Vermont, often ranked most liberal state, tries tax cuts to boost recession-ravaged economy

Blue state Vermont one of few trying tax cuts

MONTPELIER, Vt. — Vermont, often regarded as one of the most liberal states in the country, is bucking the trend of raising state taxes to boost its economy and heading in the opposite direction, cutting capital gains and estate taxes.

Just a handful of states have joined Vermont in trying to fight their way out of the Great Recession with tax cuts. At least 35 states have opted for tax increases to respond to fiscal woes brought on by the economic downturn, according to a Washington think tank that studies government budgets.

“It’s unusual. Most states are focusing on raising revenue as part of a balanced approach to balancing their budgets,” said Nick Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities.

Other recent state tax cuts, according to the National Conference of State Legislatures, have been enacted in:

— Georgia, which will eliminate taxes on retirement income for those 65 and older;

— Florida, which has passed tax cuts for the entertainment industry and for companies hiring new workers and has capped sales taxes on yachts; and

— Alaska, which has a cruise ship passenger tax that it reduced from $46 to $34.50.

But most others have been raising taxes. Even conservative Kansas recently increased its sales tax, from 5.3 percent to 6.3 percent, to avoid tough cuts in school budgets.

Vermont’s move was welcome to Mark Saba, owner of the Formula Ford and Formula Nissan dealerships in Barre, Montpelier and Rutland, as well as a boat dealership in Colchester.

“They say thank you for investing in Vermont, for buying these four additional businesses, thank you for preserving the jobs that we’ve had. … And at the end of the thanks for me it’s, ‘Here’s your tax bill,’” Saba said Thursday.

Saba appeared last week at a news conference organized by business groups urging that Vermont roll back increases in the capital gains and estate taxes passed last year.

Last year, lawmakers ended the 40 percent exemption from capital gains and replaced it by exempting the first $5,000 in such income. That meant someone who made $100,000 on the sale of a home or business would pay taxes on $95,000 of that income, rather than $60,000. This year, they restored the 40 percent exemption for businesses.

Republican Gov. Jim Douglas was so upset with the Legislature’s actions last year that he became the first governor in Vermont history to veto a state budget, only to be overridden by a Democrat-dominated Legislature. This year, the governor and lawmakers were able to agree.

In both Kansas and Vermont, “It shows the power a governor can have,” said Grover Norquist, president of Americans for Tax Reform. “In each case the governor wanted to go in a direction opposite of what you’d expect from the state.”

In Kansas, Democratic Gov. Mark Parkinson had to persuade a Republican-led Legislature to enact the tax increase.

Vermont Senate President Pro Tem Peter Shumlin noted that when conservatives are forced to raise revenue, they often go to a sales tax, as Kansas did, rather than income taxes.

“Kansas might still have to learn lessons that Vermont already has learned,” Shumlin said. “Regressive taxes don’t work.”