Tax Reform Agrees With VermontThat

❖

The Vermont Fair Tax Coalition Friends of the Earth

Vermont Businesses for Social Responsibility - Research and Education Foundation

Vermont Natural Resources Council

Vermont Public Interest Research Group

November 2005

Tax Reform That Agrees With Vermont ❖

Written by Brenda Hausauer

for The Vermont Fair Tax Coalition ❖

November 2005

The Vermont Fair Tax Coalition with assistance on the second edition from Gary Flomenhoft and his students in the “Green Taxes and Public Finance in Vermont” class, University of Vermont, Fall 2004; Evangelos Germeles; Stephen Holmes, Vermont Natural Resources Council; Andrew Hudson, Vermont Public Interest Research Group; Scudder Parker, Vermont Businesses for Social Responsibility

This report is available on the Internet at www.vnrc.org. Related The Coalition explores and promotes reforms that eliminate information from the class that assisted in the re-writing of this subsidies for environmentally destructive activities, reduce report, including spreadsheets of all the tax revenues and a vision regressive and distorting taxes, and increase taxes on pollution of how Vermont could shift all its taxes, is available at www.uvm. and waste. edu/~gflomenh/GRN-TAX-VT-PA395. This report was made possible by the generous support of the The Vermont Fair Tax Coalition was founded in 1998 by Friends of Merck Family Fund. The first edition of this report was also the Earth, Vermont Businesses for Social Responsibility - Research made possible by W. Alton Jones Foundation, Energy Foundation, and Education Foundation, the Vermont Natural Resources Council, Nathan Cummings Foundation, the Rockefeller Family Fund, and and the Vermont Public Interest Research Group, who joined the Surdna Foundation. together to focus on reforms to the Vermont tax system to encourage a stronger economy, fairer tax system, and healthier environment. First edition printed March 1999; second printing January 2000; The Coalition believes that the concept of tax shifting is an second edition November 2005. important tool in promoting a vigorous, fairer, and environmentally sustainable economy. Printed on 100% post-consumer recycled paper Tax Reform That Agrees With Vermont

Table of Contents

Executive Summary...... 3 Performance Based Regulation Option...... 32 Product Efficiency Feebate...... 32 I. The Tax Shifting Concept Tax Credit Options...... 33 Taxes and Essential Services...... 8 Nuclear Waste Tax...... 33 Taxes as Public Policy Instruments...... 8 The Tax Shifting Concept...... 9 Where to Start ...... 35 A More Efficient Economy ...... 9 A Healthier Environment ...... 10 III. An Inventory of Vermont’s A Fairer Tax System...... 10 Environmental Taxes, Fees, and Incentives A More Efficient Tax System ...... 11 How to Start a Tax Shift ...... 11 Energy-Related Taxes and Fees...... 36 Fuel Gross Receipts Tax...... 36 II. Tax Shifting Options for Vermont Heating Oil Tax ...... 37 Electric Energy Tax...... 37 Taxes to Reduce or Eliminate...... 13 Utilities Gross Receipts Tax ...... 37 Property Tax...... 13 Sales Tax on Commercial Energy Use...... 38 Sales Tax...... 14 Motor Fuel Taxes and Fees ...... 38 Personal Income Tax ...... 15 Motor Vehicle Purchase and Use Tax ...... 39 Payroll Tax ...... 15 Motor Vehicle Registration Fees...... 39

Taxes to Create or Increase ...... 16 Air and Water Pollution Taxes and Fees...... 40 Energy and Air Pollution...... 16 Air Contaminant Emissions Fee...... 40 Motor Fuel Tax ...... 17 Water Discharge Fee...... 40 Motor Vehicle Feebate ...... 18 Stormwater Fee...... 40 Sales Tax on Fuel...... 21 Carbon Tax ...... 22 Waste Taxes, Fees, and Incentives ...... 41 Water Pollution ...... 25 Solid Waste Tax ...... 41 Pesticide and Fertilizer Tax...... 25 Hazardous Waste Tax...... Solid Waste...... 27 Deposit/Refund for Beverage Containers. . . . . 41 Solid Waste Tax/Variable Pricing Program. . . .27 Petroleum Cleanup Fee and Deposit/Refund Program for Tank Assessment Fee...... 41 Beverage Containers...... 28 Land Use ...... 29 Land-Related Taxes, Fees, and Incentives ...... 42 Land Value Tax...... 29 Use Value Appraisal (Current Use) for Energy Efficiency...... 31 Agricultural and Forest Land ...... 42 The Energy Efficiency Utility/ Capital Gains Tax on Speculative Land Sales. 43 Societal Benefits Charge...... 31 Property Transfer Tax...... 43 Transmission and Distribution Least Cost Planning Option ...... 32 Endnotes ...... 44

 Tax Reform That Agrees With Vermont

Executive Summary The Tax Shifting Concept

he topic of taxes has the power to simplify the tax code. Examples include produce blank stares and yawns, as well creating a ‘flat tax’ on income, or relying A tax shift can T as impassioned emotions, complaints, more heavily on sales taxes to raise necessary be designed and arguments. Many individuals and revenues. These proposals are regressive tax to strengthen businesses believe taxes are too high and too shifts, rather than progressive ones. Flattening complicated, and that nothing can be done the income tax would disproportionately the economy, to change them. But there’s a good reason to benefit the wealthiest wage-earners, while clean up the overcome the boredom, set aside preconceived low-income Vermonters would be squeezed environment, ideas, and reconsider just how taxes work and from two ends: paying higher taxes (presuming make our tax how they could work better. the flat percentages was set at a median level system fairer of income) and loss of access to public services for low-income Our taxes fund many programs that we that are often their only access to health care, wage-earners, benefit from every day, including education, child care and other services. and encourage government services, and Social Security. efficient As the levels of the taxes imposed increase, While tax shifting can be applied to a investment. taxes tend to discourage the activities or variety of social needs and ills, it is the goal forms of ownership taxed. Taxes on wages of this report to discuss environmental tax discourage employment, and taxes on air shifts. This is in part because we believe the pollution discourage activities that pollute environment is a consistently undervalued the air. But some activities are worth economic resource. It is also in part because discouraging more than others. Federal, state, shifting taxes from production to pollution is and local governments raise most revenue an effective and elegant way to keep business through a combination of income, property, costs low while encouraging behavior that sales, and payroll taxes. These taxes can is good for society as a whole. Finally, the discourage activities most of us believe are environment in Vermont is not only an good for society, however: earning income, important resource to preserve for moral owning property, purchasing goods, and being and aesthetic reasons, but a key part of our employed. economic development strategy. Businesses and workers often settle in Vermont because Tax shifting is about reducing the burden of our beautiful scenery, working landscape of these taxes, and shifting the tax burden to and wild character. Protecting these resources activities society wants to discourage. Tax is therefore not only a sound economic and shifting is not about raising or lowering taxes environmental strategy, but also a plan for overall. Instead, it should be revenue-neutral; building our economy and job base. We it should reduce some taxes by the same therefore considered five primary factors in amount that it increases other taxes. In this looking at potential tax shifts. way, the power of taxes is used to improve the public good instead of work against it, with ◆ Economy: Does the tax discourage or lasting benefits for our economy, environment, encourage job creation, enterprise, and and all members of society. other societal benefits? Does it help to reflect the full costs of under-priced prod- This concept is inherently different than ucts? Or does it cause distorted incen- some other proposals that have sought to tives in the economy?

 Tax Reform That Agrees With Vermont

◆ Environment: Does the tax discourage some goods with large negative environmental or encourage conserving resources and impacts are exempt from the sales tax in reducing pollution? Vermont, including energy used for transpor- tation, residential, and industrial purposes, ◆ Equity: Does the tax require polluters to and pesticides and fertilizers used for farming. pay their fair share? Is the tax assessed Our sales tax also encourages people to make on people in proportion to their ability to purchases in New Hampshire, which has no pay, or does it create a greater hardship sales tax, and through mail-order catalogues. for lower-income people than for higher- income? Vermont should consider reducing its sales tax rate across the board, and exempting ◆ Efficiency: Does the tax raise up-front some additional items from the sales tax. For costs, but deliver equal or greater savings example, eliminating or reducing the tax in later on? Or better, can the tax encourage designated downtowns and village centers, and investment in sustainable systems while possibly in growth centers depending on how discouraging waste? they are defined, would give a boost to the state’s fragile downtown economies and spur ◆ Alternatives: Does the tax directly commerce in appropriate locations. The state or indirectly help support alternative also should consider removing the sales tax approaches to solving environmental exemption on energy use, and pesticides and problems? fertilizer used for farming.

Personal Income Tax Taxes to Reduce or Eliminate Personal income taxes are more progressive than many other types of taxes, but they still Property Tax place a substantial relative burden on low- Vermont’s high property taxes have income wage-earners. A significant number a number of disadvantages. First, they of families in Vermont earn less than a increase the costs of home ownership and livable wage, and these families should not rental housing. Second, they are only partly be required to give up part of their earnings based on peoples’ ability to pay, requiring to income taxes. In addition, income taxes low- and middle-income families to pay a make it more difficult for other families with proportionately larger part of their income low- and middle-incomes to make ends meet. on property taxes. Finally, a significant These families already pay property, sales, portion of Vermont’s property taxes fund road payroll, and federal income taxes, and need the construction and maintenance, inappropriately remainder of their paychecks to purchase basic embedding some of the costs of vehicle use necessities. into land ownership. Vermont should consider eliminating Vermont’s property tax is a good candidate personal income taxes for people earning less for a tax reduction, in conjunction with than a livable wage, reducing them substan- expanded rebates to renters and low and tially for other low-income and middle-income moderate income-earners. In addition, wage-earners, and expanding the Earned Vermont should consider eliminating the Income Tax Credit that benefits low-income portion of property taxes that funds road wage-earners. construction and maintenance. Payroll Tax Sales Tax Payroll taxes are collected by the federal Sales taxes also produce some problems. and state government, and include Social People with lower incomes pay a much larger Security, Medicare, and unemployment proportion of their income in sales taxes than insurance. Workers pay 7.65% of their higher-income wage-earners. In addition, paychecks for Social Security and Medicare,

 Tax Reform That Agrees With Vermont

and employers must match these payments have poor fuel economy ratings and give and pay for unemployment insurance. And, a rebate for new car purchases that have the Vermonters who are self-employed pay good fuel economy ratings. 15.3% of their wages in payroll taxes. Sales Tax on Fuel Payroll taxes have a number of ◆ Place a sales tax of 6% on gasoline disadvantages. They increase labor costs, and fuels used for residential purposes. which discourages businesses from hiring new Continue to exempt fuels in the indus- employees. They are also very regressive; trial and farming sectors from the sales Social Security taxes are collected only on tax. With the money raised, reduce the the first $90,000 of wages, ensuring that low- property tax; expand the renters’ rebate; income and middle-income wage-earners pay a and contribute additional funds to the larger portion of their salaries in payroll taxes Low Income Heating Energy Assistance than those who earn the most. Program and the Weatherization Assistance Fund. Payroll taxes paid by businesses could be reduced in order to encourage businesses to Carbon Tax create more jobs. Payroll taxes are collected ◆ Assess a carbon tax on fossil fuels used by the federal government, but Vermont in Vermont, exempting fuels used in the could simulate a payroll tax reduction by industrial and farm sectors and wood offering businesses a credit on their state energy use. Eliminate the current gaso- corporate taxes in proportion to the amount line tax, diesel tax, sales tax on commer- of annual payroll taxes they paid. As with the cial energy, utilities gross receipts tax, income tax, payroll taxes paid by employees and fuel gross receipts tax. Return the could be eliminated completely for people remaining revenues to the residential and earning less than a livable wage. At the same commercial sectors, and provide funding time, the Social Security tax exemption for for public transportation and alternative money earned after the first $90,000 could be and low-emission vehicles. eliminated. Pesticide and Fertilizer Tax Taxes to Increase or Create ◆ Introduce a system of pesticide and fer- tilizer taxes in the state over a period of Taxes can work for us rather than against several years. Continue the initiative us. They can strengthen our economy and started in 2002 with the removal of the clean up our environment. And, they can do sales tax exemption on non-agricultural so equitably for those who pollute, for those uses of pesticides and fertilizers. As a who don’t, and for our lower-income citizens. next step, remove Vermont’s 6% sales The following options are examples of taxes tax exemption on pesticides and fertil- that Vermont could institute or increase, izers used for farming. At the same time, while decreasing some of the taxes described provide tax credits to farmers, and finan- above, to keep the tax shift revenue-neutral. cial subsidies and technical assistance to help farmers move toward low-impact Motor Fuel Tax and organic farming. ◆ Place an additional tax on motor fuels of 4 or 5 cents per gallon, and use the rev- Solid Waste Tax / Variable Pricing enue to create stable funding for public Program transit, reduce property taxes, and expand ◆ Increase the solid waste tax to provide a the renters’ rebate. stronger incentive to reduce waste. At the same time, require municipalities Motor Vehicle Feebate and waste haulers to institute pay-as- ◆ Assess a fee on new car purchases that you-throw pricing for residential custom-

 Tax Reform That Agrees With Vermont

ers, in which customers pay based on the damaging and unfair tax exemption. While amount of trash they discard. Provide these shifts represent steps in the right revenues to subsidize recycling, compost- direction, there is much more that can be ing, and other programs that help people done to significantly reduce energy use and reduce waste. pollution, protect the environment, and distribute taxes more fairly. Bottle Bill for Beverage Containers ◆ Expand Vermont’s current deposit/refund There are a multitude of good options for program to cover all non-carbonated additional tax shifts in Vermont. A few are beverage containers, increase the deposit outlined above, and there are many other amount to 10 cents per bottle, and con- possibilities. In any form, a tax shift works by sider instituting similar programs on decreasing some taxes, while increasing others other types of standard food packages. in a revenue-neutral manner.

Land Value Tax Options that decrease property taxes would ◆ Pass state legislation that would enable be highly visible and would have widespread cities and towns in Vermont to use land appeal and benefits. Sales tax reductions value taxation in their downtown cores are attractive, but not as visible as reduced if they choose. Allow cities to determine property taxes. Reducing payroll taxes paid the proportion of the property tax that by businesses is a very advantageous option, will be raised from land values and the because it would encourage job creation and proportion raised from buildings and wage increases, and improve progressivity. improvements. Finally, options that eliminate or reduce personal income taxes for Vermonters with Where to Start low and middle incomes are an excellent way to compensate for the regressive nature of our Vermont has already undertaken some tax system. small but noteworthy tax shifts and related programs. In 1997, the state shifted a portion Increasing taxes on energy use would have of education funding from Vermont’s high the biggest impact on improving economic property tax to a collection of other taxes, efficiency and human and environmental including the gasoline tax and the motor health in Vermont. Other taxes, such as those vehicle purchase and use tax. (Changes in related to solid waste disposal, are attractive 2004 removed the gasoline tax contribution because they are manageable, predictable, and to education but enlarged the motor vehicle there is widespread experience with them. purchase and use tax’s contribution.) In 1999 Whatever the form of Vermont’s next tax shift, the Vermont Legislature and the Department it should be sensibly sized, easy to understand, of Public Service had the foresight to create an easy to administer, highly visible, and very innovative program for delivering efficiency beneficial for Vermont. services to all Vermonters called Efficiency Vermont (EVT). EVT is the nation’s first Tax shifting is a smart way to harness the energy efficiency utility; funded by a societal power of the economy to work for us rather benefits charge, the program’s sole mission is than against us. If we do it wisely, tax shifts to lower the electricity bills of Vermonters. will strengthen our economy, make our The societal benefits charge shifts costs from environment more beautiful and healthy, more expensive electric power generation preserve our social goods, and keep taxes fair to cheaper efficiency improvements. Also and efficient for all Vermonters. in 2002 the Legislature eliminated the sales tax exemption on pesticides and fertilizers for non-farmers, ending an environmentally

 Tax Reform That Agrees With Vermont

increased are outlined. These include energy, The chapters ahead include the following air pollution, water pollution, waste, and land information: use taxes. A brief conclusion describing some ways to get started with tax shifting closes out Chapter 1: The Tax Shifting Concept the chapter. Chapter 1 gives a brief introduction to tax shifting, how it relates to broader tax policy, Chapter 3: An Inventory of Vermont’s and how it can benefit the economy, the Environmental Taxes, Fees, and environment, and all members of society. Incentives Chapter 3 summarizes Vermont’s current Chapter 2: Tax Shifting Options for environmental taxes, fees, and incentives, Vermont including taxes related to energy, air and water Chapter 2 outlines a number of tax shifting pollution, waste, and land use. The summary options for Vermont. First, taxes that could be of each tax includes a brief description of the reduced or eliminated are discussed, including tax, an explanation of how the tax revenue is property, sales, personal income, and payroll used, and a list of the revenue collected from taxes. Second, taxes that could be created or the tax between 2000 and 2004.

 Tax Reform That Agrees With Vermont

Chapter 1

The Tax Shifting Concept

Taxes and essential services • Taxes should be (in general) as adminis- tratively simple and enforceable as pos- t its best, taxation is the way sible. governments fund the creation of • Taxes should be levied in a manner that A“public goods and essential services.” is attuned to, but not controlled by, “bor- der” and “competitive” effects. In other Taxation’s purpose is to provide fair and words, a very high tax on one form of consistent revenues for critical investments transaction or wealth in Vermont could like: public education, safety and protection, change behavior because we are a small transportation, public infrastructure, and state, and business could migrate to other the other services we count on to create states. opportunity, health, and the societal • In some instances, taxes can be designed framework in which we live, work and to fund “special purpose” functions. A conduct our business. tax, often related to purchase or use, is directed to establish a special “fund” Taxation should serve a government that is related to that area of activity. For committed to creating the structures that give example, in Vermont we have created people opportunity, preserve their rights, and special funds for Fish and Wildlife, petro- protect the health of our communities and the leum cleanup, Weatherization funding, environment. Housing and Conservation, and many others. These special funds are some- The design of a tax policy that supports times criticized for fragmenting the over- these purposes needs to have the following all taxing and appropriations effort. On essential features: the other hand, they have been very suc- cessful in consistently funding valuable • Taxes should be “fair.” Taken together, public benefits. they should reflect the ability of those taxed to pay. All taxes may not be “pro- Taxes as public policy gressive,” but overall the tax burden instruments should generally correlate to the resourc- es available of those taxed. Whether we like it or not the ability • Taxes should, in general, be levied at to tax becomes intertwined with govern- moderate rates on all the various forms mental policy in many ways. Tax policy is of wealth. If this does not happen, tax constantly used as a policy tool to “promote” policy tends to create incentives for or “discourage” various forms of activity. wealth to “migrate” to the non-taxed Depletion allowances for oil and gas drilling, forms of wealth. tax credits for business investment, deduct- • Taxes should be balanced and stable to ibility for home mortgage interest expense, provide secure funding of essential ser- sales tax exemptions for thirty-plus kinds vices so that changes in the economy are of transactions in Vermont and literally moderated, and there is relative consis- thousands of other tax policy incentives tency in funding. pervade our tax law. At the Federal level,

 Tax Reform That Agrees With Vermont

tax cuts in the personal and corporate income A tax shift can be accomplished in a number taxes have seriously distorted our tax system of ways. To encourage socially beneficial away from the principles of tax fairness and activities, we can start by reducing or lessening moderate taxation of wealth in all its forms. the regressivity of property, sales, personal income, and payroll taxes. Or, we can use the Some of these “policy features” of our tax revenue from new taxes to offer incentives for law may be consistent with the broad public socially beneficial activities. For example, we interest; some are not. When we talk about can give people rebates for purchasing energy- tax policy, we may want to start with the efficient products and saving energy, or we relatively clear principles outlined in this can offer farm and forest landowners lower chapter, but when we look at our tax code, we property taxes for preserving our rural working find hundreds of exceptions. We need to be landscape. Tax credits, tax exemptions, aware of these exceptions as we discuss the rebates, and other incentives are all useful concept of “tax shifting.” tools. Our current federal and The Tax Shifting Concept At the same time, we can discourage state tax socially harmful activities by taxing or placing systems raise The concept of “tax shifting” is an attempt fees on activities that harm the public good. most revenue to bring some consistency to the widespread For example, we can tax toxic air emissions, through a practice of using taxes to shape public policy. polluting water discharges, and the generation combination Tax shifting strategies may be designed to of solid and hazardous waste. We can protect of income, overcome some of the distortions that have finite natural resources, such as our drinking property, sales, found their way into the tax system, or they water supply, by placing a tax on its use. may draw on some of the successful experience and payroll with creating “special purpose” taxes and Such tax shifts will re-orient the way we taxes. These funds. produce and consume goods. The power taxes, however, of taxes can be used to improve the public effectively Taxes tend to discourage the activities that good instead of work against it, with lasting discourage are taxed. For example, taxes on wages, if benefits for our economy, environment, and all activities most excessive, discourage employment. Taxes on members of society. of us believe air pollution discourage activities that pollute are good for the air. But clearly some activities are worth A More Efficient Economy society. discouraging more than others. Our current federal and state tax systems raise most Tax shifts can increase the efficiency of our revenue through a combination of income, economy in a number of ways. Currently, property, sales, and payroll taxes. These taxes, many of our taxes and the design of many however, if not in balance, can discourage of our fee and rate structures have distorting activities most of us believe are good for impacts. For example, utility rates used to be society. Meanwhile, most of the taxes we designed to promote increased consumption. place on activities we do want to discourage The so-called “declining block rates” were raise painfully little revenue and have only a supposed to provide a benefit to large users. modest impact. Instead they tended to reward wasteful consumption and promote inefficiency—while Tax shifting strategies consider reducing ignoring the costs (to the utility system and taxes on activities society wants to encourage, the environment) of increased usage and while placing taxes instead on the activities we pollution. want to discourage. Tax shifting is not about raising taxes overall. The government still Another distortion in our economy results would collect the same amount of revenue, but from the fact that many goods are under- revenues would come from taxes on activities priced in the marketplace - their prices do not we want to reduce. include all the social and environmental costs of their production, use, and disposal. For

 Tax Reform That Agrees With Vermont

example, the price of gasoline doesn’t include benefit through lower taxes. In addition, the costs of human health problems resulting cleaner technologies would be relatively less from gasoline’s polluting air emissions, the expensive. costs of maintaining a military presence in the Middle East to protect oil interests, or A Fairer Tax System even the full costs of maintaining our road system. If the full costs were included in the When polluters pay for their polluting price of gasoline, more consumers would make activities through taxes or other means, fuel-efficient choices - some would purchase individuals who don’t pollute are treated fuel-efficient cars, carpool more often, and fairly. But currently, society or certain live closer to their places of work. Economic individuals effectively subsidize many of efficiency would improve because consumers polluters’ activities. For example, when waste and manufacturers would make choices based haulers charge the same monthly rate for all on price signals that more accurately reflect residential customers, the people who generate reality. A tax shift is an excellent way to start small amounts of garbage pay the same as …today’s including the real costs of under-priced goods those who generate large amounts. A tax shift problems are into prices. could make polluters pay their fair share for increasingly their polluting activities, resulting in a more caused by the A Healthier Environment just society for everyone. cumulative impact of the Many of our everyday activities have In addition, tax shifting gives more far-reaching, yet subtle impacts on the control to individuals and businesses to small-scale environment. For example, commuting to make decisions that can reduce their taxes. activities of work, as many Vermonters do, adds more Pollution limits, regulations, and other everyone. Tax carbon dioxide to the atmosphere, hastening restrictions can be successful in reducing shifting is an global climate change; adds more toxic pollution and resource use, but these methods ideal way to fumes to the air, worsening respiratory are often inflexible. Taxing pollution and address this problems and compromising the health of resource use allows individuals and businesses trend. some ecosystems; adds more oil to the roads, to make their own decisions about when which eventually runs off into groundwater; reductions in the taxed activities are cost- and depletes more of our finite oil resource. effective. In and of themselves, most of our everyday activities have insignificant impacts - but the Many of our current taxes impact low- cumulative impact of many people doing the income wage-earners to a greater degree than same thing is a different story. While many Vermonters with high-incomes. For example, of the biggest environmental problems in the Vermont sales tax requires people with the past were caused by a few big polluters, low-incomes to pay a greater percentage of today’s problems are increasingly caused by their income for each product purchased the cumulative impact of the small-scale compared to people with high-incomes. Some activities of everyone. proposed tax shifts continue this unfair trend, while others provide ways to lessen the impact Tax shifting is an ideal way to address this for low-income wage-earners. If done wisely, trend. Tax shifting benefits the environment tax shifting can make our tax system fairer for by placing substantial taxes, not token taxes, Vermonters with low incomes. on pollution and resource depletion. As outlined above, the taxes would serve to In a similar vein, concerns over the balance correct the failure of the market to include of the total tax system, and the competitive environmental and social costs into prices. disadvantages of extreme tax shifts should The result of such taxes is that wasteful and inform the design of specific tax shift policies. polluting businesses and individuals work harder to reduce pollution, save energy, and Tax shifts of some forms will be more conserve resources because they get a direct effective at the national level than at the

10 Tax Reform That Agrees With Vermont

local or state level. But there are still many makes modern life possible, but it should also effective strategies that can implement the be aware that it is often such investments goals of societal least cost through tax policy. that contribute to other “problems” that government is asked to address later through One effective strategy that has been used its ability to tax and spend. For example, our in Vermont is to levy a very small tax that government has created a unique highway avoids creating competitive disadvantage transportation system in this country, but problems, and use it to fund an alternative that system is also one of the major sources that directly benefits consumers. The 0.5 of pollution and greenhouse gas emissions -- a Our small percent tax on domestic fossil fuels funds problem on which government is expected to scale, our the weatherization program that makes spend a growing portion of its resources. tradition of low-income Vermont homes more energy- independence efficient. Progressivity is enhanced because LCIP is a tool for analyzing current tax and bills are dramatically reduced for the poorest and expenditure policies to see if there is a innovation, Vermonters; competitive disadvantage is way to promote alternatives that will provide and our history avoided because the tax is so small; and yet effective options at lower total public, private, least cost principles are implemented because and environmental costs. Tax shifting is an of preserving an effective capacity to provide efficiency effective option for implementing least cost environmental to low income Vermonters is enhanced. strategies. With tax shifting, taxing activities and social Environmental benefits are provided because society wants to discourage can reduce the goods make fuel consumption is significantly reduced. underlying destructive activity and either fund Vermont the The economy is strengthened because fewer the remediation or reduce other tax burdens. perfect place dollars flow out of state; and the demand for to begin a tax public subsidies for winter heating is at least The principles of tax shifting can also shift. stabilized if not reduced. be applied to the design of fees and rates for various special purpose funds, and for A More Efficient Tax System important sectors of the economy such as solid waste disposal and the structure of utility Tax shifting is a way to make our tax rates and charges. Tax shifting principles, in system more efficient. The tax shifting coordination with the principles of LCIP can concept is based on the principle that “societal be effectively applied to these portions of the least cost analysis” (or “Least Cost Integrated economy as well. Planning;” LCIP) should inform government taxing and spending policy. LCIP was used starting in the 1980s as a way to analyze How to Start a Tax Shift the total “costs” of providing electricity (for instance, a huge new nuclear plant) compared Tax shifting is not a new idea. Several to other options (efficiency and smaller- European countries, including Germany, scale distributed generation). LCIP proposed Sweden, the Netherlands, Spain, and others, that alternatives should be compared over have undertaken tax shifts on a large scale their full “life-cycle” (the duration of the already. But North America has not yet project, and the costs during its lifetime); that followed that trend. Tax shifts in the U.S. environmental costs and benefits should be have only occurred on a very small scale. considered; and that total costs to all parties (not just the utility or the consumer) should be Vermont places various taxes and fees accounted for. on environmentally and socially harmful activities, as Chapter 3 illustrates. Most of LCIP is a way of thinking about the major these taxes are modest. However, a small tax costs and investments in modern society shift occurred in Vermont in 1997. The state that is uniquely appropriate to government. shifted a portion of education funding from Government should be funding and supporting Vermont’s high property tax to a collection of investment in the basic infrastructure that other taxes, including the gasoline tax and the

11 Tax Reform That Agrees With Vermont

motor vehicle purchase and use tax. (Changes 2002 eliminated the sales tax exemption on in 2004 removed the gasoline tax contribution pesticides and fertilizers for non-farmers, to education but enlarged the motor vehicle ending an environmentally damaging and purchase and use tax’s contribution.) In 1999 unfair tax exemption. While these shifts the Vermont Legislature and the DPS had the represent steps in the right direction, they foresight to create an innovative program for are not enough by themselves to significantly delivering efficiency services to all Vermonters reduce energy use and air and water pollution. called Efficiency Vermont (EVT). EVT is the nation’s first energy efficiency utility; funded Nonetheless, Vermont has many of the by a societal benefits charge the program’s building blocks in place for a larger tax sole mission is to lower the electricity bills shift. As Chapter 2 illustrates, Vermont of Vermonters. The program has gone on could improve or enlarge some of our tax to win awards from the Kennedy School of mechanisms that already exist, add a few Government and is now emulated by other more, and decrease the taxes that benefit state programs in the northeast and nation- society to move toward a significant tax shift. wide. Most recently, in 2005 the legislature Our small scale, our tradition of independence voted to remove the cap on EVT’s funding, and innovation, and our history of preserving paving the way for the program to continue environmental and social goods make Vermont providing services at an increased, or at least the perfect place to begin a tax shift. proportional, rate. Also the Legislature in

12 Tax Reform That Agrees With Vermont

Chapter 2 Tax Shifting Options for Vermont

n order to undertake a tax shift in Vermont, approaches to solving environmental we must reduce some taxes, while raising problems? Vermont Iothers, all in a revenue-neutral manner. historically There are some taxes that work against us Using these criteria, we can see that has raised by distorting economic efficiency, polluting property taxes, sales taxes, personal income a greater the environment, wasting natural resources, taxes, and payroll taxes work against our goals unfairly taxing some sectors of society, or and would be good candidates to reduce or percentage of allowing inefficiency. Other taxes could help eliminate. At the same time, energy taxes, air state and local us by doing the opposite. and water pollution taxes, waste taxes, some taxes through land use taxes, and energy efficiency measures property taxes We can evaluate whether a tax is one we could be increased or created. Vermont could than the rest of need or don’t need by asking the following craft many different types of tax shifts by the nation. questions about it. combining tax reductions with corresponding tax increases on any of the above-mentioned • Economy: Does the tax discourage or taxes. The following sections explore these encourage job creation, enterprise, and ideas. other societal benefits? Does it help to reflect the full costs of under-priced prod- Taxes To Reduce or Eliminate ucts? Or does the tax cause distorted incentives in the economy? Some taxes work against social goals. Property taxes, for example, may have worked • Environment: Does the tax discourage well centuries ago, when most of the people or encourage conserving resources and who owned property were wealthy and could reducing pollution? more easily afford to pay taxes. However, property taxes, like some other taxes described • Equity: Does the tax require polluters to below, have become outdated, and need to be pay their fair share? Is the tax assessed re-examined and revised to better promote on people in proportion to their ability to social goals. pay, or does it create a greater hardship for lower-income people than for higher- Property Tax income people? Vermont historically has raised a greater • Efficiency: Does the tax raise the up- percentage of state and local taxes through front cost, but deliver savings through property taxes than the rest of the nation. efficiency later on? Or better, can the In 2004, Vermont raised $998 million tax encourage investment in local and through property taxes to fund schools, sustainable systems while discouraging local government services, and local road 1 waste? construction and maintenance . By comparison, Vermont raised $896 million the • Alternatives: Does the tax directly same year through personal and corporate or indirectly help support alternative income taxes, sales and use taxes, meals

13 Tax Reform That Agrees With Vermont

and rooms taxes, cigarette taxes, and all the pesticides and fertilizers used for farming, other taxes that go into the state’s general recycled construction materials, manufacturing fund2. Relying on property taxes to fund machinery and equipment, prescription and such a substantial portion of the government’s non-prescription drugs and medications, and activities has caused repeated calls for property others. tax reform. The sales tax produces a number of Vermont’s high property taxes work against problems and distorting influences. Sales us in several ways. They increase the costs taxes stunt economic activity, and people with of home ownership and rental housing. In lower incomes pay a much larger proportion addition, property taxes are not primarily of their income in sales taxes than people with based on peoples’ ability to pay. The method higher incomes. Removing the sales tax on of collecting property taxes earmarked for specific items could work toward certain social Vermont statewide education now is more income- goals. For example, removing the sales tax on exempts many sensitive as a result of reforms to education items sold in downtown centers could help items from funding. But, even with the reforms in place, preserve the economic activity in Vermont’s the sales tax, families with low and middle incomes pay a historic downtowns, and provide an incentive including proportionately larger part of their income on for businesses to refurbish existing structures energy used property taxes than higher-income families. instead of encouraging sprawl through the for residential This makes home ownership difficult for low- construction of new malls and large retail and industrial income wage-earners, some retired people, and stores outside our existing downtowns. purposes, those whose incomes decline over time. gasoline and In addition, some goods with large, negative diesel, food, Most of our property taxes fund education environmental impacts are exempt from the agricultural and local government services, but some of sales tax in Vermont, including pesticides and feed and seed, the taxes fund local road construction and fertilizers used for farming, and energy used maintenance. If driving-related costs such for transportation, residential, and industrial pesticides and as road construction and maintenance were purposes. While much of the energy used fertilizers used entirely funded through motor fuel taxes for transportation and residential purposes is for farming, instead of property taxes, drivers would get a necessity for everyone, exempting energy recycled more accurate price signals about the full costs from the sales tax makes an environmentally construction of driving. harmful product relatively cheap. This, in materials, turn, causes people to use more energy than manufacturing Vermont should consider substantially they otherwise would. Instead of exempting machinery and reducing property taxes, while expanding environmentally harmful but necessary items equipment, rebates to renters and removing the portion from the sales tax, it is wiser to apply the prescription of property taxes that fund road construction standard sales tax rate to these items and, to and non- and maintenance. In addition, Vermont’s maintain fairness, assist low-income wage- prescription downtowns could benefit from changing the earners with paying the tax. For example, drugs and current property tax to a land value tax (see rebates or special programs (such as the Land Value Tax section below). Weatherization Assistance Program) can be medications, offered to low-income wage-earners. Or, and others. Sales Tax more sustainable energy systems such as wood heating can be offered to low-income Vermont’s 6% sales and use tax raised about wage-earners at a dramatically discounted $256 million in 2004, accounting for about cost. Or, a sales tax exemption could be 29% of the state’s general fund revenues. placed on an initial, fixed amount of energy Local options taxes raised $5.5 million in used by each Vermonter to ensure everyone 3 2004 . Vermont exempts many items from has access to a basic amount of “necessary” the sales tax, including energy used for energy. This amount of tax-free fuel could be residential and industrial purposes, gasoline set quite high initially and gradually ramped and diesel, food, agricultural feed and seed, down to encourage continuing investments in

14 Tax Reform That Agrees With Vermont

efficiency. income tax for the 52% of Vermont income tax filers who report income less than $30,000 Vermont’s sales tax also encourages people would cost the state only $20 million. to purchase products in New Hampshire, Eliminating the tax for the 71% of filers who which has no sales tax, and through catalogues. earn less than $50,000 would cost about $72 Although Vermonters technically are required million (both using 2002 figures)5. Replacing to pay our tax on items bought in other states, this revenue could be made up with increases in practice the tax usually is not paid. in energy or other taxes.

Vermont should consider reducing its sales Payroll Tax tax rate and eliminating the tax completely on necessity items that do not cause large Payroll taxes are taxes paid by individuals negative environmental impacts. Energy, and businesses to the federal and state Studies have pesticides and fertilizers used for farming, and governments for Social Security, Medicare, other items with large environmental impacts and unemployment insurance. Employees pay found that a should not be exempted from the sales tax. 7.65% of their paychecks for Social Security significant and Medicare, and employers must match number of Personal Income Tax these payments and pay for unemployment families in insurance. And, the Vermonters who are self- Vermont earn Vermont raised $430 million from personal employed pay both the employee and employer less than a income taxes in 2004, providing 48% of the portions of the tax (15.3% of their wages)6. livable wage. state’s general fund revenues4. During the past several decades, Congress has legislated a fundamental shift from income While personal income taxes are more taxes to payroll taxes. Payroll taxes accounted progressive than many other types of taxes, for 12 percent of total federal revenues in 1960, they still place a substantial relative burden on and in 2000 they accounted for 33 percent7. Vermonters with low incomes. Studies have found that a significant number of families in Payroll taxes have a number of Vermont earn less than a livable wage. These disadvantages. They increase labor costs, Vermonters, who don’t earn enough to meet which discourage businesses from hiring new their families’ basic needs, should not be employees. They are regressive, and hit low- required to give up even more of their earnings income wage-earners, self-employed workers, to income taxes. and small businesses especially hard. For example, a person earning $15,000 in wages Personal income taxes also make it more has little or no income tax liability, but pays difficult for families with low and middle $1,147 in Social Security and Medicare taxes, incomes to make ends meet. Many families an amount matched by the employer. If self- find it necessary to have two wage-earners, employed, the same person pays $2,295. An or one wage-earner with two jobs, in order employee who earns $30,000 and her employer to earn more than a livable wage and fulfill together pay $4,590. This tax burden is the family’s needs. These families already imposed on a wage level barely above that pay property, sales, payroll, and federal considered a livable wage in the state for an income taxes, and need the remainder of their individual, and below that for even a small paychecks to purchase basic necessities. family8.

Vermont should consider eliminating Employers pay more than one-half of the personal income taxes for people earning less payroll tax, but this tax burden ultimately is than a livable wage, reducing them substan- paid by workers in the form of lower wages tially for other low-income and middle-income and unemployment. In addition, Social wage-earners, and expanding the Earned Security taxes are collected only on the first Income Tax Credit that benefits low-income $90,000 of pay, ensuring that low-income wage-earners. Eliminating the state personal and middle-income wage-earners pay a larger

15 Tax Reform That Agrees With Vermont

portion of their salaries in payroll taxes than would reduce our energy use, and with it, the those who earn the most. negative economic and environmental impacts, they also would make those who pollute Payroll taxes paid by businesses could be most pay their fair share of the costs pollution substantially reduced to encourage businesses creates. to create more jobs and to create a more progressive tax system. Payroll taxes are Vermonters’ energy use is quite different collected by the federal government, but from that of the rest of the country. Due Vermont could simulate a payroll tax reduction partly to the rural nature of our state, we use by offering businesses a credit on their state the greatest amount of our energy for transpor- corporate income taxes in proportion to the tation purposes; close to 50% of Vermont’s amount of annual payroll taxes they paid. total energy use in 2003 was for transportation. As with the personal income tax, Vermont All residential uses of energy, including space should consider eliminating payroll taxes paid heating, water heating, lighting, and other by employees for people earning less than electrical uses accounted for about 37% of our Vermonters’ a livable wage, or sending them a refund of total energy use in 2003. The remainder of energy use is payroll taxes paid. our energy use was split between commercial and industrial sectors with commercial energy quite different 9 from that of Taxes To Create or Increase use representing the majority. About 70% of Vermont’s energy use is fueled by products the rest of Taxes can work for us rather than against derived from oil: gasoline, diesel, fuel oil, the country. us. They can strengthen our economy and and propane. The state uses relatively small Due partly clean up our environment. And, they can do amounts of natural gas and wood. Seventy to the rural so equitably for those who pollute, for those percent of Vermont’s electrical power is nature of our who don’t, and for our lower-income wage- supplied by just two sources: Vermont Yankee state, we use earners. The following options are examples of Nuclear Plant and Hydro-Quebec. Neither the greatest taxes that Vermont could institute or increase, of these sources is renewable as defined by amount of while decreasing the taxes described above, all Vermont law, but both are in significant danger our energy for in a revenue-neutral manner. of ending their power supply relationship with transportation Vermont: in 2012 Vermont Yankee’s license purposes; close Energy and Air Pollution expires and the Hydro-Quebec contracts phase to 50% of out over several years around the same time Significant energy taxes would have the Vermont’s total ending by roughly 2015. At present less than largest impact of any type of tax on cleaning 12% of our electric energy needs are produced energy use in 10 up the environment, on correcting distorting by renewable generating options. 2003 was for economic impacts, on spending less money on transportation. out-of-state fuels, on reducing pollution-related Because Vermont has a relatively small health care costs, and on making polluters industrial sector, our energy use and the pay for their polluting activities. Energy pollution that accompanies it come mostly use causes most of Vermont’s air pollution, from widely dispersed sources that are difficult including emissions that cause serious to control through traditional regulations. respiratory health problems and global climate Currently, traditional regulations attach costs change. Energy use also causes much of our to many of the larger, business-related sources water pollution, due to oil runoff into lakes, of energy use and air pollution, but not to the rivers, and groundwater. In addition, energy more widely dispersed sources. Enlarging our is one of our most under-priced commodities, energy and air pollution taxes to cover these causing significant distorting impacts on the widely dispersed sources would improve the economy. Because most of the fuel Vermont fairness of our tax system. uses is derived from oil, most of the $1.4 billion we spend annually on energy leaves the These details of our energy use show where state, resulting in an extensive drain on the our greatest opportunities lie for reducing statewide economy. Taxes on energy not only energy use and pollution. Fuels derived from

16 Tax Reform That Agrees With Vermont

oil, especially gasoline, account for most In addition to road construction and of our energy use and have very negative maintenance, there are many other costs impacts on air quality, human health and the of driving that are not included in gasoline environment. Therefore, taxes that encourage prices. For example, a substantial amount of gasoline conservation have the biggest the work of Vermont’s local police and fire potential for positive impacts in Vermont, and departments is directly related to transpor- they should be our first priority. Taxes that tation, in the form of emergency responses encourage other forms of energy conservation to vehicle accidents, vehicle fires, and traffic also should be high priorities (see the Energy and parking problems.12 But virtually none of Efficiency section later in this chapter). The the transportation-related work of local police following four tax options work toward these and fire departments is funded through motor goals. fuel taxes. Other costs not included in motor fuel prices are health costs from air pollution, Motor Fuel Tax costs to reduce the impacts of global climate change, cleanup costs from polluted runoff A motor fuel tax is an energy tax on the into Vermont’s waters, accident and noise In Vermont, consumption of motor fuels, and it is usually costs, military costs to protect foreign oil substantial measured in dollars per gallon of gasoline interests, the cost of maintaining the Strategic amounts of the or diesel. Currently, Vermont’s motor Petroleum Reserve, and lost tax revenues from revenue used fuel taxes cover only some of the costs of oil companies’ subsidies. There are on-going to build and building and maintaining roads and a very attempts to quantify the transportation costs maintain roads small portion of the environmental damage not borne directly by the users; for example, caused by driving. Raising motor fuel taxes a study of the Twin Cities, Minnesota region come from would discourage the air and water pollution found that costs of congestion, crashes, air property taxes caused by driving, and encourage carpooling, pollution, noise, fires and robberies, and and vehicle driving efficient vehicles, commuting shorter petroleum consumption in 1998 were between registration distances to work, expanding public transit use $285 to $2,000 per person.13 fees. and availability, and other environmentally beneficial measures. Vermont’s vehicle registration fees are used to pay for road construction and maintenance. Motor fuel taxes are commonly used However, registration fees represent some of by states and the federal government to the fixed costs of driving - costs that don’t raise some of the revenue needed to build vary with the number of miles driven. If these and maintain roads. However in Vermont, registration costs were reduced or eliminated, substantial amounts of the revenue used to and the revenue were raised through motor build and maintain roads come from property fuel taxes instead, we would encourage conser- taxes and vehicle registration fees. Shifting vation, efficiency, and public transportation, these revenues away from property taxes and without increasing total costs. registration fees onto a motor fuel tax would incorporate more of the true costs of driving Drivers in Vermont pay 20 cents per gallon into the prices drivers pay. of gasoline and 26 cents per gallon of diesel in state motor fuel taxes and fees. The majority Property taxes in Vermont fund about 20% of the revenues raised from these taxes fund of road construction and maintenance costs. road construction and maintenance, thereby Revenues from the state gasoline and diesel encouraging more driving. In 1997, Vermont taxes contribute 19%, while state vehicle raised the gasoline tax rate by four cents per registration fees contribute another 25%.11 gallon and the motor vehicle purchase and The remainder of the revenues are raised from use tax by 1% in order to offset property tax federal motor vehicle taxes and user fees, reductions that fund education. Although appropriations from the state’s general fund, small, this was Vermont’s first significant tax and other minor sources of funding. shift. However due to changes from Act 68 starting in 2004, the revenue from the gasoline

17 Tax Reform That Agrees With Vermont

tax that funded education now funds transpor- Motor fuel tax option for Vermont tation, and a larger portion of the motor vehicle purchase and use tax (1/3 instead of • Place an additional tax on motor fuels of 1/6) now funds education. 4 or 5 cents per gallon (which would raise $14 million or $17.5 million respectively). While the carbon tax discussed below A car-owner who drives 15,000 miles per represents “the polluter pays” principle, the year and gets 20 miles per gallon would tax increases suggested here for motor fuels pay only $30 to $38 more per year with more closely approximate “the user pays” this tax. principle. Because Vermont’s current motor fuel taxes don’t even cover current road * Use a small portion of the money raised construction and maintenance costs, the user to create stable funding for public transit. (the driver) does not pay for the immediate, With the rest of the money, reduce prop- direct costs of driving. Increasing the motor erty taxes and expand the renters’ rebate. fuel tax further in the ways suggested here Alternatively, reduce vehicle registration All of the begins to shift those direct costs to the user. fees for cars, while continuing to assess New England registration fees on the heaviest vehicles states How a motor fuel tax works that cause the most damage to roads. except New Hampshire Motor fuel taxes usually are paid by fuel Motor Vehicle Feebate have higher distributors, who pass the cost along to consumers. Because a motor fuel tax is already A motor vehicle feebate program places gasoline tax in place, it is not difficult to implement an a fee on purchases of inefficient vehicles, rates than increase in the tax rate. and gives a rebate for purchases of efficient Vermont. vehicles. Because each new car purchased Motor fuel taxes in other places commits Vermont to many years of future energy use and emissions, we can create a In 2003 the average state gasoline tax rate cleaner and healthier environment and more was 20.3 cents per gallon, and the average efficient economy by encouraging people to state diesel tax rate was 20.47 cents per gallon. buy efficient cars and discouraging them from Drivers in Vermont pay 20 cents per gallon of buying inefficient ones. gasoline and 26 cents per gallon of diesel in state motor fuel taxes and fees. All of the New A feebate program is a significant way to England states except New Hampshire have improve Vermont’s air quality. The average higher gasoline tax rates than Vermont. Rates car emits one-third a ton of hydrocarbons, range from 21 cents to 30 cents per gallon.14 carbon monoxide, and oxides of nitrogen per Vermont could raise gasoline taxes and still year, and five or six tons of carbon dioxide remain within the range of New England tax emissions per year.16 The cumulative impact rates. of the emissions from the 516,000 motor vehicles registered in Vermont is quite large.17 Compared to other western industrialized Moreover, emissions from motor vehicles are nations, the U.S. has by far the lowest motor dispersed throughout the state, making them fuel prices and taxes. In late April 2005, the difficult to control. Setting air emissions U.S. gasoline price was $2.43 per gallon, while standards for cars and trucks is one way to the price in the United Kingdom was $6.20 and control these emissions. Tax mechanisms in Germany was $5.83.15 As we might expect such as a feebate program are another way. from such relatively low tax rates, the average American also uses more gallons of gasoline Feebate programs are appropriate because per year than people in other industrialized the average efficiency level of all the vehicles countries. in use is declining. This is due largely to the phenomenal growth in market share of sport utility vehicles, vans, mini-vans, and

18 Tax Reform That Agrees With Vermont

pickup trucks during the past two decades. Gasoline prices have increased dramatically In 2004 these vehicles, called light trucks, overall since early 2004; regular grade gasoline accounted for a record 55% of vehicle sales in in the U.S. was about $1.50 per gallon in the U.S.18 In Vermont, 41% of all registered January 2004, compared to $2.10 per gallon in motor vehicles in 2003 were light trucks.19 In late March 2005.24 However, the share of light general, the fuel efficiency of light trucks is truck sales (as a percent of the total) increased much worse than that of passenger cars. The in 2004, despite the rising gasoline prices.25 It city-driving fuel economy of 2005 sport utility remains to be seen whether gasoline prices will vehicles ranges from 10 to 24 miles per gallon; impact the sales of light trucks over the longer that of vans and mini-vans ranges from 13 to term. Analyses in March 2005 found that full- 20 miles per gallon; and that of pickup trucks size SUVs and large pickups lost market share ranges from 9 to 24 miles per gallon.20 Overall, during the previous two months, while fuel- average fuel economy for 2004 light trucks was efficient compact cars gained market share.26 17.9 miles per gallon, compared to 24.6 miles Crossover vehicles, which have similarities to per gallon for cars.21 SUVs but are smaller and more fuel efficient, are also becoming more popular, and could The average Currently, the federal government assesses be the fastest growing segment of car sales in 27 car emits one- a fee, called a gas guzzler tax, on passenger 2005. third a ton of cars that have combined city/highway fuel hydrocarbons, economy ratings of less than 22.5 miles per A feebate program not only sends a more gallon. The tax ranges from $1,000 to $7,700 accurate price signal about the full costs of carbon per vehicle, and is paid mostly by manufac- driving to consumers when they purchase cars, monoxide, turers of luxury sedans and high-performance it also encourages automobile manufacturers to and oxides of sports cars.22 However, light trucks are increase the efficiency levels of their vehicles. nitrogen per exempted from this tax. Because most light In addition, a feebate program generally does year, and five trucks are gas guzzlers, and because they now not impact lower-income people, because or six tons of are used as automobiles by most drivers, their most do not purchase new cars, and those who carbon dioxide exemption from the federal tax represents a do tend to purchase smaller, cheaper, more emissions per loophole that should be closed. One estimate efficient cars. A feebate program penalizes year. found that automakers avoided paying $10.6 those who can afford it most — people who billion in gas guzzler taxes for 1999-model purchase expensive, large, luxury, and high- light trucks.23 performance automobiles.

What are CAFÉ Standards?

The gas guzzler tax is not the only starting with model year 2005 (21.0 mpg) measure that can improve vehicle fuel through 2007 (22.2 mpg). In addition, it economy. In 1975, Congress instituted the began a longer-term review of light truck National Corporate Average Fuel Economy CAFÉ standards, with the goal of issuing (CAFÉ) standards, which require auto a final rule in 2006 that would establish manufacturers to maintain average fuel new standards for vehicles in the 2008 economies on their fleets, or pay large fines. model year. What makes a vehicle a car or The standards are 27.5 miles per gallon for a light truck is a major part of the review. passenger cars, and (until 2004) 20.7 miles In recent years, “crossover” models, based per gallon for light trucks; these standards on car platforms, have qualified as light had not increased significantly since trucks to help manufacturers meet the the early 1980s. However, the National CAFÉ standards for light trucks. Also under Highway Traffic Safety Administration, review is a provision that exempts some 28 which sets the standards, established small larger light trucks from the standards. increases in light truck CAFÉ standards

19 Tax Reform That Agrees With Vermont

How a feebate program works could be structured so that the cost of most vehicles would remain the same or decline, Under a feebate program, a fee is assessed and only the cost of the most inefficient on new purchases of inefficient vehicles, vehicles would increase. Almost all inefficient while a rebate is given to purchases of more vehicles are expensive, while almost all efficient vehicles. Feebate programs can be efficient vehicles are much less expensive. revenue-neutral; the revenues collected from Thus, when a 12% tax is assessed on one the fees can equal the revenues given for $30,000 inefficient vehicle, the revenue can rebates. Alternatively, feebate programs can offset rebates for four efficient vehicles that be designed to collect more revenues than are cost $15,000. given in rebates, providing a funding source for the government. Feebate programs can apply Feebates in other places only to new vehicle purchases, or new and used vehicle purchases. When programs apply There are a number of other countries Almost all to used vehicles, they usually do not apply that implement feebate programs, including inefficient to vehicles manufactured before the feebate Germany, Austria, Denmark, and Ontario, vehicles are program was started. Canada. expensive, Feebate options for Vermont while almost The fuel efficiency of vehicles can be determined in a variety of ways. Perhaps the all efficient most obvious way is to use the combined • Design a feebate program for Vermont, in vehicles are city/highway fuel economy rating determined which residents who purchase new ineffi- much less by the EPA for each car. However, feebate cient cars and light trucks or register inef- expensive. programs also can use vehicle weight, engine ficient cars and light trucks in the state size, or carbon dioxide emissions per mile as for the first time must pay an extra fee, the determinant for fuel efficiency. Feebate while residents who purchase or register programs can be structured to achieve varying efficient vehicles get a rebate. efficiency goals. For example, a feebate program could be structured initially to place • Determine the tax rate of each vehicle a fee only on a small percentage of the most purchase by the efficiency of the vehicle, inefficient vehicles. as measured by the EPA combined city/ highway fuel economy rating, or by a sur- One option states can use to implement a rogate, such as the vehicle weight, engine feebate program is to institute a sliding-scale size, or carbon dioxide emissions per mile sales tax. Vermont assesses a motor vehicle emitted by the vehicle. purchase tax of 6% on new car purchases, in place of a sales tax. That tax could be changed • Design the feebate program to be rev- to a sliding-scale tax of 0% to 12%. Purchases enue-neutral, raising the same amount of of the most polluting vehicles would be taxed revenue as the current motor vehicle pur- at 12%, while purchases of the most efficient chase and use tax raises. cars would not be taxed at all. Purchases of average vehicles would be charged the same • Structure the program so that the cost of 6% rate they currently are charged. Under most vehicles (about 70%-80%), includ- this type of feebate program, consumers aren’t ing the tax, remains the same or decreas- actually given rebates; instead, rebates are es, while only the cost of the most ineffi- offered in the form of lower sales taxes. cient vehicles increases. For example if a sliding-scale tax of 0% to 12% were used, This is an attractive option, because the a sport utility vehicle that costs $35,000 mechanism for collecting the motor vehicle and has a fuel economy rating of 14 miles purchase and use tax already is in place, and per gallon, might have a tax rate of 12%, because rebates do not have to be returned to or $2,100 more than would normally be consumers. In addition, this type of program paid at the current 6% rate. A car which

20 Tax Reform That Agrees With Vermont

costs $13,000 and has a fuel economy rat- sales tax exemptions on fuel lower the relative ing of 28 miles per gallon, might have a costs of energy, making energy-intensive rate of 3%, or $390 less than would nor- options less expensive than they otherwise mally be paid at the current 6% rate. would be and distorting the efficiency of the marketplace. • Exempt agricultural vehicles, school buses, trailers, and commercial timber- How a fuel sales tax works related and construction-related vehicles for small businesses from any motor A sales tax on fuels works the same way vehicle tax greater than 6%. as our sales tax on other products. The tax is assessed on the cost of fuel at the time of its Sales Tax on Fuel final sale.

Vermont’s general sales tax of 6% applies to Some have argued that we should not place most products sold at the retail level. However, a sales tax on motor fuels, because there Vermont’s some products are exempted, such as food, already are state and federal taxes on motor general sales agricultural feed and seed, prescription drugs, fuels. However, motor fuels taxes cover part and strangely enough, most fuels. Currently, of the costs of building and maintaining roads tax of 6% only fuels sold to commercial establishments and other transportation projects, and in this applies to most are subject to the sales tax. Fuels used in the sense, are “user fees.” Motor fuel tax revenues products sold residential, industrial, and farm sectors are do not contribute to the state’s general fund, as at the retail exempt from the tax, as are all motor vehicle sales tax revenues do. level. However, fuels. some products Some states assess the sales tax on motor are exempted, These sales tax exemptions are in place fuels on the fuel cost before state and federal such as food, for various reasons. The residential energy motor fuel taxes are assessed. Other states agricultural exemption was introduced to compensate for assess sales taxes after the motor fuel taxes feed and seed, the energy price shocks of the 1970s. The are assessed. When a sales tax is applied to prescription sales tax on industrial fuels was phased out the full sales price of motor fuels, it effectively drugs, and in the 1990s to increase the competitiveness taxes our use of roads, paying for the costs we strangely of Vermont-made products. Motor fuels have generate by using the roads. always been exempt from the sales tax.29 enough, most Removing the sales tax exemptions on fuels fuels. The estimated lost revenue form Vermont’s used for residential purposes could negatively energy sales tax exemptions is significant. For impact Vermonters with low incomes by example, the state loses about $38 million increasing the costs of essential items. As annually by exempting gasoline from the sales a result, extra measures to compensate low- tax. (By comparison, the state raises $317 income wage-earners should be introduced million from the sales and use tax.30) As a when a residential fuel sales tax exemption result, one of Vermont’s largest retail sectors is removed. For example, an initial, fixed – energy sales – does not support state services. amount of electricity and heating fuel could be exempt from the sales tax for all Vermonters. Vermont’s sales tax exemptions on fuel Because many Vermonters with low-incomes work directly against economic and environ- also have inefficient homes and appliances, mental goals. The exemptions result in a this policy would work best when combined tax break for the two activities that cause with a very strong weatherization assistance the most energy use and air pollution in program for people with low incomes. Vermont: driving and heating homes. Sales tax exemptions make it cheaper to waste energy Fuel sales taxes in other places and pollute, and more expensive to make efficiency improvements. And because most A number of states place sales taxes on products except food are taxed in Vermont, motor fuels, as the table above illustrates.

21 Tax Reform That Agrees With Vermont

Sales Tax Rates on Motor Fuels in Selected States31

Connecticut...... 5% gross earnings tax Georgia...... 3% “second motor fuel” tax + 1% sales tax Hawaii ...... 4% sales tax Indiana...... 5% sales tax Maryland ...... 5% sales tax on fuels not taxable under state motor fuel tax laws Massachusetts. . . . . 5% sales tax on fuels not taxable under volume tax laws Texas...... 6.25% sales tax on fuels not taxed or exempted under other laws

Fuel sales tax option for Vermont radiated into space, a greenhouse effect occurs, thereby warming the earth. • Place a sales tax of 6% on gasoline and fuels used for residential purposes. Taxing Many gases that cause the greenhouse effect Human gasoline would raise $38 million per year, occur naturally and have helped to make the activities, and taxing residential fuels would raise earth a habitable environment. However, especially $33 million per year,32 for a total of $71 human activities, especially fossil fuel use, fossil fuel use, million. Continue to exempt fuels used have substantially increased the amounts of have substan- for industrial purposes from the sales greenhouse gases in the atmosphere. The tially increased tax, to avoid competitiveness issues. Or, Bush Administration commissioned a study the amounts assess the sales tax on fuels used in the by the National Academy of Science four years of greenhouse industrial sector at a lower rate. Continue ago, which concluded that climate change is gases in the to exempt fuels used for farming from the already occurring, and that human emissions atmosphere. sales tax, to help preserve Vermont’s agri- of greenhouse gases are the primary culprit cultural sector. behind the warming. This report was only one of many reports written in the U.S. and abroad • With the money raised, reduce the prop- that confirms that if substantial action to erty tax; expand the renters’ rebate; reduce greenhouse gas emissions is not taken and contribute additional funds to the soon, our society may face drastic impacts on Low Income Heating Energy Assistance our economy, public health, and way of life. Program and the Weatherization Assistance Fund. Predictions by the Intergovernmental Panel on Climate Change and other scientific bodies Carbon Tax warn that global warming may radically change the earth’s climate and produce A carbon tax is an energy tax placed on unpredictable effects in local temperature the carbon content of fuels, and usually ranges, precipitation patterns, sea levels, and is measured in dollars per ton of carbon the incidence of extreme weather events such contained in each fuel or dollars per ton as floods, droughts, fires, and heat outbreaks. of carbon dioxide emissions. A carbon tax In addition, global climate change may have discourages fossil fuel energy use and its severe impacts on all natural ecosystems, corresponding carbon dioxide emissions that agriculture, forestry, coastal communities, lead to global climate change. water resources, urban infrastructure, and many other aspects of human life. Future Global climate change, or global warming, generations likely will face enormous costs refers to the warming of the earth and the in coping with the impacts of such a quickly accompanying climate changes caused by changing climate. Vermont’s ecosystems and the “greenhouse effect.” When gases such economy have already experienced changes, as carbon dioxide trap and absorb heat in the such as a decrease in average snowfall since earth’s atmosphere that otherwise would have the 1950s, and more erratic and later foliage

22 Tax Reform That Agrees With Vermont

and maple syrup seasons. In the future, we with Hydro Quebec, which currently supplies are likely to face many uncertain impacts, about 30 percent of the state’s electricity; including impacts to our agricultural and dairy whether the contract will be renewed, and at sectors, sugaring operations, ski areas, and what level, remains uncertain. Additionally, other tourist-related businesses. the operating license on Vermont’s Yankee nuclear reactor expires in 2012; for environ- With global climate change already mental, public health, and safety reasons, underway, and with current energy use state officials should support its on-schedule committing the earth to further warming, retirement.35 Replacing these major power it is important to begin to limit the impacts sources without causing a jump in greenhouse now through measures such as a carbon tax. gas emissions will be a challenge. Fossil fuel combustion emits several gases that contribute to global climate change, but carbon Transportation is the most significant source dioxide emissions are by far the most serious of greenhouse gas emissions in Vermont, because these emissions are the greatest. accounting for about 55% of emissions.36 Average Vermont drivers travel 17,000 miles Vermont’s 2001 Carbon dioxide is emitted from cars, each year in their cars, emitting about 6.8 tons 37 greenhouse trucks, and other vehicles, as well as oil- of carbon dioxide per car per year. gas emissions, fueled, propane-fueled, and natural gas-fueled excluding the furnaces, boilers, water heaters, stoves, clothes How a carbon tax works electric power dryers, and manufacturing equipment. Coal, oil, and gas electric generating plants also A carbon tax usually is assessed as dollars sector, were 23 emit carbon dioxide. Because it is emitted per ton of carbon contained in each fuel, or percent above from many dispersed sources, carbon dioxide dollars per ton of carbon dioxide emissions. the 1990 levels. emissions are difficult to control through Since the carbon contents and carbon dioxide A recent report regulations. A carbon tax is a more appropriate emissions of fuels are known, possible tax rates found that mechanism and is one of the most effective for various fuels are easily calculated. consumption ways to discourage carbon dioxide emissions of gasoline, and energy use, encourage conservation and Various rates for carbon taxes have been diesel, heating efficiency, and encourage switches to fuels widely debated. In the early 1990s, the federal oil, natural with lower carbon content (such as natural gas) government estimated that a carbon tax of gas, and coal- or no carbon content (such as wind power). around $100 per ton of carbon would stabilize fired and the nation’s carbon dioxide emissions at their natural gas- Greenhouse gas emissions in Vermont 1990 levels by 2000, a goal of the 1992 Earth fired electric Summit. The Vermont Department of Public Vermonters emitted about 1.84 million Service estimated that in order to meet the power have MTCE (metric tons of carbon equivalent) of same goal in Vermont, a much higher tax rate all increased greenhouse gases in 2001 from energy use.33 would be necessary, due to Vermont’s small since 2001 in Vermont’s 2001 greenhouse gas emissions, use of fossil fuels for electricity and lack of New England, excluding the electric power sector, were transportation alternatives. Lower tax rates with a parallel 23 percent above the 1990 levels. A recent also have been discussed. Although these increase in report found that consumption of gasoline, numbers are out-of-date, the state estimated emissions. diesel, heating oil, natural gas, and coal-fired that a tax rate of $50 per ton of carbon (if and natural gas-fired electric power have all instituted in 1997) would raise around $107 increased since 2001 in New England, with a million in 2000 and reduce greenhouse gas parallel increase in emissions.34 emissions by about 215,000 tons compared to current practices.38 More recent discussion The state may be headed for an increase in by the Regional Greenhouse Gas Initiative, greenhouse gas emissions from the electric a working group launched by New York power sector in the next 10 years, due to the Governor Pataki, may end up recommending expiration of power from state’s two largest forgoing a carbon tax of any kind in favor sources. In 2015, the state’s contract will expire of a northeastern regional cap. All of

23 Tax Reform That Agrees With Vermont

these strategies have relative strengths and Carbon taxes in other places weaknesses, but it is our conclusion that an active carbon tax is the most effective way to Eight European countries enacted carbon encourage efficiency of fuel use, protect the taxes in the 1990s (Denmark, Finland, environment, and grow our economy. Germany, Italy, Netherlands, Norway, Slovenia, Sweden), and England followed in The most efficient way to administer a 2002. France, Belgium, and Luxembourg carbon tax is to assess the tax on fuels as close currently are considering carbon taxes, as is as possible to the point at which they enter the European Union collectively. Most of the state’s economy. For example, the tax the countries with carbon taxes continue to would be assessed when each fuel is purchased exempt industry from carbon taxation. In by businesses or individuals for use or resale Finland, which has the highest carbon tax in within Vermont. This collection method Europe, carbon dioxide emissions fell by 7% would minimize the number of tax collection between 1990 and 1998. Sweden saw a 9% points. reduction in carbon dioxide emissions between Although 1991 and 1994.39 In the developing world, wood emits A tax on electricity generated from nuclear Costa Rica has enacted a 15% tax on fossil carbon dioxide sources should also be combined with a carbon fuels. The revenues raised fund a program when burned, tax. While nuclear energy does not emit that encourages private landowners to adopt carbon dioxide, it does produce radioactive practices that increase the sequestration of if wood is 40 harvested waste - a dangerous pollutant that remains carbon dioxide. sustainably, hazardous to humans and the environment for millions of years. Nuclear energy often There are no true carbon taxes in the U.S., new tree is taxed at the same rate as an oil-fueled or but New Jersey has undertaken an initiative growth coal-fueled electricity plant to represent the that resembles partial carbon taxation. In recaptures comparatively high environmental costs of 2001, New Jersey enacted a “social benefit as much nuclear power. Large hydropower generating charge” attached to every utility bill at a rate carbon as is facilities also could be taxed because of their of $.026 per kilowatt hour. It is estimated lost through negative impacts on rivers, surrounding lands, that this “mini carbon tax” will generate $358 burning. and local populations. million each year in state revenues. Seventy- five percent of the revenues are earmarked “to Fuels used for manufacturing often are help buy down the cost of energy efficiency exempted from some or all of the carbon tax and to transform the marketplace for energy burden. Because most industries compete efficiency.” The remaining revenues are used nationally and globally, a localized carbon to create a Renewable Energy Fund to assist tax can limit industries’ competitiveness, the development of solar, wind, and fuel encouraging them to relocate. Until the entire cell development and to “buy down the cost nation and other industrialized countries levy of these technologies and assist in market a carbon tax on industry, calls to exempt the transformation.”41 industrial sector from localized carbon taxes will continue. Carbon tax option for Vermont

In addition, wood energy use can be • Assess a carbon tax on fossil fuels used exempted from the tax. Although wood in Vermont. In addition, assess a tax on emits carbon dioxide when burned, if wood nuclear energy and large-scale hydroelec- is harvested sustainably, new tree growth tric power, to eliminate their comparative recaptures as much carbon as is lost through advantage under a carbon tax. A recent burning. report estimates that a $100 per ton car- bon tax would have raised $216.2 mil- lion in 2004. If an accompanying tax of $0.0084 per kilowatt hour were placed on nuclear and large hydropower, revenues

24 Tax Reform That Agrees With Vermont

raised would have been $364.5 million in Water Pollution 2004.42 Clean lakes and rivers are essential for • Exempt fuels used in the industrial sector environmental health, and safe drinking water from the carbon tax, as is done in Europe, is critical for good human health. Water to avoid competitiveness issues. Or, pollution occurs when pollutants run off assess the carbon tax on fuels used in the directly into lakes and rivers, or enter the industrial sector at a lower rate. groundwater and eventually contaminate drinking water sources. • Exempt fuels used for farming from the carbon tax, to help preserve Vermont’s Vermont’s water pollution, like our air agricultural sector. pollution, is increasingly the result of many small, widely scattered sources, such as • Exempt wood energy use from the carbon pesticide and fertilizer runoff from farm land, tax. road salt and oil runoff from developed land, failed septic systems, and leaking underground Vermont’s • Eliminate the current gasoline tax, die- oil storage tanks. Vermont has made some water sel tax, sales tax on commercial energy, progress on controlling water pollution from pollution, utilities gross receipts tax, and fuel gross large sources, but has not made enough like our air receipts tax. These taxes amounted to progress on reducing pollution from these 43 pollution, is $116.1 million in 2004. smaller, scattered sources. increasingly • Spend the remaining revenues ($100.1 Vermont currently assesses fees on the result million, or $248.4 million if nuclear and pollutants discharged directly into waters. of many large hydro are taxed) in the following However, the fees collect only a small amount small, widely ways: of money each year, and do not cover smaller, scattered 1) Residential sector: Provide a yearly flat widely scattered polluters. Additional taxes sources … refund to all Vermont households; or are an excellent method of including some of eliminate the state income tax on all the human and environmental costs of water Vermonters earning less than $50,000 pollution into the prices of these dispersed, per year; or increase funding of the polluting activities. Vermont already assesses Weatherization Assistance Program a one-cent-per-gallon tax on gasoline and and the Low Income Heating Energy diesel for cleaning up leaking oil storage tanks. Assistance Program; or some combina- Higher motor fuel taxes would help to include tion of the above options. some of the costs of water pollution, as well as 2) Commercial sector: Provide a yearly other costs, into the price of motor fuels (see refund to all Vermont businesses in the section on motor fuel taxes). A pesticide the commercial sector, calculated as and fertilizer tax, which also would help a percentage of the company’s yearly protect our water quality, is described below. FICA/Medicare payments to the federal government; or eliminate corporate Pesticide and Fertilizer Tax income taxes, which amounted to $31.3 million in 2004; or provide fund- Taxes placed on pesticides and fertilizers ing to improve energy efficiency in help protect human and environmental health commercial establishments; or some that can decline from polluted surface water combination of the above options. and groundwater. In addition, such taxes 3) Transportation sector: Provide funding include some of the costs of water pollution for public transportation and alterna- into the prices of pesticides and fertilizers. tive and low-emission vehicles. One estimate places the environmental and social costs of pesticide use in the U.S. at $10 billion per year.44

25 Tax Reform That Agrees With Vermont

In fiscal year 2003, Vermonters used about How a pesticide and fertilizer tax works 36,000 tons of fertilizer, with the highest levels of use in the agricultural Addison and Franklin Pesticide and fertilizer taxes can be assessed counties.45 Commercial pesticide applicators in as a percentage of wholesale or retail sale Vermont used about 561,000 pounds of active prices. Alternatively, they can be assessed pesticide ingredients in 2003; by poundage of as a per pound tax on the nitrogen content active ingredients, the largest three areas of of fertilizers and on the active ingredients in application were in cooling waters or other pesticides. Other options include taxes levied waters used in industrial processing, around at the point of manufacture; registration fees human dwellings, commercial establishments, for products, manufacturers, or retailers; dealer or institutions46 (62%); corn crops (29%), and licensing; permit and certification fees for golf courses (5%).47 applicators; and inspection fees.

The pollutant with the most damaging Currently, Vermont levies fertilizer product impact to Vermont’s surface waters is registration fees, company license and Fertilizer use phosphorus, which encourages excessive plant application fees for pesticide dealers, fertilizer on farms is one and algae growth that kills fish and other life tonnage tax, and pesticide product registration of the primary forms. Virtually all of Vermont’s streams and fees; the latter of these raises about 78% of the lakes are at risk from phosphorus discharges. total $932,000 raised annually by all of these sources of 49 Lakes Champlain and Memphremagog fees. Vermont’s are particularly vulnerable to phosphorus phosphorus discharges because more than one-half of the In 2002, a Vermont sales tax exemption on discharges. state’s land area drains into them, including pesticides and fertilizers for non-farming was most of our prime agricultural lands and many removed. However, Vermont still exempts of our settled areas. Fertilizer use on farms all pesticides and fertilizers used “directly in is one of the primary sources of Vermont’s the production for sale of tangible personal phosphorus discharges. property on farms” from the 6% sales tax. Removing these exemptions would be a good Groundwater also can be contaminated next step in including some of the costs of from pesticide and fertilizer runoff, which is fertilizer and pesticide use into their prices. an important concern in rural areas where people get their water from wells. Vermont’s Pesticide and fertilizer taxes in . Pesticide and Groundwater Monitoring other places Program has tested wells adjacent to agricultural land for the presence of pesticides Iowa and California have instituted pesticide and fertilizers since 1986. The major focus and fertilizer taxes. Pesticides in California of the program is on testing groundwater for are taxed at 2.1% of wholesale value.50 Iowa corn herbicides because, with the exception of introduced a system of pesticide and fertilizer chemicals used for cooling towers and water taxes in 1987 to protect groundwater. Iowa’s treatment, corn herbicides are used more than system established a scheme to raise revenue any other group of pesticides. The program in three ways: pesticide manufacturing also tests surface and groundwater near registration fees, pesticide dealer licensing other types of land use where pesticides and fees, and fertilizer taxes.51 Several European fertilizers are used, including large farms, golf countries also use pesticide taxes, including courses, and along highways, electric power Sweden, Belgium, Norway, Finland, and lines, and railroads. As of 2002, 1,215 wells Denmark.52 In Denmark, for example, a have been tested. Of the wells tested since program started in 1986 reduced pesticide use 1998, 23% tested positive for a level of nitrates by more than 50 percent within 10 years.53 (coming from fertilizer use) that requires corrective action. Based on the current sampling results, only 4% of the wells showed traces of herbicides.48

26 Tax Reform That Agrees With Vermont

Pesticide and fertilizer tax option for Vermont increasing the deposit on each container could result in even more waste being reused and • Gradually introduce a system of pesti- recycled. While a deposit/refund program is cide and fertilizer taxes in the state over not identical to a tax, it functions much like a a period of several years. As a next step, tax for consumers who don’t collect the refund. remove Vermont’s 6% sales tax exemp- tion on pesticides and fertilizers used for Solid Waste Tax/ Variable farming. Pricing Program

• Provide substantial tax credits to farmers. Taxing solid waste based on its weight or volume and ensuring that taxpayers can • In conjunction with these tax policies, reduce their tax payment through conser- provide financial subsidies and technical vation has good potential to reduce our solid assistance to help farmers move toward waste stream, conserve resources, and reduce low-impact and organic farming. the costs of human and environmental health problems. We generate Solid Waste about the Vermont currently assesses a tax on solid same amount Higher taxes on the solid waste we generate waste generated in the state, paid by operators of solid waste would be a powerful mechanism for reducing of solid waste facilities and waste transfer per capita waste and resource use in Vermont. Every facilities. The tax raised about $3.2 million discarded item required energy and natural in 2004, and the funds are earmarked for solid as the rest of resources to produce it. Low-cost solid waste waste management activities. Some Vermont the country disposal simply encourages more energy and municipalities and cooperatives also charge a — about natural resources to be used because more per capita or a per ton waste tax on top of the 3.4 pounds per items are discarded. In addition, solid waste state tax. The two permitted lined landfills person every disposal can contaminate groundwater and in Vermont are projected to reach capacity in day. surface waters, use up valuable land, and about seven years at current rates of fill.54 place additional burdens on future generations who must live with landfills that continue to Taxes are effective at reducing undesirable pollute groundwater. activities only when the tax rates are set high enough to influence behavior and when the Vermont generates less hazardous waste taxpayers can reduce their tax payment by than most states, because our industrial sector changing their activities. Thus, solid waste is relatively small. However, we generate tax policies should ensure that consumers pay about the same amount of solid waste per in proportion to the amount of waste they capita as the rest of the country — about 3.4 generate. pounds per person every day. The solid waste disposal rates paid by most High taxes on waste disposal would businesses are based on the volume or weight encourage innovation and thrift as individuals of the waste they generate, or the frequency and businesses found ways to reduce their of their trash pickup. However, the same is own waste. Such taxes would be most not true of the rates paid by many residential effective if complementary programs were customers. A growing number of communities undertaken at the same time to reduce around the country base residential waste illegal dumping and help people reduce their disposal rates on the number of trash bags waste through composting and recycling. In discarded or the size of their trash can. Called addition, Vermont’s deposit/refund program for pay-as-you-throw (PAYT) programs, these beverage containers has been very successful pricing schemes are not only fairer – people in diverting a substantial waste stream from pay only for the waste they discard – they our landfills. Adding beverage containers that encourage more people to reduce their waste. currently are exempted to that program, and According to the EPA, pay-as-you-throw

27 Tax Reform That Agrees With Vermont

programs have expanded rapidly — from 1,800 • Require municipalities and waste haulers communities in 1980 to more than 6,000 to institute pay-as-you-throw pricing for today. A study in 1999 found that 88 Vermont residential customers and to continue municipalities used PAYT programs.55 PAYT is using variable pricing for commercial one of the tools being promoted in Vermont’s customers. current Solid Waste Plan.56 • In conjunction with these tax policies, provide revenues to subsidize recycling, How solid waste taxes and pay-as-you-throw composting, and other programs that help programs work people reduce waste.

Solid waste taxes often are assessed on Deposit/Refund Program waste haulers, who generally pass the costs on for Beverage Containers to their customers. Alternatively, sales taxes can be placed on garbage pickup services. Vermont currently requires a five-cent deposit to be placed on the sale of many An estimated Most pay-as-you-throw programs for beverage containers, and the deposit is 90%-95% of residential customers in the U.S. charge people refunded to consumers when the empty the containers for each bag or can of waste they generate. containers are returned to a redemption center available for Many communities distribute distinctively or retailer. The law was enacted in 1972 and marked cans or bags. Others use stickers expanded in 1987. An estimated 90%-95% refund were or tags, which residents affix to the bags of the containers available for refund were returned or cans they set out for collection. A few returned in 2000 in Vermont.58 Improving this in 2000 in communities bill customers based on the program by closing a loophole would result in Vermont. weight of their trash. even more recycling and waste reduction.

Solid waste taxes and pay-as-you-throw Currently, the five-cent deposit is required programs in other places on the sale of glass, metal, paper, or plastic containers of beer, malt beverages, mineral Many states and countries assess some waters, mixed wine drinks, soda water, and type of solid waste taxes. European countries carbonated soft drinks. However, juice, teas, have been especially successful in reducing sports drinks, and bottled water are exempted waste with these taxes. In the U.S., many from the program – such bottled drinks were communities use pay-as-you-throw programs not widely available when Vermont’s bottle with success. For example, in Williamsburg, bill was enacted. Iowa, residential waste fell from 20 tons per day to 7 tons per day after PAYT was However, these drinks now account for implemented. Falmouth, Maine enacted a a significant portion of all beverages sold pay-per-bag program in 1992, and reduced the and their sales are projected to continue solid waste disposed by 900 tons per year, to increase. The biggest growth in bottled saving the town $50,000 in landfill tipping beverages currently is bottled water; total fees. In Gainesville, Florida, residents were bottles of water sold in the U.S. jumped from able to choose three trash cart sizes at different 3.3 billion in 1997 to 15 billion in 2002.59 monthly rates, starting in 1994. One year later, the waste disposed in the city fell by Including these beverages in the deposit/ 4,000 tons, and the waste that was recycled refund program would be administratively increased by 25%.57 simple and would easily improve Vermont’s recycling rates, reduce resource use, and save Solid waste tax option for Vermont landfill space.

• Increase the solid waste tax to raise more Increasing the deposit from 5 cents to 10 revenue and provide a stronger disincen- cents on most beverages has been proposed as tive to create waste. well. Vermont Senator Jim Jeffords introduced

28 Tax Reform That Agrees With Vermont

a national “Beverage Producer Responsibility Land Use Act” in November 2003, that would have: expanded container deposit legislation to Sprawl is threatening to change the include wine, liquor, juice, teas, sports drinks, state’s traditional rural landscape, our and bottled water; established a 10-cent deposit sense of community, and the vitality of our on every container; allowed the deposit value downtowns. Vermont has preserved many of to rise with inflation; and required that every its compact villages and towns, but in many beverage brand owner achieve a national 80% parts of the state, pressures to develop outside recycling rate for their beverage containers. the downtown centers are strong. Vermont The Container Recycling Institute estimates could harness taxes to help reverse this trend. that an 80% national recycling rate for beverage containers would save the equivalent Exempting downtowns from Vermont’s of more than 40 million barrels of oil a year.60 sales tax is one mechanism that could help preserve the economic activity in our historic How a deposit/refund program works downtowns. Pressures The mechanics of Vermont’s deposit/refund There are a variety of other ways taxes to develop program are described in Chapter 3. Adding could be used to improve our land use. The outside the new beverage containers to the program or current capital gains tax on speculative land increasing the deposit would not change these sales could be increased. The capital gains tax downtown procedures. rate could be lowered for socially beneficial centers are land use transactions. Assessing property strong. Deposit/refund programs in other places taxes in downtown centers based on the value of land rather than the value of buildings and Eleven states currently have deposit/ improvements is discussed below. refund programs. Maine, California, and Hawaii’s laws cover beverages such as juice, Land Value Tax sports drinks, teas, and bottled water.61 After implementing bottle bills, seven states A property tax is actually two taxes rolled reported a reduction of beverage container into one: a tax on the value of the land, and litter ranging from 70 to 83 percent, and a a tax on the value of buildings and other reduction in total litter ranging from 30 to improvements. A land value tax is a property 47 percent. High recycling rates were also tax that falls only or mostly on the value achieved.62 of the land, instead of on the value of the buildings and improvements. This taxation Deposit/refund program option for Vermont arrangement encourages compact development and improvements on valuable land. If used • Expand Vermont’s current deposit/refund carefully, a land value tax can decrease sprawl, program to cover all non-carbonated bev- preserve open space, and encourage compact erage containers except milk containers development in our downtowns, ensuring their and containers made primarily of paper. economic viability.

• Increase Vermont’s deposit on most bev- Land value taxation is not a new idea; erages from five cents to ten cents. classical economists in the early 1800s were land value tax enthusiasts, and economists • Consider instituting a deposit/refund today continue to discuss the idea. Land program on other types of standard food value taxation has been attractive to many packages. economists because, in theory, it should cause no distortions in economic decision-making.

Land receives its value based on its location. Land values rise when new amenities such

29 Tax Reform That Agrees With Vermont

as a park or library are built nearby; when Land value taxes in other places new infrastructure, such as a road or sewer line, is built nearby; and when neighborhoods Pennsylvania has pioneered the use of the become more popular, safe, or change in other land value tax in the U.S. The state empowers ways. The factors that determine land values cities and boroughs to decrease their taxes are generally beyond the control of property on buildings and increase their taxes on land owners. if they choose. Currently, 18 cities use this approach, including communities of varying If Vermont communities decreased their sizes. Communities determine the ratio taxes on building values and increased their at which they tax land in comparison to taxes on land values in their downtown buildings. The land value tax has helped to centers, property owners would have revitalize some of Pennsylvania’s cities.63 incentives to build on, maintain, and improve their properties. Tax rates can be set so that Land value taxation is more widely used most property owners would have to build in other countries, including Denmark, South on, maintain, or improve their buildings Africa, and some parts of Australia. More than in order to pay their taxes. This, in turn, 700 cities worldwide use a system where land would promote compact development and is taxed at a higher rate than improvements. more efficient use of infrastructure such as roads and sewers. Property owners who had Denmark began assessing the national improved their buildings in the past would property tax on the value of the land only be in a favorable position, while those who in 1844. The land value tax was abolished had let their buildings deteriorate would be and replaced with a flat rate tax on land and encouraged to make improvements or sell the improvements in 1903, but farmers, who were property. hurt by the change, lobbied for a return to the land value tax. The tax on improvements Taxing land values instead of building was never removed entirely, but today all values in Vermont’s downtowns could cities in Denmark use a graded property tax. create pressure to develop important green South Africa started using land value taxation space in our downtowns. Thus, policies in 1914. By the 1980s, more than one-half that permanently protect green space valued of its largest cities used land value taxes. In by the community should be undertaken Australia, taxes are levied on the “unimproved in conjunction with land value taxation value” of each land parcel; the tax is only schemes. Other protection measures also may applicable to urban areas. Canada introduced be required with land value taxes, such as land value taxation in its four western building height limitations and careful zoning provinces in 1903 in an effort to discourage district boundaries. Implementing a land value speculation and encourage construction. tax outside downtown centers would be more Today, all the cities in these four provinces complicated and would require careful consid- either exempt improvements when assessing eration; additional protection measures likely property taxes, or tax improvements at a lower would be needed. rate than land.64

How a land value tax works Land value tax option for Vermont

A land value tax falls only or mostly on the • As a first step, based on the recommenda- value of the land, instead of on the value of the tions of the January 15, 2002, Downtown buildings and improvements. Communities Task Force Report, the 2002 General usually have jurisdiction over the adminis- Assembly passed Act 114. This Act tration of the tax. Land value taxes can be required the Legislative Council and the phased-in gradually and can be revenue neutral Joint Fiscal Office, with the assistance or revenue-positive. of the Agency of Administration and the Department of Taxes, to study the feasi-

30 Tax Reform That Agrees With Vermont

bility of a land value, split-rate or two-tier by using the tax code and the pricing structure tax system that would allow munici- of monopoly regulated energy businesses to palities to levy in any year separate and provide incentives for efficiency and conser- different rates of taxation on land and vation and discourage waste. buildings in designated downtowns. The analysis evaluated the impacts on state The Energy Efficiency Utility/ and local revenues and state policy objec- Societal Benefits Charge tives, including preservation of down- towns. The study was to be submitted Recognizing the benefits of efficiency, in to the Senate Committee on Finance and 1999 the legislature and Vermont Department the House Committee on Commerce by of Public Service (“DPS”) created the Energy January 15, 2003. This study should be Efficiency Utility (“EEU”) program, which is used to form the basis for state enabling funded by a ‘societal benefits charge’ (“SBC”). legislation, that would allow cities and The SBC functions like a tax on electricity, towns to use land value taxation if they charging a fraction of a cent on each watt of choose. electricity to pay for the EEU’s total budget, One of the which is presently capped at $17.5 million. In most effective • Allow cities to determine the proportion return, the EEU contractor supplies efficiency uses of a “tax of the property tax that will be raised services to all Vermonters, stimulating from land values and the proportion investments in efficiency in buildings shift” can be to raised from buildings and improvements. appliances and equipment that lower the state’s help decrease total electric bill and save Vermonters money. waste in our Energy Efficiency economy by The cheapest and cleanest way to meet encouraging The production and use of energy is one of electricity demand in Vermont today is efficiency. the greatest threats to Vermont’s environment through efficiency. Efficiency Vermont (EVT), today. Both the production of electricity, and the state’s current EEU contractor, consis- its use in everything from lighting to motors tently supplies efficiency services at a cost has a significant inefficiency or “waste” of 2.9 cents/Kilowatt hour. This is compared associated with it. More broadly, pollution to the roughly 6-8 cents/KWh that it costs in any form can be understood as waste: the to purchase electricity from the market. In result of an incomplete or unsustainable action addition, this is electricity never used, so it that generates, in addition to its primary does not generate greenhouse gases (GHGs), purpose, products that provide no benefit, nuclear waste, air toxics or other pollution. or actually harm society or the economy. Between 2000 and 2003 EVT saved Vermonters Whether that waste is spent nuclear fuel, 156 Megawatt hours, or just less than 3%, water pollution, or carbon dioxide, the result of their current electricity energy use. EVT is that society must expend limited resources reports over 58 thousand MWh of annual to “clean up” this waste rather than investing efficiency savings for 2004. By 2020, even at it back into the production of things society current low rates of investment it is likely that wants. If we understand energy policy from EVT’s efforts could meet 15% of Vermont’s this perspective it becomes clear that one of electric energy needs. the most effective uses of a “tax shift” can be to help decrease waste in our economy by Increased Societal Benefits Charge option for encouraging efficiency. Vermont

We have already discussed addressing ineffi- If we assume an annual rate of growth in ciency in our economy by using tax shifts electric consumption of 1.5%, then over the to create more accurate price signals on the next 15 years, Vermont’s electricity demand costs of transportation, heating and other will increase from roughly 6,000 Gigawatt applications. But Vermont can also benefit hours, to 7,600 GWh, a 27% increase, far out- from ‘raising the floor’ on our total efficiency pacing the EEU’s ability to meet our needs.

31 Tax Reform That Agrees With Vermont

But with appropriate investment Vermont Performance based regulation option could come very close to holding its actual energy consumption at current levels. To do As rates have been set for gas and electric so the state will need to gradually ramp up the utilities, they gained significantly more funding for the EEU, likely doubling the EVT income to improve their profitability by selling budget from approximately $16 million a year more electricity. This perhaps unintended to $32 million a year during the next 10-15 “incentive” directly contradicted the utility years. mandate to find the “least-cost” way to provide customers with energy services. Vermont’s 2005 omnibus renewable energy A proposal to adopt a different system of law approved removing the “cap” on what can regulation, one that would reward them for be raised through the SBC to fund efficiency helping customers reduce usage, was included programs. Starting in the summer of 2005, in the 2005 renewable energy law. This a series of workshops were convened at the significant shift in the ratemaking system Public Service Board in order to determine the dovetails well with the “tax shift” concept. appropriate increase in efficiency investment. A ruling on this tax shift by the Public Service Product Efficiency Feebate Board is expected in summer of 2006. In addition to funding programs to ‘mine Transmission and distribution least inefficiency,’ as the EEU does, the state can use cost planning option both regulation and the tax code to encourage efficiency in common appliances. The simplest A troubling feature of the system that funds way to do this is by imposing efficiency major expansions of the regional transmission standards that “push” product design to system is that there is region-wide “sharing” new levels of energy efficiency. While codes or “socialization” of the costs of investment and standards are not an obvious example in “poles and wires” that would improve of a “tax shift” strategy, they do effectively electric system reliability. There is not, “internalize” the costs of pollution, by slightly however, a policy of sharing the costs of less increasing initial product cost. That increase environmentally damaging alternatives to in cost is more than offset by the savings in building transmission lines. This financing reduced energy consumption the consumer structure virtually ensures that in every experiences in using the product over its situation the choice will be to “build” poles lifetime. and wires, rather than to invest in efficiency and distributed small-scale generation that In the alternative, a tax or fee system can might make them unnecessary, Some of these be used more visibly to increase the cost issues were addressed in the renewable energy of inefficient technologies or products, and legislation that passed during the 2005 session. decrease the cost of more efficient ones. Just like an automobile feebate can encourage The bill requires the state of Vermont efficiency in car shopping, an appliance feebate to lobby the regional authority, ISO New can encourage efficiency as consumers shop England, to allow for socialization of costs for for appliances ranging from air conditioners to more creative reliability measures other than ovens. This strategy is also attractive because construction of transmission lines. Another while the state can set minimum efficiency provision in the legislation now requires standards for some common appliances such utilities to consider least cost planning for as torchiere lamps and cable boxes, federal law transmission projects. Changing the current may pre-empt state efficiency standards, but system to provide “equal-opportunity” funding not taxes or feebates on other products like air is completely consistent with the principles of conditioners. tax shifting, and could have a dramatic impact on the environmental profile of New England’s electric supply mix.

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Product efficiency feebate option . A tax credit could be provided to employers for Vermont who provided an “energy efficiency benefit” (“EEB”) to their employees. Under such a Vermont could easily commission a survey system a business offers employees a “one of the most energy intensive appliances time” benefit of (for instance) $500 to finance on the market, including air conditioners, an audit and investment in efficiency in their refrigerators, clothes-dryers and others, and homes. Employees would have to spend at then establish a sliding scale feebate where least an additional $500-$1000 in efficiency less efficient models are charged a higher investments. The credit offered would be sales tax and more efficient models are (for instance) one half of the company contri- charged less. This program could be used as bution. In this manner a public expenditure of a complement to, or in lieu of, rebates for $250 would be multiplied at least four times. efficient products that are currently offered by The business has in effect “paid” the employee the EEU, thus potentially freeing up more of far more than the direct $500 contribution, the EEU resources to focus on other efficiency because the employee will save on energy bills programs. Finally, if the program were for years. The local economy would benefit structured so that the most efficient products from new jobs created to install the efficiency could be bought without sales tax in Vermont measures; fossil fuel dependency and emissions many retailers would gain an advantage over would be reduced. New York state retailers for sale of such products, and would become competitive again Nuclear waste tax with New Hampshire retailers. Nuclear power produces one of the most Tax holiday for efficient appliances option . toxic wastes known to human kind. Nuclear The state for Vermont waste is lethal in incredibly small amounts can use both for thousands of years. No safe and effective regulation and One proposal the legislature should consider way to store this waste has been devised the tax code after 50 years of effort. Uranium must be is a limited “tax holiday” for very efficient to encourage energy intensively mined and then enriched, appliances such as air conditioners. For a efficiency limited period of time (one month) these requiring significant energy input before in common super-efficient products would be exempt the fuel is even useful. Once nuclear fuel is from the sales tax, and such an exemption, created, great care and expense must be taken appliances. in combination with an EVT rebate would to transport it safely from the enrichment encourage vendor promotions and ensure a site to Vermont’s reactor. Once there the fuel high stocking level for the efficient products. produces a tremendous amount of energy per pound of fuel, but the plutonium “waste” has Tax credit options been incorporated into the cycle of energy production. Although just over half of the Two examples of how Vermont might use electricity generated by Vermont’s nuclear tax credits to promote efficiency also deserve power station, Vermont Yankee, stays in consideration. Vermont, at present all of the high-level waste the plant has ever generated (roughly Vermont should provide a tax credit for 2800 fuel rods) is still in the state. This waste the construction (or retrofit) of industrial and represents a clear public health and safety risk commercial buildings that attain a very high to the people of Vermont. Were the spent fuel level of energy efficiency—in the range of 30- to catch fire, the ensuing cloud of radioactive 40% better than conventional energy usage. smoke could render all of Vermont, as well This would reward building owners with a as huge stretches of neighboring states and lifetime of lower bills, improve the overall Canada uninhabitable for decades. state energy profile, encourage growth in the industries that design and build such buildings, and reduce pollution.

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Nuclear waste tax option for Vermont • Promotion of farm methane generating systems that facilitate better manure It is appropriate and reasonable for the management, reduce greenhouse gasses, legislature to enact a significant annual tax and improve farm economics. on each spent fuel rod stored in the state. By taxing high-level waste, the legislature would The Legislature took a step in the right use the tax code to provide an incentive for direction in 2005 when it passed legislation phasing out one of Vermont’s least sustainable which permits Vermont Yankee to seek energy supplies. At a minimum the tax would permission from the Public Service Board help accelerate waste removal from a site that to store spent nuclear fuel in “dry casks.” was never intended to be a long-term waste (Vermont Yankee is owned by Entergy Nuclear, storage facility. If the legislature were then a Louisiana-based company that owns power to channel this revenue into a dedicated fund generating stations in many states and abroad.) for renewable energy and energy efficiency investments, the tax would serve a dual A portion of the dry cask bill requires By taxing high- purpose of encouraging sustainable energy Entergy to pay $2.5 million per year into level waste, development even as it discouraged the a renewable energy development fund in the legislature creation of dangerous waste. exchange for being allowed to store waste in dry casks. Though these funds are small in would use To ensure that the money is used effectively, absolute terms, they represent a significant the tax code the legislature should direct that the revenue increase in funds available for renewable to provide from the tax on spent fuel be used for some or energy development in Vermont. Invested well, an incentive all of the following purposes: those funds can help create alternative sources for phasing of renewable energy that will strengthen out one of • Expansion of Efficiency Vermont services Vermont’s bargaining position when it comes Vermont’s least to cover thermal efficiency (for un-regu- time for renewal of Hydro Quebec contracts sustainable lated fossil fuels) and on-site generation and replacement of Vermont Yankee power energy of electricity that uses the “waste” heat when the license expires in 2012. supplies. from combustion to meet heating and cooling loads (known as combined heat The agreement also directs the Public and power applications). Service Board to play a significant role in determining appropriate measures to protect • Aggressive development and promotion public health and the environment in their of wood chip and pellet heating systems permitting process. Taxing this dangerous in Vermont in medium-sized community pollution in order to fund the development of energy systems that distribute heat to renewable energy would help advance the tax- multiple buildings and generate electric- shifting concept overall. ity as well. Payment into the fund is contingent on • Stable funding for small-scale renewable the approval of a recently proposed “uprate” energy incentive programs to promote in power production at Vermont Yankee that solar photovoltaic, solar thermal, and is currently under review by state and federal small wind applications. regulators. An “uprate” would allow Vermont Yankee to increase their power output 20 • An aggressive program to promote percent beyond what they are currently legally residential efficiency through improved allowed to produce. insulation, air sealing, and other improve- ments.

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Where to Start Increasing taxes on energy use would have the biggest impact on improving economic Vermont can begin a small tax shift in a efficiency and human and environmental variety of ways. health. While some of the energy taxes described above are regressive, measures that Decreasing property taxes further would counteract this flaw could accompany the be highly visible, would have widespread taxes. Solid waste taxes, variable pricing on appeal, and would benefit both families solid waste disposal, and expanded deposit/ and businesses. Reducing the sales tax is refund systems are attractive because they attractive because the tax impacts low-income are manageable, predictable, and there is wage-earners disproportionately, but reduced widespread experience with them in Vermont payments from a lower sales tax aren’t as and the U.S. Whatever the form of Vermont’s visible as reduced property taxes. On the other next tax shift, it should be sensibly sized, hand, eliminating the sales tax in downtowns easy to understand, easy to administer, highly would be a large enough reduction to be visible, and very beneficial for Vermont. There visible, and downtown economies would are a multitude of good options for specific tax get a significant boost. Reducing payroll shifts in Vermont. taxes paid by businesses is very desirable, because it would create an upward spiral for Tax shifting is a smart way to harness the full employment in the economy. Finally, power of the economy to work for us rather eliminating the income tax for Vermonters than against us. If we do it wisely, tax shifts who earn less than a livable wage is an will strengthen our economy, make our excellent way to address the regressive nature environment more beautiful and healthy, of our current and future tax systems. preserve our social goods, and keep taxes fair and efficient for all Vermonters.

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Chapter 3 Vermont’s Environmental Taxes, Revenues and Expenditures

urrently, Vermont places a variety of licensing to move towards compliance with taxes and fees on socially and environ- both federal and state standards. Vermont has Cmentally harmful activities, and uses made great progress, but it has, along with incentives and other mechanisms to encourage many other states, been facing a problem: beneficial activities. Some of the state’s taxes revenues from these environmental and partic- have been in place for some time while others ularly transportation and energy related taxes are more recent. Most of the taxes raise are sorely needed to shore up the general fund. modest amounts of revenue. Many of the tax rates, such as those for air contaminant Given the current fiscal realities, pressures emissions and water discharge fees, are too for tax reform, and the public perception that small to effectively discourage pollution. there are perhaps more important problems— Some of the revenues from these taxes are national security, crime, education and social re-invested in pollution cleanup, monitoring, welfare programs—it is unclear whether or energy-saving programs or cover the costs Vermont might divert more of its environ- of administering permit programs and state mental taxation and revenue scheme into the regulations. Others are deposited into the general fund. It is clear that these taxes will general fund. increasingly play a very important role in funding Vermont’s current system of environ- In addition to the taxes and fees described mental planning, regulation, monitoring below, there are a host of permits and licenses and remediation. It is also clear that state which carry fees that the state requires to governments often divert funds away from protect environmental quality, including the pressing problems for which they were stream alteration permits, sludge facility originally raised and appropriated. certifications, product registration fees for items containing pesticides, and many others. Energy-Related Taxes and Fees The federal income taxation scheme also will carry over to state tax liability, because Fuel Gross Receipts Tax65 state taxation is often based on the amount of federal taxable income. Thus, federal Vermont places a 0.5% gross receipts tax deductions for hybrid vehicles would also on the retail sale of heating oil, kerosene, be recognized for purposes of state income propane, natural gas, electricity, and coal when taxation. the seller receives more than $10,000 per year for the sale of such fuels. The tax will be Since 1997, fiscal pressures on both the collected through June 2008, when it expires. State and Federal governments have increased Some fuel sellers are eligible for rebates of this dramatically. Vermont has used revenue tax. from various environmental taxes, fees, and

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Revenues from this tax provide funds Heating Oil Tax70 for the state’s Weatherization Assistance Program, which helps low-income Vermonters A new heating oil tax was enacted starting weatherize their homes in order to reduce July 1, 2004, levied separately from the fuel their energy bills. Vermonters earning 150% gross receipts tax. The heating oil tax is one- or less of poverty level income are eligible for half cent per gallon of heating oil or kerosene, the program. Between 1980 and 2001 this fund and is paid by retail sellers receiving more than helped Vermonters weatherize 33,594 homes.66 $10,000 per year in sales for these fuels. The The fuel gross receipts tax was instituted in tax is set to expire in April 2008. 1990 in order to provide a stable funding source for the program in the face of diminishing Revenue from this tax is deposited into federal support.67 The gross receipts tax is the the Petroleum Cleanup Fund, which funds largest funding source for the Weatherization the restoration and cleanup of soil and Assistance Program; in 2001, the tax provided groundwater contaminated by the release of about 81% of the program’s funds.68 petroleum from underground storage tanks and pays third-party claims for compensation.71 Under the program, progressivity is enhanced because bills are dramatically Electric Energy Tax72 reduced for the poorest Vermonters; competitive disadvantage is avoided because Vermont levies an annual tax on electric the tax is so small; and yet least cost principles generating plants constructed after 1965 with are implemented because an effective a generating capacity of 200,000 kilowatts capacity to provide efficiency to low income or more over a 3-year average. The tax is $2 Vermonters is enhanced. Environmental million for plants with less than 2,300,000 benefits are provided because fuel consumption megawatt hours, and a higher graduated tax is significantly reduced. The economy is for plants producing more megawatt hours. strengthened because fewer dollars flow out In addition, the same plants pay an education of state; and the demand for public subsidies property tax of $1.465 million for plants for winter heating is at least stabilized if not producing less than 2,300,000 megawatt hours reduced. over a 3-year average, with a similar higher graduated tax for more megawatt hours. The program is a stunningly successful case study in effective tax shifting. A very small tax increase on energy consumption (much Revenues collected from of it fossil fuel) funds a program to build the electric energy tax73 “alternative” capacity to deliver efficiency services that improve the economy, provide 2000...... $5,927,676 savings and comfort, and reduce emissions. 2001...... $3,117,905 2002...... $2,809,859 2003...... $2,577,328 Revenues collected from the 2004...... $2,767,228 fuel gross receipts tax69

2000...... $4,660,257 Utilities Gross Receipts Tax74 2001...... $4,919,472 2002...... $4,732,476 Cooperative, municipal, and privately 2003...... $5,195,947 owned companies that generate, distribute, 2004...... $5,532,603 sell, or transmit electric energy in Vermont are taxed annually at a rate of 0.5% of their gross operating revenue. Gas utilities are taxed annually at a rate of 0.3% of their gross operating revenue.

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Revenues of this tax fund the activities of motor vehicles (see description under “Motor the Vermont Public Service Board and the Vehicle Purchase and Use Tax”). Vermont Department of Public Service. The Board is Vermont’s quasi-judicial body that Revenues from this tax are deposited into makes decisions related to regulated utilities the state’s general fund. and companies, including electric, gas, water, phone, and cable companies and utilities. The Department acts as a consumer advocate in Estimated Revenues from cases before the Board, undertakes energy Sales Tax on Commercial Energy and telecommunications planning efforts and energy efficiency activities, and oversees 2000...... $12,010,000 regulations related to utility systems. 2001...... $12,800,000 2002...... $13,500,000 2003...... $14,200,000 Revenues collected from 2004...... $15,000,000 utilities gross receipts tax75

2000...... $5,013,416 Motor Fuel Taxes and Fees77 2001...... $5,315,430 2002...... $5,536,710 Gasoline is taxed at 20 cents per gallon 2003...... $5,585,151 in Vermont, which includes a one-cent per 2004...... $5,669,316 gallon Petroleum Cleanup Fee (see “Petroleum Cleanup Fee” section). Diesel fuel is taxed at 26 cents per gallon, including one cent per Sales Tax on Commercial gallon for the Petroleum Cleanup Fee. There Energy Use are several exemptions to the diesel tax.

There is a 6% sales tax on electricity, In addition to gasoline and diesel taxes, natural gas, fuel oil, propane, and wood that there are a number of other taxes placed is sold to commercial establishments in on transportation fuels and infrastructure, Vermont. When any of the above fuels are including railroad fuel, aviation jet fuel, used in motor vehicles, this tax does not apply. aviation gasoline, and railroad property.78

The sales tax applies to most products sold Most of the revenues from the gasoline in Vermont, but it does not apply to energy and diesel tax go to the transportation fund, used in the residential, industrial, and farm which provides money for road construction, sectors. In addition, the sales tax does not maintenance, and other transportation projects. apply to motor vehicle fuels, or to the sale of The gasoline tax rate was raised in 1997 from 76 motor vehicles. However, a motor vehicle 15 cents per gallon to 19 cents per gallon in purchase and use tax does apply to the sale of order to offset property tax reductions that

Revenues collected from gasoline tax, by destination79

Fiscal Transportation Fish and Wildlife Education DUI Year Fund Fund Fund Enforcement Fund Total

2000 $52,800,000 $1,300,000 $10,300,000 $1,300,000 $65,700,000 2001 $52,500,000 $1,300,000 $10,500,000 $1,300,000 $65,600,000 2002 $52,600,000 $1,300,000 $10,500,000 $1,300,000 $65,700,000 2003 $52,600,000 $1,300,000 $10,800,000 $1,300,000 $66,000,000 2004 $54,300,000 $1,300,000 $10,800,000 $1,400,000 $67,800,000

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fund education. However due to changes from When a purchase tax is not paid (for Act 68 starting in 2004, the revenue from the example, when a vehicle is purchased out-of- gasoline tax that funded education now will state), there is a motor vehicle use tax assessed fund transportation. at the same rates and with the same rules as the purchase tax. The tax is assessed when a Vermont also levies a petroleum distributor vehicle is first registered, or when the vehicle license fee. A distributor is classified as registration is transferred. wholesaler or retailer who imports motor fuel. There also is a titling tax levied in cases where no purchase or use tax applies. The Revenues collected from diesel tax80 titling tax is assessed at the same rates and with the same rules as the purchase tax and 2000...... $14,900,000 is paid at the time of obtaining a certificate of 2001...... $17,800,000 title to the vehicle. 2002...... $16,600,000 2003...... $16,400,000 There are a number of exemptions to this 2004...... $18,000,000 tax.

The motor vehicle purchase and use tax Revenues collected from Petroleum was last changed in 1997 when the rate was Distributor License Fee increased from 5% to 6% to provide funds for education. Starting in 2004, the revenue 2000...... $3,500,000 from the gasoline tax that funded education 2001...... $3,500,000 will fund transportation, and a larger portion 2002...... $3,500,000 of the motor vehicle purchase and use tax (1/3 2003...... $3,500,000 instead of 1/6) will fund education. 2004...... $3,600,000 Motor vehicle registration fees

Motor Vehicle Purchase and Vermonters pay annual motor vehicle 81 Use Tax registration fees for all motorized vehicles. There is a flat fee of $50 for automobiles. There is a motor vehicle purchase tax Registration fees for trucks are based on their assessed on Vermont residents who purchase a loaded weight and type of fuel used. For motor vehicle. The tax is assessed in place of a example, an owner of a gas or diesel truck sales tax on motor vehicles. The tax rate is six weighing 17,000 pounds when loaded would percent of the taxable cost of the vehicle. For pay $286.83 trucks weighing 10,100 pounds or more, the maximum tax is $1,100. Motor vehicle registration fees fund the Department of Motor Vehicles and transportation projects. Revenues collected from motor vehicle purchase Vermonters often may and use tax, by destination82 support special efforts, such as the conservation license plate. Fiscal Transportation Education Year Fund Fund Total 2000 $57,900,000 $11,600,000 $69,500,000 2001 $62,300,000 $12,400,000 $74,700,000 2002 $67,700,000 $13,200,000 $80,900,000 2003 $68,700,000 $13,400,000 $82,100,000 2004 $71,900,000 $14,300,000 $86,200,000

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87 Air and Water Pollution Water Discharge Fee Taxes and Fees Vermont levies fees on individuals and Air Contaminant Emissions Fee84 businesses that discharge wastes into lakes, rivers, reservoirs, or other waters. The fees Vermont levies annual registration fees on are based on the volume and types of waste air emissions of sulfur dioxide, particulate discharged. Applications for discharge permits matter, carbon monoxide, nitrogen oxides, carry a fee of $100, and there are application and hydrocarbons. Businesses and individuals review fees and annual operating fees. who generate more than five tons of emissions per year pay $0.021 per pound, and those who Revenues from water discharge fees are generate more than ten tons per year pay an deposited into the environmental permit fund $924 fee in addition to the rate per pound.85 and used to cover expenses related to the state’s environmental permit programs. To address the toxicity of air contaminant emissions, Vermont also levies annual fees on businesses and individuals who emit Revenues collected from 88 more than five tons per year of hazardous air water discharge fees contaminants that cause short-term irritant effects, that cause chronic systemic toxicity, 2000...... $102,962 that are known or suspected to cause cancer, 2001...... $140,723 and that result from the combustion of coal, 2002...... $265,171 wood, fuel oil, propane, and natural gas. 2003...... $381,782 2004...... $570,000 Revenues collected from air contaminant emissions fees are deposited in the state’s 89 environmental permit fund and are used to Stormwater Fee cover all the costs of the operating permit program for air emissions. Revenues A stormwater fee was instituted in 2001; collected from hazardous air contaminant previously it had been levied as part of the emissions fund the hazardous air contaminant water discharge fee. There are three parts to monitoring program, which undertakes the fee: the administrative operating fee ($100); activities to monitor the presence of hazardous the application review fee ($300 per acre of contaminants in the air, assess risks, and impervious surface in a Class B watershed, gather data. $1,170 per acre of impervious surface in Class A watershed); and an annual operating fee ($50 per acre of impervious surface in Class B Revenues collected from watershed, $235 per acre of impervious surface air contaminant emissions fees86 in Class A watershed).90 The revenues are used to fund ANR’s permitting programs. 2000...... $360,700 2001...... $225,100 The Vermont Agency of Natural Resources 2002...... $278,500 issues stormwater permits to new construction 2003...... $360,700 sites and developments with large impervious 2004...... $313,000 surfaces. Stormwater deposits contaminants (3/4 year only) such as animal waste, fertilizers, pesticides, copper, zinc, lead, oil, grease, phosphorus, and soil particles into rivers.

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disposal.) Some hazardous waste is exempt Revenues collected from from the tax. The hazardous waste tax was 91 stormwater fee most recently changed in 1997, when the tax rates were raised. 2001...... $36,100 2002...... $198,300 The revenues collected from the hazardous 2003...... $318,700 waste tax are used to improve hazardous 2004...... $318,700 estimated waste management and mitigate the effects of hazardous waste releases into the environment.

Waste Taxes, Fees, and Incentives Total Hazardous Waste Revenues94

92 Solid Waste Tax 2000...... $370,704 2001...... $335,103 Operators of solid waste facilities and 2002...... $427,238 waste transfer facilities in Vermont pay a 2003...... $572,081 tax of $6.00 per ton of waste. The tax also is 2004...... $352,317 assessed when waste is shipped to an out-of- state facility without first being delivered to a transfer facility in Vermont. Certain landfill Deposit/Refund for Beverage operators that receive 1,000 tons of waste per Containers year or less may, if they choose, pay a tax of $2.80 per cubic yard instead of $6.00 per ton. Vermont requires a five-cent deposit to In addition, certain types of waste are excluded be placed on the sale of glass, metal, paper, from the tax. or plastic containers of beer, malt beverages, mineral waters, mixed wine drinks, soda water, Revenues from the solid waste tax are and carbonated soft drinks. (Containers that deposited into the waste management are biodegradable do not require a deposit.) assistance fund, which funds activities that Liquor containers that are greater than 50 enhance solid waste management in the state. milliliters in volume are required to have a deposit of fifteen cents. The deposit is paid by the consumer and refunded to the consumer Revenues collected from by a retailer or redemption center when the waste taxes empty containers are returned. Distributors and manufacturers compensate retailers and 2000...... $2,599,374 redemption centers for redeeming and handling 2001...... $3,052,700 the containers. All beverage containers must 2002...... $2,765,289 be labeled with the deposit amount. 2003...... $3,199,289 2004...... $3,243,041 Petroleum Cleanup Fee and Tank Assessment Fee95 Hazardous Waste Tax93 A fee of one cent per gallon is assessed on A tax is assessed on hazardous waste in all motor vehicle fuels sold in the state for the Vermont when the waste is shipped, or when purpose of providing cleanup funds for leaking facilities recycle, treat, store, or dispose petroleum storage tanks. The fee is collected of hazardous waste. The tax is based on in the same manner as the tax on motor fuels. the quantity of the hazardous waste and its ultimate destination (e.g., whether it is In addition to the petroleum cleanup fee, destined for recycling, treatment, or land- owners of underground storage tanks are

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required to pay an annual tank assessment fee Land Related Taxes, Fees, through June 2004. The fee does not apply and Incentives to fuel oil storage tanks used for on-premise heating, and to farm or residential tanks used Use Value Appraisal (Current Use) for storing motor fuel. The standard fee is for Agricultural and Forest Land97 $200 per tank, but some gasoline outlets and municipalities that use smaller amounts of Vermont’s use value appraisal program for motor vehicle fuel pay $100 per tank. agricultural and forest land allows approved lands to be assessed for property tax purposes Most hazardous releases into Vermont’s based on their current use values rather environment come from leaking underground than their fair market values. To qualify for petroleum storage tanks. Underground storage the program, forest land must be at least 25 tanks often start to leak when they are about acres and must be managed under a 10-year 25 years old. Because Vermont has always forest management plan that meets certain relied heavily on fuel oil for heating, there minimum standards. Agricultural land must are many aging tanks that have the potential be at least 25 acres, with some exceptions, to leak in the near future, posing hazards to and must be used for agricultural purposes. A human health and the environment. Federal current use advisory board is responsible for law required that single-wall commercial determining current use assessment values.98 underground storage tanks be replaced by newer, safer tanks by December 1998. A state Use Tax Reimbursement Fund exists to reimburse municipalities for the Petroleum cleanup fees and tank assessment property tax revenues lost as a result of use fees are deposited into the Petroleum value appraisals. The fund is financed with Cleanup Fund. The fund was established in appropriations from the Legislature and from 1987 after private insurance companies no the revenues raised from the Land Use Change longer were willing to cover cleanup costs Tax. associated with leaking fuel tanks.96 The fund program originally provided money to Vermont’s tax break for keeping land in the clean up and restore contaminated soil and use value appraisal program is combined with groundwater caused by petroleum releases a tax penalty for subsequently developing that from underground fuel storage tanks. In 1997, land. If land that was previously appraised the program also started to provide money for under the use value appraisal program is leaking above-ground tanks. subsequently developed, a 10% land use change tax on the full fair market value of the changed land is assessed. Revenues collected from the Petroleum Cleanup Fee and The use value appraisal program was Tank Assessment Fee originally started in 1977 when legislators recognized that people who lived off the Fiscal Petroleum Annual Tank Year Cleanup Fee Assessment Fee income of farm and forest land were taxed 2000 $3,999,099 $361,870 beyond their ability to pay. The program 2001 $3,967,028 $361,308 has several goals, including encouraging 2002 $4,351,115 $366,134 agricultural and forest land to remain in 2003 $4,115,480 $364,060 productive use now and in the future, 2004 $2,385,227 Not available helping to maintain Vermont’s working rural landscape, encouraging the protection of ecological systems, and discouraging accelerated development of open lands.

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Capital Gains Tax on Speculative The disbursement of the property transfer Land Sales99 tax revenues is codified in statute, however this disbursement formula has not been Vermont taxes the capital gain realized from followed in the past several years. The the sale or exchange of land held for less than disbursement formula in statute is: 1% to the six years, in order to deter short-term, high- Tax Department; 33% to the General Fund; profit land speculation. The number of years 50% to the Housing and Conservation Trust the land has been held prior to the sale and Fund; and 17% to the Municipal and Regional the extent to which the land has risen in value Planning Fund (MRPF). Of the 17% going to determine the tax rate, which ranges from 5% the MRPF, 70% of it was earmarked in statute to 80% of the gain. There are a number of for the Regional Planning Commissions; 20% exemptions from this tax. for the Municipal Planning Grants (MPG) program; and 10% for Vermont Center for The revenues are deposited into the general Geographic Information (VCGI). In Fiscal fund and the Property Tax Rebate Trust Fund, Year 2005, the General Fund received roughly which funds property tax rebates and credits in double the amount it would have received the state. under the statutory formula, while the other categories received roughly one-half of what they would have received. Revenues collected from capital gains tax on 100 speculative land sales Property Transfer Tax Disbursements, Fiscal Year 2005103 2000...... $1,729,903 FY 2005 FY 2005 (Passed 2001...... $2,010,081 Formula in legislature) 2002...... $1,915,651 Tax Dept. $438,000 $288,000 2003...... $2,672,174 General Fund $14,309,460 $27,138,080 2004...... $4,288,132 Housing and Conservation Trust Fund $21,681,000 $12,604,000 RPCs $5,160,078 $2,638,944 101 Property Transfer Tax MPGs $1,474,308 $753,984 VCGI $737,154 $376,992 Vermont levies a property transfer tax on the sale of real property. Currently, the Total $43,800,000 $43,800,000 purchaser pays a tax at the rate of 0.5% on the first $100,000 of the property, and 1.25% on the amount above $100,000, for the purchase Property Transfer Tax Revenues104 of a principal residence. For the purchase of a non-principal residence, the rate is 1.25% on 2000...... $20,948,234 102 the entire amount. 2001...... $22,745,881 2002...... $26,764,285 2003...... $30,424,383 2004...... $33,951,657

43 Tax Reform That Agrees With Vermont

Endnotes

1 Vermont Department of Taxes, 2004 12 Vermont Department of Public Service, 23 Friends of the Earth, “Gas Guzzler Annual Report: Division of Property 2004 Vermont Comprehensive Energy Loophole: SUVs and Light Trucks Drive Valuation and Review, 2004. and Electric Plan: Final Draft, December off with Billions,” 2000, www.foe.org. 2003. 2 Vermont Legislative Joint Fiscal Office, 24 U.S. Dept. of Energy, Energy 2004 Fiscal Facts, 2004. 13 David Anderson and Gerard Information Administration, “U.S. McCullough, The Full Cost of Retail Gasoline Prices,” http://www. 3 Vermont Department of Taxes, Revenue Transportation in the Twin Cities eia.doe.gov/oil_gas/petroleum/data_ Acconting System Tax Receipts Region, August 2000, www.cts.umn. publications/wrgp/mogas_home_page. Summary, June 30, 2004; and Vermont edu/trg/research/reports/TRG_05.html. html Legislative Joint Fiscal Office, 2004 Fiscal Facts, 2004. 14 U.S. Federal Highway Administration, 25 Econoday, “2005 U.S. Economic Events Highway Statistics 2003, Table MF- and Analysis: Motor Vehicle Sales,” 4 Vermont Legislative Joint Fiscal Office, 121T, www.fhwa.dot.gov/policy/ohim/ fidweek.econoday.com/reports/US/ 2004 Fiscal Facts, 2004. hs03/index.htm. EN/New_York/motor_vehicle_sales_1/ 5 John Demeter, “Green Tax 15 year/2005/yearly/01/. U.S. Energy Information Recommendations,” November 28, 26 Administration, Department of Energy, MSNBC News, “Gas prices eat into 2004, http://www.uvm.edu/~gflomenh/ Weekly Retail Premium Gasoline Prices sales of large SUVs,” March 15, GRN-TAX-VT-PA395/papers.html. (Including Taxes), http://www.eia.doe. 2005, http://www.msnbc.msn.com/ 6 The true rate is slightly lower, since gov/emeu/international/gas1.html. id/7181566/. self-employed workers can deduct a 16 27 U.S. Environmental Protection Agency, Edmunds.com, “Edmunds.com Looks portion of the payroll taxes from tax- “Emission Facts,” www.epa.gov/otaq/ Back at 2004 and Forecasts 2005 able income. John Demeter, “Green consumer/f00013.htm. Automotive Trends,” January 3, 2005, Tax Recommendations,” November 28, http://www.edmunds.com/help/about/ 2004, http://www.uvm.edu/~gflomenh/ 17 U.S. Federal Highway Administration, press/104065/article.html. GRN-TAX-VT-PA395/papers.html. Highway Statistics 2003, Table MV-1, www.fhwa.dot.gov/policy/ohim/hs03/ 28 Rick Popely of Chicago Tribune, 7 Ted Halstead, The Washington Post, index.htm. Detroit Free Press, “Impact of tightened “The Big Tax Bite You Don’t Even fuel rules for light trucks is unknown,” Think About,” April 23, 2000, http:// 18 National Automobile Dealers March 3, 2005, www.freep.com; and www.newamerica.net/index.cfm?pg=arti Association, “Auto Sales to Continue Friends of the Earth, “Gas Guzzler cle&DocID=201. Modest Climb in 2005, Reports NADA Loophole: SUVs and Light Trucks Drive Chief Economist,” www.nada.org/ 8 John Demeter, “Green Tax off with Billions,” 2000, www.foe.org. Content/NavigationMenu/Newsroom/ Recommendations,” November 28, 29 News_Releases/2005/TaylorForecast_1- Vermont Department of Public Service, 2004, http://www.uvm.edu/~gflomenh/ 30-2005.htm. Fueling Vermont’s Future, July 1998. GRN-TAX-VT-PA395/papers.html. 19 U.S. Federal Highway Administration, 30 Vermont Joint Fiscal Office, 2005 Fiscal 9 Vermont Department of Public Service, Highway Statistics 2003, Tables MV-1, Facts, 2005. 2004 Vermont Comprehensive Energy MV-9, www.fhwa.dot.gov/policy/ohim/ and Electric Plan: Final Draft, December 31 U.S. Federal Highway Administration, hs03/mv.htm. 2003. Highway Statistics 2002. 20 U.S. Environmental Protection Agency, 10 Vermont Department of Public Service, 32 Vermont Joint Fiscal Office, 2005 Fiscal Model Year 2005 Fuel Economy Guide, 2004 Vermont Comprehensive Energy Facts, 2005; and Andrew Jope, UVM www.fueleconomy.gov/feg/FEG2000. and Electric Plan: Final Draft, December student. htm. 2003, quoted in Vermont Public Interest 33 21 Vermont Public Interest Research Research Group, Clean energy for U.S. Environmental Protection Agency, Group. Vermont: plan today for tomorrow, Light-Duty Automotive Technology and Summer 2004. Fuel Economy Trends: 1975 through 34 New England Climate Coalition, 11 2004, April 2004, www.epa.gov/otaq/ Getting on Track: New England’s U.S. Federal Highway Administration, cert/mpg/fetrends/420r04001.pdf. Rising Global Warming Emissions and Highway Statistics 2003, Tables SF-1 22 How to Reverse the Trend, February and LGF-1, www.fhwa.dot.gov/policy/ U.S. Environmental Protection Agency, 2005. ohim/hs03/mv.htm. www.fueleconomy.gov, “Frequently Asked Questions,” www.fueleconomy. gov/feg/info.shtml#guzzler; and Friends of the Earth, “Gas Guzzler Loophole,” 2000.

44 Tax Reform That Agrees With Vermont

35 New England Climate Coalition, 47 Vermont Agency of Agriculture, Food, 58 Container Recycling Institute, Getting on Track: New England’s Rising and Markets, “Commercial Applicator “Beverage Container Deposit Systems Global Warming Emissions and How to Pesticide Usage Summary for 2003,” in the U.S.,” http://www.bottlebill.org/ Reverse the Trend, February 2005. http://www.vermontagriculture.com/ geography/usa_deposit.htm pestuse2003/pidpestuse2003.htm. 36 Vermont Public Interest Research 59 Miquel Llanos, MSNBC, “Plastic bottles Group. 48 Vermont Agency of Agriculture, Food, pile up as mountains of waste,” March and Markets, “Pesticide Monitoring 3, 2005, http://www.msnbc.msn.com/ 37 Vermont Agency of Natural Resources, Program,” http://www.vermontagricul- id/5279230/. Air Pollution Control Division, Air ture.com/pidagchem.htm. Pollution from Motor Vehicles in 60 Container Recycling Institute, Vermont. 49 Cheryl Diersch, “Progressive poli- “Growing problem of beverage con- cies to eliminate pesticide hazards,” tainer waste,” http://www.bottlebill. 38 Vermont Department of Public Service, November 23, 2004, http://www.uvm. org/about_bb/campaigns-national.htm Fueling Vermont’s Future, July 1998. edu/~gflomenh/GRN-TAX-VT-PA395/ 61 Container Recycling Institute, 39 European Environment Agency, papers.html. “Beverage Container Deposit Systems Environmental Taxes: Recent 50 Brian Skoloff, Associated Press, “Farm in the U.S.,” http://www.bottlebill.org/ Developments in Tools for Integration, Scene: Pesticide tax, farmer education geography/usa_deposit.htm. www.reports.eea.eu.int/Environmental_ could lessen pollution from runoff, Issues_No_18/en. 62 Container Recycling Institute, “What report says,” February 16, 2005, http:// is a bottle bill?” http://www.bottlebill. 40 EcoSecurities, The Costa Rican System www.ebfarm.com/News/NewsStories/ org/about_bb/bottlebill-whatis4.htm of Direct Payment for Environmental PesticideTax021605.aspx 63 Services, www.ecosecurities.com/ 51 Melissa Bailey, “Applications of Land New Rules Project, “Iowa Groundwater 200about_us/233costa_rica. Value Taxation,” 09/21/04, http://www. Protection,” http://www.newrules.org/ uvm.edu/~gflomenh/GRN-TAX-VT- 41 Barry Rabe, Statehouse and Greenhouse: environment/iaground.html. PA395/papers.html. The Emerging Politics of American 52 Cheryl Diersch, “Toxic chemicals are Climate Change Policy, pp. 123-124, 64 Melissa Bailey, “Applications of Land poisoning us… what’s being done to quoted in Andrew Jope, “Carbon Tax Value Taxation,” 09/21/04, http://www. stop this injurious behavior using tax Possibilities in Vermont: A Fitting uvm.edu/~gflomenh/GRN-TAX-VT- reform?” September 29, 2004, http:// Policy Laboratory?,” 9/21/04, http:// PA395/papers.html www.uvm.edu/~gflomenh/GRN-TAX- www.uvm.edu/~gflomenh/GRN-TAX- VT-PA395/papers.html. 65 33 V.S.A. § 2503. VT-PA395/papers.html. 53 66 42 Brian Skoloff, Associated Press, “Farm Vermont Weatherization Program Andrew Jope, “The Case for a Vermont Scene: Pesticide tax, farmer education Overview, January 2002; available at Carbon Tax,” 11/16/04, http://www. could lessen pollution from runoff, http://www.ahs.state.vt.us/oeo/wxpo. uvm.edu/~gflomenh/GRN-TAX-VT- report says,” February 16, 2005, http:// htm. PA395/papers.html. www.ebfarm.com/News/NewsStories/ 67 43 See note 61. Andrew Jope, “The Case for a Vermont PesticideTax021605.aspx 68 Carbon Tax,” 11/16/04, http://www. 54 Thomas Benoit, “Solid Waste Tax,” See note 61. uvm.edu/~gflomenh/GRN-TAX-VT- September 21, 2004, http://www.uvm. 69 PA395/papers.html. Vermont Office of Economic edu/~gflomenh/GRN-TAX-VT-PA395/ Opportunity. 44 The Woman’s Foundation of California, papers.html. 70 10 VSA § 1942. “Confronting Toxic Contamination 55 U.S. Environmental Protection Agency, in Our Communities,” www.wom- 71 “Pay-as-you-throw: Vermont,” http:// Vermont Department of Taxes, ensfoundca.org/media_env_key.html. www.epa.gov/epaoswer/non-hw/payt/ “Highlights of Tax Legislation Passed in 45 Vermont Agency of Agriculture, Food, states/vt.htm. 2004.” 72 and Markets. 56 Thomas Benoit, “Solid Waste Tax,” 32 VSA § 8661 and 32 VSA § 5402a. 46 “Cooling tower” usage refers to antimi- September 21, 2004, http://www.uvm. 73 Vermont Department of Taxes. edu/~gflomenh/GRN-TAX-VT-PA395/ crobial pest control for the use of pes- 74 ticides to control pests in non-potable papers.html. 30 V.S.A. §22. cooling waters and in water or slurries 57 75 Thomas Benoit, “Solid Waste Tax,” Vermont Department of Public Service. used in industrial processing, in, on or September 21, 2004, http://www.uvm. 76 around human dwellings, commercial Vermont Department of Public Service. edu/~gflomenh/GRN-TAX-VT-PA395/ establishments, or institutions. papers.html.

45 Tax Reform That Agrees With Vermont

77 23 VSA §3101; §3001 85 Vermont Agency of Natural Resources, 94 Vermont Department of Taxes, 2002 Permit and License Information, Biennial Report and 2004 Biennial 78 Vermont Department of Public Service. Air Pollution Annual Registration, Report. 79 Vt. Legislative Joint Fiscal Office, Stationary Sources, Revised 02/05. 95 10 V.S.A. §§ 1941–44. Transportation Fund Revenue Forecast 86 Personal conversation with Corrie Update, July 2004; and Vt. Legislative 96 Vermont Department of Public Service. Dunn, Vt. Dept of Environmental Joint Fiscal Office, Education Fund Conservation, Air Pollution Control 97 32 V.S.A. §§ 3751–3776. Revenue Forecast Update, July 2004. Division.. 98 80 Personal conversation with Bill Snow, Vt. Legislative Joint Fiscal Office, 87 3 VSA § 2822 (j) (2). Current Use Programs Chief, Vermont Transportation Fund Revenue Forecast 88 Department of Taxes, 2/99. Update, July 2004; U.S. Federal Vt. Department of Environmental Highway Administration; http://www. Conservation, Wastewater Management 99 32 V.S.A. §§ 10001–10011. fhwa.dot.gov/policy/ohpi/hss/hsspubs. Division. 100 Vermont Department of Taxes; personal 81 89 32 V.S.A. § 8901–23. 3 V.S.A § 2822. conversation with Mike Pietkowski, 82 90 October 2004. Vt. Legislative Joint Fiscal Office, Amanda Davis, “The Unaddressed Issue Transportation Fund Revenue Forecast of Water Consumption in Vermont,” 101 32 V.S.A. Chapter 231; 24 V.S.A. §4306; Update, July 2004; and Vt. Legislative November 16, 2004, http://www.uvm. 10 V.S.A. §312

Joint Fiscal Office, Education Fund edu/~gflomenh/GRN-TAX-VT-PA395/ 102 Revenue Forecast Update, July 2004. papers.html. Melissa Bailey, “Policy Analysis of Land Related Taxes in Vermont,” 10/12/04, 83 91 Vermont Department of Motor Vehicles, Vt. Department of Environmental http://www.uvm.edu/~gflomenh/GRN- “Vermont Vehicle Registration,” Conservation, Wastewater Management TAX-VT-PA395/papers.html.

http://www.aot.state.vt.us/dmv/ Division. 103 REGISTRATION/REGISTRATION. Vt. Joint Fiscal Office spreadsheet, from 92 32 VSA §5952. htm. John Shullenberger. 93 104 84 32 V.S.A. §§ 10101–10113. 3 V.S.A. §§ 2805, 2822. Vt. Department of Taxes website.

46

Tax Reform That Agrees With Vermont

The Vermont Fair Tax Coalition Members

American Flatbread The Natural Step of Vermont Association of Vermont Recyclers Noise Pollution Clearinghouse The Baldrige Network Northeast Organic Farming Association of Better Planet Books, Toys, and Hobbies Vermont (NOFA) Center for Small Business and the Peace & Justice Center Environment Powderhound Resort CET Solar Store Quality Solutions Chamberlain & Associates ReCycle North Child Care Resource Renewable Energy Vermont City of Burlington Ribbon Recyclers The Clean Yield Group Samii Clothes Community and Economic Development Save Our World–VT Office (CEDO) Seventh Generation Concept II Share the Wealth Controlled Energy Corp. Solar Barns Create Joy Coaching Southern Vermonters for a Fair Economy Dewey and Associates, Architects & Environmental Protection Energy Efficiency and Renewable Energy Spruce Mountain Design Services Stephanie Lahar and Associates The Fat Hat Factory, Inc. Taproot Consulting ForesTrade Vermont Businesses for Social Friends of the Earth Responsibility (VBSR) Gardener’s Supply Co. VBSR – Research & Education Foundation Global Resource Options, LLP Vermont Energy Investment Corporation Gund Institute for Ecological Economics (VEIC) Healthy Habitat Ecological Cleaning and Vermont Natural Resources Council Property Services (VNRC) Doug Hoffer Vermont Population Alliance Debra Howard Communications Vermont Public Interest Research Group Insights (VPIRG) John Hancock Lumber, Inc. Vital Communities of the Upper Valley Tricia Lyon-Gunderson, MBA, RYT David Wagner Consulting William Maclay Architects & Planners The Wilderness Society Merritt & Merritt Wind Harvest Company, Inc. National Wildlife Federation/ Northeast Work Recovery Services, Inc. Natural Resource Center Ted Zilius Design

48

he topic of taxes has the power to produce blank stares and yawns, as well as impassioned emotions, Tcomplaints, and arguments. Many individuals and businesses believe taxes are too high and too complicated, and that nothing can be done to change them.

Tax Reform That Agrees With Vermont shows there’s good reason to overcome the boredom, set aside the preconceived ideas, and reconsider just how taxes work and how they could work better – better for the economy, the environment, and for Vermont families.

This book explains how the power of taxes could be better harnessed to improve the public good with lasting benefits for the economy, the environment and all members of society.

The Vermont Fair Tax Coalition Friends of the Earth

Vermont Businesses for Social Responsibility - Research and Education Foundation

Vermont Natural Resources Council

Vermont Public Interest Research Group