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Essay | The Vermont affordability myth

By Wallace Roberts | Special to the Vermont Guardian

Posted April 27, 2007

Vermont’s political leaders continue to wring their hands over the state’s “affordability problem,” framing the issue in such a way as to make it appear that the problem is unique to Vermont and that state government can fix it.

With those assumptions, it’s no surprise then that the solutions being discussed call for tweaking municipal zoning laws, Act 250 regulations, and fiddling with the tax formula for education funding, but those kinds of solutions do not address the most important cause of the problem, which is that our vanishing affordability is not the result of “market forces.” It is the inevitable outcome of national economic, tax, and labor policies made over the last quarter century.

Inflation has certainly played a part. In 1974, after it was clear that the first oil shock would dramatically heighten inflation, you could buy four bags of groceries at the local supermarket for $40. According to the inflation calculator at the Bureau of Labor Statistics, those same four bags of groceries bought 32 years ago for $40 would today cost $165, an increase of 400 percent.

That increase would not be noticeable if a person’s wages had increased the same amount, but of course, they have not for most people. According to a new report, New Data Show Incomer Concentration Jumped Again in 2005, published by the Center on Budget and Policy Priorities, the annual average wage for 90 percent of U.S. workers in 2005 has increased by only 15.2 percent, adjusted for inflation, since 1970, while the incomes of the top 100 chief executive officers (CEOs) have increased 2,193 percent.

It’s not just the CEOs who are cleaning up. The economists who issued this report, Thomas Piketty and Emmanuel Saez, said the top 300,000 wage earners together earned almost as much money as the bottom 150 million.

Piketty and Saez sliced the pie in several different ways. The size of the pie — total reported income — increased almost 9 percent in 2005, but average income for the bottom 90 percent dropped by $172, or 0.6 percent.

The top 1 percent of tax filers (with incomes above $348,000) received their largest share of national income since 1928. The average income of a member of this group rose to more than $1.1 million, an increase of 14 percent.

Here some other perspectives. Data analyzed by MIT professor Thomas Kochan show that the productivity of U.S. manufacturing rose by about 70 percent between 1979 and 2005, but the real wages of production workers remained flat over that period.

Two other economists, I. Dew-Becker and R.A. Gordon, analyzed inflation, income, and worker productivity in 2005 and said their analysis shows that “[o]ver the entire period 1966-2001 … median real wage and salary income barely grew at all … because half of the income gains went to the top 10 percent of the income distribution.”

It wasn’t always thus. Before Ronald Reagan became president in 1981 and instituted huge tax cuts for the rich, the country had enjoyed more than 40 years of increasing prosperity, and the wage differential was only a fraction of what it is today. How has this huge disparity come to exist?

Robert Kuttner, editor of The American Prospect, took note of this phenomenon last fall and wrote that it is part of a pattern: employer-provided health coverage declined from 69 percent in 1979 to 56 percent in 2004, and the top 1 percent’s share of interest, dividends, and capital gains has risen from 37.8 percent in 1979 to 57.5 percent in 2004.

“Politically, it’s evident what is occurring,” Kuttner wrote. “Those in a position to capture astronomical incomes are awarding themselves an ever-larger share of the national economic pie. Meanwhile, ordinary incomes, job security, health security, and retirement security are eroding.”

How closely do incomes in Vermont mirror the national trends? Data are harder to come by, but Doug Hoffer, a Burlington-based policy analyst, who devised the original livable wage calculations for the Peace and Justice Center, shows that wages failed to keep pace with inflation from 1989 to 2005.

These figures show that in 1989, the median household income in Vermont, adjusted for inflation, was $46,194, and in 2005, it was $48,508, an increase of only 5 percent in 15 years. To put this another way, if in 1989 your median income was $46,194, you would have had to earn $72,755 in 2005 for your money to have the same purchasing power.

Politicians and policy analysts focus on the affordability of housing because prices have been rising faster than in other areas of the economy.

According to the Vermont Housing Finance Agency, the median purchase price of a single-family home in Vermont in 2006 was $197,000, an increase of 8 percent over the previous year, almost four times the rate of inflation. That median purchase price also represents a 97 percent increase since 1996.

The situation with property taxes in Vermont is similar but to a smaller degree. According to a tax study published by the Legislature’s Joint Fiscal Office in January, the inflation-adjusted Vermont Education Property Tax Revenue Estimates rose only 14 percent, adjusted for inflation, from 1996-2005, much less than the median single-family home price.

Nevertheless, for most Vermonters who have had essentially flat incomes over this period, a 14 percent hike is a real hit. And it’s little solace that much of this hike is the result of their homes becoming more valuable because of the rising sales prices of single-family homes.

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Vermont is not an island
In addition to being subjected to the national trends of flat wages and rapidly rising housing prices, Vermonters must contend with state policies that contribute to the affordability problem. First, its income tax system is coupled to the federal system so that tax cuts for the wealthy mean that Vermont tax revenues from the wealthy are reduced. The balance is made up by higher taxes on everyone else, or programs are cut.

Second, a significant portion of Vermont’s affordability problem is caused by the fact that the tax for school funding is based on property that affects working families much more than it does wealthy ones.

Hoffer wrote recently that “when we consider all state and local taxes (including the regressive property and sales taxes), the richest Vermonters actually pay a lower percentage of income than low- and moderate-income families.”

Hoffer also estimated that “state tax liability for someone with $1 million in taxable income has declined by 64 percent since 1968, 37 percent in the last 10 years alone.”

A third area where state policy helps create the affordability problem is corporate income taxes. A recent study by Citizens for Tax Justice (CTJ), a non-partisan research group in Washington, shows that as a percentage of gross state product, corporate income taxes in Vermont dropped 42 percent from 1989 to 2003, about two points more that the national average.

The CTJ study also shows that in 2001, IBM paid no income taxes in any state where it had operations, including Vermont, despite the company’s global profit of $5.6 billion.

Besides tax policy, another area where the state’s political leaders help make Vermont a less affordable place to live is in the allocation of state funds for affordable housing. For the past six years the Legislature and governor have not followed the rules for allocating the receipts from the property transfer tax. A total of 49 percent of those receipts are supposed to go to the Vermont Housing and Conservation Board (VHCB) to be used to building affordable housing and to conserve farmland and natural resource areas.

To plug holes in the state budget without raising taxes, Gov. Jim Douglas and the Legislature have allocated $27.6 million less to VHCB that it would otherwise have been entitled to receive under state law from 2001 to the present. But the impact of the cut is far larger than the diverted funds.

For every VHCB dollar invested in a project, approximately $4 are invested from other sources, so this action by lawmakers has really cost Vermont another $122 million, for a total of $150 million. The cumulative lost opportunities from this “fiscal savings” is 750 affordable homes, 50 farms, and 58 community conservation projects.

Lawmakers are playing a similar game in this session. The Democratic majorities in both houses seem stymied by Gov. Douglas’ threat to veto any tax increase or new tax and may agree with his plan to raid the funding set-aside for the Catamount Health program, which was enacted last year to provide health insurance for Vermonters who have none, in order to make up budget deficits in other areas.

And on it goes. Vermont can’t do much by itself to fix the affordability problem by forcing employers to pay wages that keep pace with inflation, but it can change state polices that aggravate income disparities and intensify the local impact of the national affordability problem. Just recently, for instance, Maryland, not usually known for progressive legislation, passed a law requiring all companies that do business with the state to pay a “living wage.”

Piketty and Saez said that gap between the rich and the rest of us has not been as wide as it is now since 1928 on the eve of the Great Depression. Then, as now, the income disparities blossomed over more than a decade of growth fueled by the hands-off policies of a federal government under the control of free market fundamentalists. Then, as now, much of the difference in incomes was due to stock market speculation and tax policies that favored the wealthy.

An additional factor that today increases income inequality is globalization which has exported millions of U.S. jobs to low-wage countries, with most of the “savings” being pocketed by the corporate executives responsible for the decision to export — and the companies’ shareholders.

In the 1920s, as now, there was little complaint about income inequality from the workers or the middle class, apparently because they all embraced the myth that anyone can get rich in this country with hard work and a little luck. The Depression disabused many of that myth, but it won’t die.

What changed the United States back then was that the voters, 25 percent of whom lost their jobs between the stock market crash and 1932, got their act together and created the political movement that brought in the New Deal and with it steeply progressive tax rates along with a host of regulations and reforms that transformed the country.

As important as the laws and regulations, the country enshrined a commitment to income security for all people in this country, a commitment that has since been sacrificed on the altar of greed.

History is full of sudden and unpredictable twists and turns. Perhaps people will be fortunate enough to create the 21st-century version of that political movement — before we are hit by another severe Depression. If not, we can catch up at the food shelf.


Wallace Roberts is an independent journalist who writes about public policy issues. He lives in Williamstown.