By Elizabeth Hewitt, VTDigger
After weeks of closed-door wrangling, the White House and Republican congressional leaders unveiled a framework for reforming the federal tax code Wednesday. The proposal, they say, will simplify the federal tax system and stimulate the economy. However, the changes at the federal level may have implications for state budgets. If some of the ideas in the GOP framework are enacted, Vermont could be left grappling with an estimated $80 million reduction in state revenue, according to an official.
The outline for tax reform would involve reducing the number of tax brackets from seven, currently, to three, and lowering the corporate income tax rate. It would double the standard deduction, as well as eliminate the estate tax.
Introducing the proposal at a press conference in the Capitol, House Speaker Paul Ryan said the current system is “a constant source of frustration.” “We are taking the next step to liberate Americans from our broken tax code,” Ryan said.
Republican lawmakers said that their plan will rev up the American economy, alleviate financial pressures on middle class families, and make paying taxes easier. Nine out of 10 Americans would be able to file their federal taxes on a postcard, promised House Ways and Means Chair Kevin Brady, R-Texas.
The reveal of the tax reform framework came after attempts to repeal an Obama-era health care policy floundered for months. Senate leadership announced Tuesday that they would not vote on the most recent proposal, effectively tabling the health care issue for now.
But congressional leaders vowed swift action on the tax proposal. “We want the American people to wake up in the New Year with a new system,” Ryan said.
Sen. Orrin Hatch, R-Utah, chair of the Senate Finance Committee, recalled that he was in Congress in 1986 when the tax code was reformed. He said he hoped Democrats would support the proposal. “We’re tired of things going the way they’re going, and we’re going to try and turn this mess around and I hope that we’ll have support from all of our senators and congresspeople on both sides for the benefit of our country,” Hatch said.
But indications on Wednesday suggest those across the aisle will not be quick to endorse the GOP-led proposal. “It’s bad,” Rep. Peter Welch, D-Vt., said of the proposal Wednesday afternoon. The framework, he said, will “lower taxes for the wealthy, and increase the deficit for everyone.”
Welch, noting that the framework is lacking many details, said that the proposed changes to the tax code tend to benefit wealthy Americans. He pointed to proposals to lower the tax rate for the top bracket and eliminate the estate tax. “There’s not much in it for the middle class,” Welch said.
The Republican framework will “explode” the national deficit, he said, advocating instead for tax reform that would be revenue neutral.
The loss of revenue from the tax cuts the GOP is proposing could propel more effort to cut programs like Social Security, Medicare or Medicaid, he said.
Earlier in the day, Sen. Patrick Leahy, D-Vt., called for tax reform to go through the committee process. “If they want to bring forward a tax cut plan, let’s have hearings,” Leahy said. Leahy referred to the Senate Republican leadership’s attempt earlier this year to bring forward health care overhaul initiatives without vetting in legislative panels. “I think one of the things we found with their Trumpcare plan, when you kind of spring it a couple of hours before the vote and nobody’s seen it, that’s not a way to do it,” he said.
Sen. Bernie Sanders, I-Vt., in an interview Thursday, said he thinks the Republican plan is “a disaster.” The proposal, he argues, gives tax breaks to the wealthiest people in the country and to large corporations. “I think you want a tax system which is equitable, which in fact asks the wealthiest people in this country and the largest corporations to start paying their fair share of taxes,” Sanders said.
Sanders said he sees hypocrisy on the part of congressional Republicans who are backing a tax proposal that will increase the size of the national debt and deficit — burdens they typically lament. Like Welch, he sees that strategy as putting social programs on the chopping block. “They will then come back and tell us that because the deficit and debt are so high, we’ve got to cut Social Security, Medicare and Medicaid,” Sanders said.
Meanwhile, Vermont officials say that the proposal could have implications for the amount of revenue the state brings in, because the starting point for calculating Vermont corporate and individual income tax is based on federal numbers.
A proposal to double the standard individual income tax deduction, for instance, would result in an approximately $80 million reduction in the amount the state brings in from individual income tax each year, according to Vermont Tax Department Commissioner Kaj Samsom.
That would be a decrease of about 10 percent from the more than $700 million Vermont takes in from individual income taxes annually.
“That would almost certainly require either some major budget discussions or some major adjustments by the Legislature to kind of neutralize that impact, and that would be difficult,” Samsom said.
Other changes to corporate income taxes could also have impacts on Vermont state taxes in the short term, but would likely balance out in the long term, he said. While the state could stand to benefit from some promises in the GOP proposal, like efforts to keep more businesses and jobs in the United States rather than overseas, it is difficult to quantify what the impact would be.
A spokesperson for Gov. Phil Scott said that the governor supports federal tax reform, especially reform to benefit businesses in Vermont and across the country. “It’s clear some of the ideas presented today by congressional Republicans are approaching tax code from that perspective and the governor appreciates the President and Congress making it a priority to clarify our tax laws for everyday Americans,” spokesperson Ethan Latour said.
He noted that the standard deduction is just one part of the proposal. While that may reduce state revenues, Vermont may see benefits from other parts of the reform package, he said. “If the net effect of the federal tax reform creates revenue challenges for Vermont, the governor will work to address the issue with the Legislature with the goals of growing Vermont’s economy, making Vermont more affordable and protecting the most vulnerable,” Latour said.
Art Wolfe, an economics professor at the University of Vermont, said that Vermont has a history of adjusting the state rate when changes at the federal level occur. Such an adjustment could remedy the $80 million hit to state personal income tax revenues, he said. However, as a whole, Wolfe said he has concerns that the proposal would increase the national debt.
“One of the major fiscal challenges for Congress is to get that under control, and by cutting taxes, you don’t get it under control,” Wolfe said. “You make it worse.”