Vermont Tax Commissioner Tom Pelham speaks in front of the House Ways and Means Committee. Photo: Stefan Hard/Times Argus

By JON MARGOLIS

They are, so the saying goes, as certain as death, and almost as unwelcome. They've been blamed for the decline and fall of the Roman Empire. We complain about them as much as we complain about the weather. Even when they are low, they are too high.

They are taxes, and we love to hate them.

Especially in Vermont, where they are higher than anywhere else in America, where they are outpacing our ability to pay them, where they are stifling our economic growth.

With one possible exception, none of that is true. In Vermont (and probably elsewhere) the discussion of taxes is shrouded in myth.

Taxes are controversial everywhere and often. But as a new year and a new Legislative session begins, they are particularly salient right now in Vermont, where activists from inside and outside the state are making the case that they are dangerously high.

Much of this campaigning comes from one sliver of the ideological spectrum. But it has support from the political mainstream, including Gov. Jim Douglas, who last year said: "Vermonters are upset with the growing burden of their property taxes and the unsustainable increases in spending —and they have every right to be."

Are Vermonters upset? Are the increases "unsustainable"? Or is this part of the myth?

Not that there's anything mythical about taxes. They're real, paid with real money, more of it every year.

But everything goes up every year, including most incomes. That's the main reason taxes go up. But if taxes are a "growing burden," they'd have to be going up faster than Vermonters' incomes

Maybe they are. Or, more prudently, maybe they did, in the aggregate, in 2006.

To the extent that "maybe" could really be "yes," it is largely due to one tax – the statewide educational property tax (hereinafter, to avoid boring repetition, "the education tax").

A Vermont invention, this tax. There is nothing else quite like it. In its present form, it's been around only since Act 68 (which replaced Act 60, which in turn created the statewide property tax to begin with) was passed in 2003.

So it's something of an experiment, and some Vermonters — Democrats and Republicans who find the education tax both inequitable and inefficient — have already declared it a flop. They want to junk it, and instead use income tax money to support the schools.

Not so fast, says Tax Commissioner Tom Pelham.

"The income tax is much more volatile," Pelham said. "The income tax in a time of recession is much less stable. Revenues go down as human service costs rise and income declines."

Something to bear in mind now that a recession could be looming, if it is not here already.

But then this recession, if it comes, will be accompanied by falling property values, so Pelham's faith in the stability of property taxes could be fleeting.

It isn't that Pelham is a great champion of the education tax in its current form. It is, he said, complicated, confusing, and full of arcane terms. Worse, as if they wanted to maximize confusion, state officials keep tinkering with it.

"Tell me that a reasonable person wouldn't be frustrated," said Pelham.

Pelham's warning illustrates one of the myths surrounding the Vermont tax debate, the one claiming there is a quick fix to the tax problem. If, indeed, there is a problem, there is no easy solution. Worse, there may be no solution that is not likely to cause other problems, perhaps more undesirable than today's tax bills.

It isn't that there is no case to be made for cutting taxes. There is. But the only thing anyone can say with certainty is that cutting taxes means that taxes will be lower. All the other supposed benefits are either dubious or downright mythical.

At bottom, then, the tax discussion is not about business, the economy, or even about money. It is about politics.

This is not a pejorative. Politics is the means by which free people govern themselves, the way they decide what kind of society they want. That's what Vermont's tax debate is about. Should there be more private wealth and fewer public goods or vice versa? Should the wealthy pay a greater share of their income to support public services or be permitted to enjoy more of the fruits of their success?

Behind these political questions, there are numbers, so let's start with them, but with this caveat: These figures are from 2006, the last year for which comparative figures are available. It was not a typical year. Taxes rose at a higher rate than they had in the few preceding years or (probably) last year and the next few.

In fiscal year 2006, Vermont's total state and local tax revenues grew by just about 8 percent. The adjusted gross income of Vermonters grew by 6 percent.

This does not mean that most Vermonters saw their taxes go up 2 percent faster than their incomes in 2006. First of all, that adjusted gross income raise was in the calendar year, not the fiscal year, so the relationship is not one-to-one. And 2006 was a good year. Income taxes were up sharply (6.7 percent) because income was up. But the rates did not change, so the people who paid a lot had made a lot, and, in fact, kept more of what they made.

When it comes to that education tax, the calculations get a little foggier. It rose by 10 percent. It's supposed to be based on school costs, but education spending only rose by 5.9 percent. Property values went way up, but in theory tax rates should come down as property values go up. For some reason, that didn't happen.

Most Vermonters are sheltered from sharp rises in their property tax bills by an "income sensitivity" provision. But some taxpayers are not protected, no matter how little they earn. The cap applies only to taxes on a home and the two acres around it. So even though the education tax is "only" 30 percent of the total tax take, it's possible that the tax bills of some Vermonters went up faster than their incomes in 2006.

How many? Nobody knows. Certainly very few as a percentage of the whole state, which is little solace if you are one of them, and not a good reason to dismiss their complaints.

"I hear from a lot of people," said Tax Commissioner Pelham. "Some of them are hurting."

Even allowing for humanity's innate propensity to complain more than is warranted, it might be prudent to heed some of these protests.



The same cannot be said of all the complaints in the Vermont tax debate, starting with the one that our state and local tax burden is the highest in the country.

So conclude several "studies" put out by business-funded advocacy groups and dutifully reported by news organizations who presumably would report a "study" demonstrating that the world is flat.

"Studies" is in quotes here because these are not based on empirically testable public data. Instead their creators cherry-pick information that supports the conclusion they prefer, ignoring the rest. (As, it should be noted, do some folks on the other side of this debate).

"They're jokes," said Robert Lynch of Washington College in Maryland, an economist who has pored over the academic research relating to state and local taxes and their impact on state and regional economies.

The most commonly cited of these reports comes from the Tax Foundation, a Washington-based conservative advocacy group, which added up all the tax revenues Vermont governments take in, divided the sum by the population, and … Presto! Vermont has the nation's highest per-capita state and local tax burden.

But Vermonters don't pay all those taxes.

"We're the No. 2 state in the country in non-resident-owned real estate," said Stephen Klein of the Legislature's Joint Fiscal Office. That means some of that education tax is paid by owners of vacation homes and other property who live elsewhere. Some of the sales, fuel, and rooms and meals taxes are paid by visitors.

Nobody knows how much, which is why we don't really know how much more Vermonters paid in taxes.

From a real economist at the Federal Reserve Bank of Boston comes a real study. It showed that in fiscal year 2004 Vermont ranked sixth in the share of its total personal income paid in state and local taxes.

Sixth is high. But it isn't as though the sixth place state has a tax burden so much higher than most of the others. Vermont's 11.9 percent is only 1.2 percent higher than the national average. The tax load in nine states is within a percentage point of Vermont's, and within 1.5 percent in 15 more.

Suppose a Vermont family — two adults, two kids, with $60,000 in total income — moved to the state dab smack in the middle of the list: Delaware.

Believe it or not, they'd pay more in income tax. Assuming this family took the standard federal deduction and an exemption for each family member, its taxable income would be only $36,500. At that level, they'd pay $1,314 in Vermont, but $1,633 in Delaware.

But Delaware residents would make it up at the store. Delaware has no general sales tax. Vermont's 6 percent sales tax excludes food, medicine and inexpensive clothing, but we'll make our hypothetical family big enough spenders to rack up three grand a year in big-ticket items (more than they can afford, but we're loading the dice here to make Delaware look good). That will result in another $180 that they won't be taxed in Delaware.

The fuel taxes are about the same, and we won't deal with fees and "voluntary taxes" for cigarettes, alcohol, hunting and fishing licenses, etc.

Now we come to that cursed education property tax. Assuming that our family owned no more than a house and two acres in Vermont, they were covered by the "income sensitivity" provision of the education tax.

But that provision is devilishly complicated. The actual cap depends on where people live, how much they and their neighbors decide to spend on schools, how many earners are in the household and other variables.

"The average person is hard-pressed to understand how the benefit they got was calculated, which in a democracy is a pretty significant disconnect," said Commissioner Pelham.

On average, though, we can calculate that the family would have paid no more than $1,560 for their education tax. Alas, they also have to pay a municipal property tax. This, too, varies widely from town to town, but to make Delaware look really good, let's assume that they live in a big-spending town and add another $1,500. Total Vermont state and local taxes: $4,850.

In their new home in Delaware, if they are lucky enough to find a $250,000 three-bedroom house (more than they can afford but probably the best they can do down there), they'd pay about $2,500. Total Delaware state and local taxes: $4,133.

Grand total saving: $717.

That's not chicken feed. But enough incentive to move to Delaware? A fine place, Delaware, convenient to Philadelphia cheese steaks, Baltimore crab cakes and the ocean. But it's flat. It's crowded. Life there is a lot more hectic than in Vermont. You think I-89 is jam-packed at 5 p.m.? Try getting off I-95 onto Route 896 just north of the toll plaza at rush hour. That could take a day off your life every time. Some people would spend part of that $717 on stress therapy unnecessary in Vermont.

Many Vermonters — maybe even most — live here because they want to. If a few hundred more dollars of taxation is the price to pay for living in Vermont, it seems to be a price most Vermonters are willing to pay.

That doesn't mean policy-makers and citizens shouldn't try to keep taxes as low as possible. It does mean that most people know they wouldn't save all that much by going someplace else, especially if they'd rather be here. If people have left the state because of taxes, at least as many have moved into it regardless of the taxes. The population grew minimally last year, but grow it did.

As always, a hypothetical example like this is only an approximation. If that family had moved into a good neighborhood with good schools (a one-time windfall inheritance from a rich uncle, perhaps), its Delaware property taxes would have been substantially higher. But if it was richer, or owned some Vermont property not covered by income sensitivity, it would save more by moving to Delaware. Compared to other states, Vermont's taxes are relatively "progressive," with wealthier taxpayers sharing more of the burden than in, well, Delaware, for instance.
This is precisely what some people don't like. They think Vermont puts too much of the tax burden on upper-income earners. The tax debate is not just about how much is paid. It's also about who pays it.

No doubt being the sixth highest tax-paying state can be a problem, especially when one of the neighbors — New Hampshire — is number 49. That difference provides ammunition to those who argue that Vermont's taxes are hurting its economy, providing an incentive to do more business on the east rather than the west side of the Connecticut River.

But this is doubtful for several reasons. First, Vermont's economy is reasonably healthy. Over the last few years it has grown faster than the rest of New England as a region and about as fast as the rest of the country. The most recent statistics indicate that the rate of business start-ups is rising and the rate of failures is dropping. Despite all the claims to the contrary, neither in this state nor in this country nor in this world has it been demonstrated that lower taxes lead to faster economic growth.

Besides, it turns out that all this attention paid to businesses moving in and out of states could be unwarranted. It's always a big story, apparently a rare occurrence.

"Most moves (by businesses) are over very short distances," said economist Jed Kolko, one of the few who has studied this phenomenon. Kolko is a researcher with the California Public Policy Institute, a San Francisco-based think tank originally funded by a founder of the Hewlett-Packard Company. "Most economic activity is intra-state," he said.

Then it turns out that while comparative tax obligations are one factor in a business's decision to move, stay, expand, contract, get born or die, it is rarely the biggest, or the second biggest. It is often not the third or fourth biggest, simply because taxes are not the third or fourth biggest expense.

"The bottom line is that state and local taxes, at their current low levels, may be largely irrelevant to business investment decisions," said Robert Lynch, who has analyzed hundreds of studies on how state and local policies affect economic development.Labor is the biggest expense for most businesses. So if a state can offer a well-trained, reliable work force – usually the result of good schools — it is likely to attract and hold businesses even if its taxes are on the high side. Successful economic development, Lynch said, requires "a government to invest in infrastructure — high quality roads and bridges, good amenities, recreation and cultural facilities that make a state an attractive place to live."

At least to some extent, Vermont has done that, and it seems to have paid off. The schools do well in nationwide standardized tests. A number of national organizations have declared Vermont among the healthiest, cleanest and most livable states in the country.

Some of these reports should be greeted with as much skepticism as those "highest-taxed state" claims. But if nothing else, their findings augment the state's image among both businesses and individuals. And to the extent that Vermont is healthier, cleaner, more livable than other places, public spending is one reason why. We don't just pay taxes; we buy something with them.

But what about buying less? If taxes were lower, wouldn't the state's economy grow faster, making us all more prosperous?

No.

At least not according to the great preponderance of academic (meaning, usually, disinterested) economic research. Admittedly, "great preponderance" is not unanimity. On the right fringe of the economics community, a few "free market" purists insist otherwise. But they are a decided minority even among conservative economists.

Actually, under one condition, cutting taxes would stimulate the economy. The trick would to cut taxes and not cut spending. Not lay off public employees, not reduce grants to localities or individuals, not cut back on building or maintaining highway or bridges.



Timothy Bartik, an economist W.E. Upjohn Institute in Kalamazoo, Mich., who has also specialized in examining the evidence about the relationship between taxes and growth, said that in an economic downturn, "If you cut spending, that also hurts a state's economy. When you cut spending you're cutting people's jobs. The overwhelming consensus in mainstream economics is that … a spending cut would have a more negative effect than a tax increase."

As a practical matter, no state can cut taxes without cutting services. Nor do Vermont's tax-cut advocates simply want to cut taxes. They do want the state to do less.

Well, doesn't everybody? This is America, after all. "Smaller government" comes close to being a national mantra.

Duane Marsh, the president of the Vermont Chamber of Commerce and a devoted if moderate advocate of lower taxes, expressed this outlook succinctly: "Individuals should have more money to spend on things they need. Who is better to decide how to spend their money?"

A widespread belief. But a funny thing happens whenever an actual spending cut is proposed: Many Vermonters — arguably most of them — say, "not that one."

The state budget is large and complicated, and people from across the political spectrum have specific programs they'd like to cut or even eliminate — mental health services, housing agencies, economic development, subsidies for various industries.

But none of that has gained much political traction, and most of it violates the Willy Sutton rule of public finance. Asked why he robbed banks, Sutton said, "that's where the money is."

In Vermont, the biggest chunk of the money is in primary and secondary education, the sole purpose of that education tax. As the cost of education rises, so does the education tax, and with fewer kids in the schools each year, so does criticism of school spending.

The increase in school costs is likely to be lower over the next few years, but costs will still rise. And while "income sensitivity" means that most taxpayers are protected from sharp increases, it also means that the unprotected pay all the more.

Even Jack Hoffman of the Public Assets Institute, the Montpelier-based liberal organization founded by former Democratic Rep. Paul Cillo, agreed that "there are some two-earner families who don't qualify for income sensitivity whose property values, and therefore taxes, are rising faster than their incomes."

That's people who earn more than $90,000 a year. One might conclude that they can afford it. But upper-income people deserve tax stability, too. Granted, wealthy Vermonters pay a smaller share of their income in state taxes than they did a decade or so ago. The top income tax rates are lower and more capital gains are un-taxed. Still, it it's reasonable for people of any income level to be unhappy about a sudden boost in their tax bills.

Besides, not all of the property unprotected by the income sensitivity cap is owned by the upper crusts. Pelham said 71 percent of the non-protected property is owned by Vermonters, some wealthy, but some not. Many moderate-income Vermonters own a store, a woodlot, a camp that may have been in their family for generations. It's hard to think that anyone in this state wants to see a middle-income Vermonter have to sell his grandfather's deer camp because he could no longer pay the taxes. These are the people Pelham thinks are "hurting."

Perhaps some are, raising the question of why liberals have not joined conservatives in raising questions about rising school costs. It might be good politics for them, too. If these taxes continue to rise, a political backlash is likely one day.

Pelham said he thought last year's passage of a law requiring school districts to hold a second election to approve large budget increases signaled the start of that backlash. Maybe. But despite all the talk about a taxpayer "revolt" against school budgets, none has yet erupted.

In fact, a perfect illustration of the "not that one" response to a spending-cut proposal has been the reaction of most Vermonters to "consolidation," the various suggestions that schools, school districts and supervisory unions be combined to reduce costs.

They don't like it, fearing that it endangers Vermont's commitment to "local control." Some of the most intense opposition — for instance the editorial page of the Caledonian-Record in St. Johnsbury — comes from the same political conservatives who proclaim that taxes are too high.

"In this case, local control trumps low taxes," said one veteran educator in the Northeast Kingdom, where the sanctity of "local control" is rarely challenged.

Maybe most Vermonters aren't all that upset over the education tax after all. Or maybe they think their schools, which rank at or near the top in nationwide test results, are worth the money.


They're not, said Hugh Kemper of Londonderry, a retired businessman who is on the school board and has been studying ways to reduce what he calls overstaffing in Vermont schools.

"It's reasonable to expect a fully qualified teacher who (has no) 'special-education' issues to manage competently and well a classroom with 15 or fewer kids," he said. He would eliminate teaching assistants not assigned to "special-education" pupils in all classes except kindergarten and first grade.

That sounds sensible. But it turns out that most of the teaching assistants are assigned to "special-education" pupils. Kemper's plan would only eliminate about 300 of these $15,000-a-year positions. That doesn't mean it shouldn't be done, but it would save about $5 million (some assistants get fringe benefits) of a $1.3 billion education budget. Not a lot of tax savings there.

Publicizing his views on the conservative Web site "Vermont Tiger," Kemper argues that those high test scores don't demonstrate that the schools are doing a good job. Because almost all Vermont students are non-Hispanic whites, he said, the comparison should be only to other white students. By that standard, he said, Vermont schools are only doing an average job, not worth the high per-pupil costs taxpayers are paying.

His conclusion is questionable. It's true that Massachusetts schools are only 75 percent white instead of 95 percent like Vermont's. But according to U.S. Education Department statistics, only 15 percent of the Massachusetts white pupils are low-income (eligible for free or reduced-cost school meals) while 29 percent of Vermont pupils are. Considering that social and economic background, not ethnicity, is the relevant standard, Vermont looks pretty good with scores almost equaling Massachusetts'. Vermont schools even did slightly better than their counterparts in New Hampshire, with only 20 percent eligibility. Vermont also has a higher graduation rate than New Hampshire and most of the other affluent states, and its schools are rated at or near the top in measurements by other public and private agencies.

This does not prove that the schools are not overstaffed, as Kemper contends; they may well be. But it is at least some evidence that the schools aren't doing a bad job. Worth all the money? That's why we have elections.

Kemper, is working on other cost-saving ideas, some of which might prove valuable. But there's another statistic that illustrates how hard it will be to cut school costs, and thereby taxes.


According to Bill Mathis, the superintendent of the Rutland Northeast Supervisory Union, a close look at the numbers reveals that those high-scoring districts in other states spent substantially more per-pupil than Vermont.

In short, you get what you pay for. It isn't that a state can't have good schools and still spend less money on them. But it isn't easy. Vermonters have every right to cut back on school spending in order to cut their tax bills, even at the risk of making the schools worse. So far, they don't seem to want to take that risk.

In fact, there seems to be as good a case to be made that Vermont doesn't spend enough money on schools as that it spends too much.

"You're still regressive up there, just not as regressive as most," said Susan Pace Hamill, consulting her data in Tuscaloosa, Ala. Hamill is a law professor at the University of Alabama Law School who also holds a divinity degree from an evangelical seminary. Like many evangelical Christians, her political views are influenced by her religious convictions, but in her case the key scriptural verse is not the one in Leviticus about sexual orientation, but the one in the Gospel according to St. Luke about how "to him that that much is given, much is required." She also seems to be the only person who has compiled comparative numbers on how much the different states spend in their richer and poorer school districts.

"You're still spending $403 per pupil less in low-income districts," she said.

Superintendent Mathis said in some cases the disparity is bigger. The Vermont districts where schools "fail" (not the official word) the federal No Child Left Behind standards spend as much as $1,500 per pupil less than the higher-spending districts in the state, he said.

Unless the state starts spending less in the more affluent areas (fat chance) ending these inequities would cost several million dollars, and, perhaps, require a tax increase. Fatter chance.

That's why people across the ideological spectrum keep looking for a magic potion of sorts that will provide the level of services people want and yet allow lower taxes — cheaper (but still good) schools, tapping this or that source of revenue, abolishing an entire agency, contracting another one out, selling carbon credits. Somewhere around the next corner is an economic Shangri-La or the fiscal Big Rock Candy Mountain dispensing bountiful services at minimal tax rates. You know, in the words of that well-known public policy analyst Merle Haggard, we'll all sit around "drinking that pink bubble-up and eating that rainbow stew."

Now there's a myth.