To Create a Fair Tax Policy, Keep It Real
If you want to change tax policy in your state, sometimes you have to challenge conventional wisdom.
That was the take-home message during The Council of State Governments’ May 4 webinar, “Tax Policy Reform: What States Are Doing to Capture More Revenue.” The webinar was part of the continuing Leadership Development Series, sponsored by CSG’s Tolls Fellows Program.
Michael Costa, director of the Vermont Blue Ribbon Tax Commission, said the three-person panel was given the task in 2009 of looking at the state’s tax structure and offering recommendations on how to change it to a “more simple, sustainable and fair tax structure.”
The commission started with six common assumptions about the state tax system, such as not everybody is paying their fair share, the state sales tax is driving away business because neighboring New Hampshire doesn’t have one and government spending is too high.
The common assumptions, Costa said, were wrong. All Vermonters are paying their fair share, the commission found. Although the top 11 percent of earners are paying 60 percent of the state’s income tax, he said, it evens out when property, sales and excise taxes were brought into the mix.
“Overall, people pay a relatively stable amount of their income in taxes,” he said.
Costa said while people may be interested in cutting government spending, policymakers need to pay attention to the “shadow budget that is tax exemptions.” In Vermont, he said, those exemptions amount to $1.2 billion in lost revenue each year.
Margaret Fulton, assistant commissioner in the New Hampshire Department of Revenue, said transparency and clarity are essential for a sound tax policy.
“Transparency is a must,” she said. “When you’re talking about tax credits and special exemptions, who are they affecting, who are they going to affect? … Keep it simple. If taxpayers can’t understand the law, they don’t know when to pay it.”
Costa and Fulton agreed that tax policy is becoming a competitive field between the states.
“A hot topic in New Hampshire most recently is the possibility of temporarily lowering the gas tax for two months,” Fulton said. The move, she said, could bring more people, and more revenue, across the border to fill up their tanks. “There have been different perspectives about whether it would remain revenue neutral or actually bring more revenue into the state.”
The temporary gas tax cut hasn’t been tested. “We’re really unsure as to whether it’s going to do what it’s intended to do,” Fulton said.
“State tax competition is really a big issue,” Costa said. He said the commission tried to find persuasive data about how tax competition affected tax revenue, but so far it has been mixed. “We’re watching New Hampshire’s decision on the gasoline tax to see what affect it may have.”
“… Much of the discussion of the Vermont tax rate typically features a noun, a verb and New Hampshire,” Costa admitted.
Costa said regardless of what changes a tax commission recommends, a sound communication strategy is vital to creating any lasting change.
“The commission was very well received, very well respected,” he said. “People definitely keep referring back to the document and the recommendations and I think it served its purpose that way. But of course, like most blue ribbon commissions, the recommendations haven’t been adopted.”
He said public outreach has been minimal. “When putting together a reform committee, if you have policymakers that really are committed to it, they should really consider what happens the day after the recommendations come out. … You really need to create a dialogue with stakeholders.”