Federal tax cut could leave hole in state budget

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(Host) Governor Jim Douglas says federal tax cuts could cost Vermont at least $10 million a year. The governor says the Legislature needs to adjust Vermont’s tax law to protect the state budget. And if an easy fix isn’t possible before the Legislature goes home, officials say lawmakers may have to return for a special session to make the change.

VPR’s John Dillon has more:

(Dillon) As lawmakers in Washington negotiate the scale of the planned tax cuts, analysts in Montpelier have tried to calculate the impact on the state budget. Vermonters pay state income taxes based on a portion of their federal taxable income, so changes on the federal level have a ripple effect on state revenues.

A compromise proposal under consideration in Congress would reduce and then eliminate the taxes paid on stock dividends. Governor Douglas says this cut could end up costing Vermont needed revenue. The governor spoke at a news conference at a business expo in South Burlington.

(Douglas) “So the impact on our state treasury would be in excess of $10 million a year. I don’t know exactly how much it might be because we don’t know ultimately what version of the bill will be. But it will be significant.”

(Dillon) Douglas says he supports some federal tax cuts. But he would not say if he thought the $380 billion tax cut being negotiated in Washington was too large.

(Douglas) “I don’t know what the right number is. I’m going to be sure that Vermont’s fiscal situation is not disadvantaged by what Congress does, by urging the Legislature not to pass on the dividend cut. But what the right number is, I’ll leave to Congress and the president.”

(Dillon) The impact of the federal tax cut is already being debated in Montpelier. The Senate leader, Windsor Democrat Peter Welch, says the federal cut on dividends could cost the state $36 million over 18 months.

(Welch) “So that is an enormous concern for us on the Senate side. We simply have to protect the Vermont tax base from some of the frankly reckless actions that they’re taking in Washington.”

(Dillon) Meanwhile, officials in the Douglas administration warn that if a quick fix isn’t possible in Montpelier over the next several days, the Legislature may have to return for a special session. Congress is still working on the tax cuts. And Tax Commissioner Richard Mallary says the state response will have to depend on what comes out of Washington:

(Mallary) “If the Congress passes a significant tax reduction, other than the dividend exclusion, that we could address before the Legislature then depending on what it is, there could be a significant erosion in Vermont revenues that might require the Legislature to come back and address.”

(Dillon) Congress will probably exempt income from dividends as part of the final package. Mallary says it’s a much more complicated problem for Vermont if Congress changes the tax rate on dividends or capital gains. He says that could also leave Vermont with a $15 million to $30 million annual revenue shortfall.

For Vermont Public Radio, I’m John Dillon in South Burlington.

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