

Vermont legislators agreed in May to offer up to $8.67 million in refunds and discounts to businesses that laid off workers in the wake of 2011′s disastrous floods.

But only 75 employers, among the untold eligible businesses hailing from every county in the state, applied for the unemployment insurance relief. Instead of giving breaks for a “worst-case” scenario of 11,247 layoffs, the state forgave at least partial charges on just 299.

On their July 1 unemployment insurance bills, 54 businesses accepted $264,178.53 in refunds.

“Really, that’s all? Wow,” said Steve Moyer, CFO of Woodstock Farmers’ Market.

20130830_Woodstock-Farmers-MarketThe retail business benefited from the program almost two years after temporarily laying off all of its 50 employees.

Like other businesses, the company’s unemployment insurance charges — the money that feeds the trust fund from which unemployment benefits are paid — presumably had gone up because they’re based partly on employers’ history of layoffs: the more layoffs, the bigger the bill.

But on top of other flood-related repairs, the insurance hike hindered their recovery, employers argued. Lawmakers agreed to cut them some slack.

After a partial refund and with a discount on its current unemployment insurance charges, Moyer estimates the market’s costs will increase by $90,000 over the course of three years.

“We got hit very hard with that cost,” he said. Had more relief been offered, he wonders if his business would have taken such a hit.

Moyer’s reaction embodies the conundrum policymakers wrestled with when they struck a deal in May to create the state’s Unemployment Insurance Disaster Relief program. Some legislators were reluctant to give employers any relief, while others wanted to offer more.

// Read More

Federal reforms pushing flood insurance rates ever higher

1199 words / VTDigger.org

When it comes to flood insurance in Vermont, it’s federal reforms that worry Susan Donegan.

The commissioner of the Department of Financial Regulation gives an example: She heard from a Washington County resident a few days ago who faced an $8,000 premium for a year of flood insurance in a high-risk zone. The bill was sticker shock for a property owner who hadn’t resided in a risky zone before the latest flood map for Washington County was adopted in March.

But it’s not just the new designation that drove up the price — and that may drive down the home’s property value. It’s the fact that the bill reflects the property’s actual risk.

Residential flood insurance, for the most part only available from the federal government, is undergoing major changes in 2013 with the rollout of the Biggert-Watters Flood Insurance Reform Act of 2012. The congressional changes were inspired long before Tropical Storm Irene, as was the Federal Emergency Management Agency’s initiative to update the country’s flood insurance rate maps.

“You can debate global warming,” Donegan said, “but you can’t deny that we’re having more severe and more frequent severe storms.” Known as BW-12, the Biggert-Watters Act was crafted to address that reality and shore up federal flood insurance in its wake.

Donegan doesn’t argue the intention, but she’s concerned about what its drastic changes will mean for Vermont property owners.

// Read More

Public to private: State and independents struggle with school conversion

1364 words / VTDigger.org

When North Bennington turned its public school private this year, some people in the Statehouse and Agency of Education grew nervous.

What would this mean for local and state taxpayers, they wondered. For the Education Fund? For children in the district?

A moratorium and an outright ban on the same transition in other towns were floated in both the House and Senate, but ultimately lawmakers settled on a committee to study the issue further. That group met for the second time Wednesday morning. It’s off to a slow — but passionate — start.

Central to the sometimes edgy debate was all manner of access: Access to a full range of services for students with special needs, access to school choice for families and access to school records and accountability mechanisms for state officials and members of the public.

// Read More