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Report, not Vermont, off track

By Doug Hoffer

Posted December 29, 2006

Recent media reports touting Art Woolf’s latest report, funded by the Ethan Allen Institute, would have benefited from other perspectives. Although the question of changing demographics is worthy of discussion, the predicted fiscal impacts are based on some very questionable assumptions.

The report assumes those over 65 will no longer be in the workforce and income and tax revenues will decline as a result. However, the data shows that participation rates for older people have grown considerably as many keep working (34 percent of men and 24 percent of women 65-69 work; Federal Interagency Forum on Aging Related Statistics).

The report states that historically Vermonters have paid on average 16 percent of their adjusted gross income (AGI) for state and local taxes. But this methodology is misleading. AGI is calculated after deductions for those who itemize. The real key is how much you earned and how much of that you paid for state and local taxes. Therefore, the better measure is taxes paid as a percentage of total income. Using that measure, a family of three earning $52,000 would pay about 6 percent of gross income for state income, state education, and local property taxes. Although not insignificant, this is much less than what most households pay for food, transportation, housing, and health care.

The report then asserts that Vermonters will not agree to raise taxes since the “burden” is already so high. But there is no reason to believe that Vermonters won’t consider raising taxes on the wealthy who have benefited from decades of federal and state tax breaks. If we do, a significant part of the argument falls apart.

The report then discusses the rising cost of education and focuses exclusively on growth in personnel in contrast to declining enrollment. While this is a legitimate issue, it ignores the influence of rising health care costs and special education, a rather significant omission.

The report also notes the rising cost of human services (primarily Medicaid) but neglects to acknowledge the possibility that Vermonters will eventually solve the problem through fundamental reforms to the entire health care system. If we don’t, the state will suffer regardless of the predicted demographic changes.

Eventually, the report gets to the Straw Man — the real point of the entire exercise. That is, juxtapose the two factors: declining revenues and growing costs; throw in the scare talk about our existing tax “burden” (grossly exaggerated) and presto, the only choices left are to cut costs and/or raise taxes. But he has already told us that (in his opinion) Vermonters will not — cannot — raise taxes.

The only remedy left is to cut spending on education and health care and spend more on economic development. But here too, there are questionable assumptions.

For example, the report implies that Vermont is not competitive and must attract more businesses with, among other things, lower taxes. But there is no evidence that state taxes are a significant factor in business decisions. Indeed, there is considerable evidence that they are a relatively minor factor.

Furthermore, the suggestion that businesses avoid Vermont is also contradicted by the evidence. We lose a lot of jobs to China but that has nothing to do with state and local taxes. Furthermore, the percentage of jobs created by interstate business movement is tiny compared to jobs created by expansion and start-ups.

In the end, the report is deeply flawed and its recommendations are tainted as a result. The demographic changes ahead (not unique to Vermont by the way) require adjustments. But Vermonters have many more choices than those offered by the report. The challenges ahead are being used by the Institute to promote an agenda similar to that advanced by Grover Norquist — cut the size of government and cut taxes for businesses and the wealthy (trickle down). These are failed policies and we can do a lot better.

Doug Hoffer is a Burlington-based policy analyst and lead author of The Job Gap Study series.