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Final Report of the Vermont Tax Structure Commission

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Final Report of the Vermont Tax Structure Commission 2021 Final Report of the Vermont Tax Structure Commission PREPARED IN ACCORDANCE WITH ACT 11, SEC. H.17 OF THE 2018 SPECIAL LEGISLATIVE SESSION DEB BRIGHTON, STEPHEN TRENHOLM, BRAM KLEPPNER VERMONT TAX STRUCTURE COMMISSION | February 8, 2021 Table of Contents i 1. Introduction ............................................................................................................................. 1 2. Summary of Recommendations ........................................................................................... 4 Recommendation 1: Undertake Tax Incidence Analysis in Order to Eliminate Tax Burden/Benefit Cliffs ............................................................................................................ 4 Recommendation 2: Establish an Ongoing Education Tax Advisory Committee ..................... 5 Recommendation 3: Restructure the Homestead Education Tax ............................................. 5 Recommendation 4: Broaden the Sales Tax Base ..................................................................... 7 Recommendation 5: Modernize Income Tax Features ............................................................... 8 Recommendation 6: Improve Administration of Property Tax ................................................. 8 Recommendation 7: Create a Comprehensive Telecommunications Tax ................................. 9 Recommendation 8: Utilize Tax Policy to Address Climate Change ........................................10 Recommendation 9: Collaborate With Other States to Build a Fairer, More Sustainable Tax System ..................................................................................................................................10 3. Principles and Whole Tax Structure ................................................................................ 12 Introduction ...............................................................................................................................12 Sustainability ............................................................................................................................13 Sustainability and the Major Tax Types ..................................................................................14 Sustainability and Education/Property Tax .........................................................................14 Sustainability and Consumption Tax ...................................................................................15 Sustainability and Income/Estate Tax ..................................................................................15 Equity ........................................................................................................................................16 Equity and the Major Tax Types ..............................................................................................17 Equity and Education/Property Tax .....................................................................................17 Equity and Consumption Tax ...............................................................................................18 Equity and Income Tax .........................................................................................................18 Equity and Estate Tax ...........................................................................................................19 Appropriateness ........................................................................................................................20 Appropriateness and the Major Tax Types ...............................................................................21 Appropriateness and Education/Property Tax .....................................................................21 Appropriateness and Consumption Tax................................................................................21 Appropriateness and Income Tax..........................................................................................22 Appropriateness and Estate Tax ...........................................................................................22 Taxing Bads Not Goods .............................................................................................................23 4. Income, Assets, and the Ability to Pay ............................................................................. 24 Income ........................................................................................................................................24 Assets .........................................................................................................................................26 5. Analysis and Restructuring of the Overall Tax and Transfer System ....................... 33 The Importance of Childcare .....................................................................................................36 Protecting Low-income Vermonters From a Broader Sales Tax ..............................................36 6. Education Tax Reform ......................................................................................................... 38 Introduction ...............................................................................................................................38 Background ................................................................................................................................38 Issues .........................................................................................................................................41 Complexity .............................................................................................................................41 Equity ....................................................................................................................................42 Volatility ................................................................................................................................48 Cost Control ...........................................................................................................................50 What the Education Fund Should Pay For ...........................................................................51 Renters ...................................................................................................................................52 Ongoing Oversight .................................................................................................................52 Property Tax Administration ................................................................................................53 Recommended Structural Change to the Homestead Tax .......................................................54 Recommended Structural Change to the Homestead Education Property Tax ...................55 7. Consumption Tax Reform ................................................................................................... 58 Introduction ...............................................................................................................................58 Value-Added Taxes, Transaction Taxes, and Gross Receipts Taxes: Three Things We Do NOT Recommend .................................................................................................................59 The Effects of Adding, Increasing, Removing, or Decreasing the Sales Tax ...........................61 Why Are There Exemptions to and Exclusions From the Sales Tax in Vermont? ..................62 Are Sales Tax Exemptions an Efficient Way to Protect Low-Income Vermonters? ................63 Are Sales Tax Exemptions an Effective Way to Promote Community Goods? ........................66 Does the Exclusion of Services From the Sales Tax Still Make Sense? ...................................68 The Human Hurdles to Expanding the Sales Tax to New Goods and Services .......................69 Applying the Sales Tax to Health Care ....................................................................................70 Further Considerations on Expanding the Sales Tax Base .....................................................72 If Vermont Expands the Tax Base, What Should the Legislature Do With the Money? ........77 Meals Tax ..................................................................................................................................81 Rooms Tax .................................................................................................................................81 Excise Taxes ..............................................................................................................................82 ii | P a g e Table of Contents Conclusion .................................................................................................................................83 8. Health Care, Provider Taxes, the Insurance Premium Tax, and Health Insurance Claims Assessments ............................................................................................................ 84 Do the Current Categorical Exemptions From the Provider Tax Increase Vermonters’, and Particularly Low-Income Vermonters’, Access to Health Care? .........................................85 Are There Undue Complexities in Extending the Provider Tax to All Provider Categories? .86 9. Income Tax Reform .............................................................................................................. 91 Personal Income Tax .................................................................................................................91
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