Appropriations and Revenue Bills

I have found the Vermont Statehouse to be largely nonpartisan. This is most evident within committees, which for the most part put politics aside and try to derive the most workable solutions to the problems they face. The Judiciary Committee, on which I serve, has so far this session passed twelve bills out of committee, each on 11-0 votes.

This past week, the Appropriations Committee on an 11-0 bipartisan basis voted out of committee the budget bill for fiscal year 2016 (H.490). The nonpartisanship abruptly ended. However, once the whole House took up this bill along with a revenue/tax bill (H.489), which had passed out of the Committee on Ways and Means on a party-line 8-3 vote.

Before the third reading of these bills, a group of Republicans offered amendments plainly aimed solely at scoring political points, not at trying to resolve the underlying issues facing the legislature. They sought to cast themselves on the side of lower- and middle-income Vermonters by suggesting a reduction in taxes on those making less than $60,000 and an increase in spending on low income heating assistance. They did not, however, provide offsetting additional taxes on those earning higher incomes or realistic spending cuts.

In any event, the budget and revenue bills did eventually pass with some bipartisan support and without the Republicans’ amendments. And despite the political game playing that occurred, I do recognize the benefits of having a minority party that acts as a check on the majority. Further, through trying to reach compromise among the parties – the Democrats, Republicans, and Progressives – the legislature as a whole can achieve a better solution. In order to reach compromise, though, each party is likely going to have to accept some outcomes or positions that they find disagreeable.

Indeed, this was certainly the case with both the revenue and budget bills. I initially found aspects of the bills to be objectionable, but those aspects were the price of passing bills that, overall, are steps in the right direction for fiscal sustainability in Vermont. Also, as I delved more deeply into the explanation of those aspects of the bill, what I found alleviated my concerns enough so that I was comfortable voting for the bills.

As to the revenue bill, I disliked its apparent potential disincentive to charitable giving. Among other changes to the tax code to raise revenue, the bill caps itemized deductions, including for gifts to charitable organizations, at two and a half times the standard deduction amounts (a couple filing jointly, for example, could still deduct $31,500). Because these deductions provide an incentive for giving, a number of nonprofit organizations objected that scaling them back would hinder their fundraising.

As I learned, though, the actual impact on charitable giving would likely be very limited. Most of the tax benefit from a charitable contribution comes from the federal deduction, which is two to three times more valuable than the state benefit. It would make little financial sense to stop contributing to charities because of the limitation of the state deduction while foregoing the more valuable federal deduction.

People donate for a variety of reasons, not simply to receive a tax deduction. In fact, only 30% of Vermonters itemize their deductions but many more than that contribute to charities. The cap on deductions will affect a small group of taxpayers, resulting in a tax increase for slightly more than 6% of filers.

In effect, the cap on deductions, as well as other aspects of the revenue bill, results in a more progressive income tax. Given that the income growth for the top two income brackets in Vermont has grown significantly over the past several years, while middle class income has for the most part stagnated in the state, adding progressivity to the tax system made good sense to me.

I had a number of issues with the cuts proposed in the budget bill, but my major concern related to a $6 million cut in funding to the Low Income Heating Energy Assistance Program (“LIHEAP”). During the floor debate, however, I learned that the effect of this cut should not be dramatic. LIHEAP is a federal program. Up until recently, Vermont supplemented the program by providing state dollars through the Emergency Board, which would consider the need for additional funding in the fall after federal dollars for the fund had been designated. Two years ago, the legislature instead appropriated money for LIHEAP up front rather than waiting until it understood the extent of the federal investment in the program. The budget bill will return the state to the previous procedure.

Further, as the economy has improved and as fuel costs have decreased, the pressure on LIHEAP’s resources have decreased. As of the end of February, LIHEAP still had $3 million available if it needed a crisis grant, which is an additional benefit provided to households experiencing a heating crisis. This amount, if unused, will roll over to next year’s program. Finally, an amendment was approved that will designate up to $5 million of any general fund surplus at the end of this fiscal year to LIHEAP. In short, low income Vermonters are not at risk of losing the LIHEAP assistance that they may need next winter.

Having largely addressed my major concern with the budget bill, I was able to focus on its more positive features. First, in conjunction with the revenue bill, it closes the $113 million budget gap that the state was facing in the next fiscal year. Second, the FY 2016 budget is not an end point but part of a long term process of fiscal change to achieve a balance between the state’s spending and its expected revenue growth rates. Spending was projected to grow by five percent annually, while the state’s domestic product is projected to grow by only three percent annually.

As the Appropriations Committee has explained, to meet this balancing goal, the budget bill:

1) Reduces reliance on one-time funding. In the last fiscal year, the budget relied on $53 million in one-time funds. This budget includes $25 million in one-time funds and next year’s budget is projected to include just half that.
2) Reduces the rate of spending growth. To this end, the budget includes a number of efforts to reduce long-term spending in corrections, public safety, buildings, and other areas.
3) Sets forth two additional longer-term goals: to move toward budgeting for less than 100% of projected revenues and to explore a two-year budget, allowing time in the second year to focus on results-based accountability, evidence-based budgeting, and structural reforms.

Slower than anticipated economic growth, continued federal reductions in programs, and a growing demand for state services have created a difficult budget environment. The FY 2016 budget that was passed on to the Senate starts a multiyear process that will bend the spending curve toward long term sustainability. For more on these bills, I would suggest reading April Burbank’s recent article in the Burlington Free Press.