Thank you to this week’s sponsor of our Advocacy Update:
April 8, 2022
A larger question overshadowed this week’s legislative work: does Vermont really need to raise revenue? Much of this week’s update revolves around the potential budget showdown that is brewing and might make the Legislature miss the May 6th adjournment that many seemed optimistic about last week.
In this week’s update;
New Revenue? Legislature is Looking; the Governor says “No”
In a year with the largest budget in the state’s history and possibly the largest education fund surplus of about $95 million, the appropriators are still looking to raise new revenue. The House budget came in at a $26 million deficit and did not fund the most considerable program that it had already passed. Meanwhile, the Senate Appropriations Committee has asked the Senate Finance Committee to find an additional $40 million in revenue. Meanwhile, the Governor rejects the idea that any new taxes are needed this year. This section breaks down some of the proposed new spending and new taxation.
- Cloud (Internet Services) Tax – We have an action alert on this issue (see below) where you can learn more about this policy and how to engage with legislators. The Joint Fiscal Office again increased the revenue estimate for this proposal and might have accidentally revealed that this is the potential funding source for the child tax credit proposal.
- Sugar-Sweetened Beverage Excise Tax – Another classic source for new revenue was discussed in Senate Finance this week, with a presentation from Joint fiscal showing that a sugar-sweetened beverage tax could bring in $17.2 million annually from a $0.01 per ounce tax and $29.0 million annually from a $0.02 per ounce tax. The Commissioner of the Department of Taxes encouraged the Committee to decide if they were looking at this as a public health issue or as a revenue source and take testimony from both perspectives.
- Department of Financial Regulation Fees – added to S.53, the corporate tax modernization bill, in the final days of the House Ways and Means Committee was an increase in Department of Financial Regulation fees to try to pull in more revenue. When S.53 was first considered, the package was believed to need new revenue to make it revenue neutral, but it has since been found to be very close to neutral without a need for additional revenue.
- New Tax on Vacant Homes – We often joke about how there is a tax policy bingo card with classic tax ideas that come up. We finally have a new one: properties over $400,000 that are not lived in for more than six months would face a 1% surcharge under a proposal brought forward by Senators Pearson and McDonald. The tax is expected to bring about $30 million in revenue to the state. See the amendment here.
- Property Transfer Surcharge – still alive in H.437 is a surcharge of 0.5% on transfers of property by deeded title when the transfer value is over $1 million. This applies to both residential and commercial properties transferred by deed or controlling interest.
- Child Tax Credit – One bill passed by the House with a hefty price tag is H.510, creating a child tax credit of $1,200 per child for any family making under $200,000 a year. The bill costs about $50 million, and the House did not include it in their budget.
- Universal School Meals – As we covered last week, some House members are looking to fund universal school meals in future years using a combination of taxes on internet services, sugar-sweetened beverages, and candy. The bill, S.100, was voted out of the House Committee on Education with only a study of these revenue sources in it; however, it will next go to the Ways and Means Committee, where it is likely they will add them to the bill rather than study it.
- Corporate Tax Negotiations – Overarching all of this is the ongoing discussion around S.53, the corporate tax modernization bill, which will now be addressed by a Committee of Conference. It’s likely the Committee will not meet for some time.
- Manufacturing Sales Tax Exemption – Of the requests for new revenue expenditures, a very small, yet incredibly impactful request from the business community exists in H.437. Business advocates and the Tax Department have been asking to expand the existing sales tax exemption for machinery and equipment used in manufacturing to make compliance easier and avoid issues with auditing. This section is expected to reduce sales tax revenues by $900,000 per year.
- The Yield Bill – passed by the House, the yield bill may not reflect what the Senate feels is the most prudent use of $95 million in education fund surplus.
Action Alert: Prevent a Tax on Your Internet Use!
Legislators need to hear from you! Think about any expense you have related to something connected to the internet. It could be your cash register or point of sale system, could be an app you use to keep your team organized, or your website. Now that you have that cost in your mind, take 6% of that (7% in some areas of the state), and that is what you’re going to pay if the House passes their Cloud tax. Please take a moment to reach out to your legislators as well as those on the Senate Committee on Finance and the House Committee on Ways and Means.
- Senate Committee on Finance: thank them for preventing this proposal in past years and urge them to reject it again this year.
- House Committee on Ways and Means: urge them to reconsider this tax, which they have passed many times, as new revenue is unnecessary in a year with historic surpluses and the largest budget in history.
- Your Legislators: explain to them the impact this tax will have on you and your operations. Many legislators are under the impression that what the House passed removed a tax on prewritten software accessed remotely (SaaS), which was characterized as “only what used to come in a box and now is accessed over the internet. The language passed by the House goes much further, taxing SaaS and Platform as a Service and Infrastructure as a Service; the three service types together with makeup 100% of the services you buy on the internet.
If you have more questions or would like assistance in reaching out, please contact our team at [email protected]
More information that might be helpful for your outreach:
- “Isn’t this just a tax on what used to come in a box and was taxed?”
- No, that is a common misconception. To make it simpler to tax, the House Ways and Means Committee decided to expand the definition of prewritten software accessed remotely to include not just software as a service – it also includes platform as a service and infrastructure as a service that never was “in a box” and never taxed.
- “What’s wrong with just taxing what used to come in a box?”
- It’s not just taxing what used to come in a box due to the most recent expanded definitions; however, even if it was restricted to that type of software, in this day and age, prewritten software is increasingly becoming more service-based as it requires more frequent updates, subscriptions, and services.
- “Doesn’t the state need the revenue?”
- This year’s budget is the largest we’ve seen, and the education fund has over $95 million in surplus revenue, with years of surplus revenue becoming the norm.
- “Other states tax this type of service.”
- This is never a good reason to do something. Let’s take, for example, a prominent state that taxes internet services: Washington. Washington State doesn’t have an income tax, so their tax mix looks very different from Vermont’s. Tax mix is an important part of any conversation, and when people compare our state to other states, it is also important to know what those other states are not taxing. Washington State is also the headquarters of some of the largest and most established companies globally; their economy looks very different from Vermont’s.
- “Isn’t this necessary to adapt to a new world?”
- That is not what this is, and if it was, it’s being done in an imprudent way. The Tax Structure Commission did look at and recommend expanding the sales tax to services; however, they cautioned against cherry-picking certain taxes in favor of a comprehensive, holistic change to the tax structure of the state in which all services are taxed and the statewide sales tax is cut in half.
Economic Development, How Much to Spend?
Committees do deep dives on issues putting together a wishlist of ingredients; where the mustard meets the mayonnaise is in the Appropriations Committee. Weeks ago, we flagged the potential collision course the bills passed by the House Commerce and Economic Development Committee and Senate Economic Development Committee were on. This is just one of many mismatches in priorities between the House and Senate.
Last session, $158 million was appropriated for “economy, workforce, and communities,” with $49 million of that from the general fund, and the remaining amount covered by ARPA dollars. At the time, $250 million was pledged for total ARPA spending for these sectors. You can read more about that from coverage last year. As a result, Vermont businesses should expect another $141 million in ARPA spending focused on the economy, workforce and communities this session. It now looks as if that full amount will not be allocated.
There are three bills aimed at spending on workforce, economic development, and business recovery; H.703, H.624, and H.159. These three bills total around $160 million, and when the House budget was created, it did not account for any of the potential spending from the Senate’s economic development bill, H.159.
Advocates came together on three priorities for spending (link) for any final bill totaling $45 million. While still pushing for additional spending, the three top priorities included: recovery funds for businesses, support for arts and culture organizations, and the relocation incentive package in H.159. Next week, LCC will be testifying in the House Commerce Committee on the omnibus economic development bill. It’s worth noting that H.159 has still not reached the House Committee on Commerce and Economic Development. This week, the Governor took aim at the bill, along with other bills, for including provisions that he previously vetoed.
Clean Heat Standard
The Senate Committee on Natural Resources and Energy continued to work through H.715, the Clean Heat Standard that the House sent them. Hanging over this conversation is the Governor’s demand that any final version of the program created by the Public Utility Commission (PUC) come back to the legislature for final approval. The Chair of the PUC testified to the Committee in opposition to such a provision.
Efficiency Vermont testified that the bill too heavily favors biofuels over weatherization efforts. It is worth noting that favoring fuel switching over energy efficiency and infrastructure upgrades was an unintended consequence we noted when LCC testified on the Global Warming Solutions Act when it was still legislation. We suggested an alternative weighting factor for efforts such as weatherization and grid modernization which have strong long term emissions reductions, however, do little to move the needle in the short-term. The state is under tight deadlines to meet emissions targets, and even this week, there is speculation that those targets cannot be met. Weatherization takes time to pay off in the form of emissions reductions, so GWSA, in effect, disincentivizes such activities in favor of actions like finding a fuel that has lower emissions now.
- Here are links to our past advocacy updates from this legislative session: Week 1, Week 2, Week 3, Week 4, Week 5, Week 6, Week 7, Week 8, Week 9, Week 10, Week 11, and week 12.
- The House Committee on General, Housing, and Military Affairs came to a final consensus on H.329, a bill lowering the threshold for discrimination claims. The bill did not make the crossover deadline, so the Chair will consult with the House Clerk to identify which bill would be germane for this to be added to as an amendment.
- S.113, the medical monitoring bill, passed the House this week. This could possibly bring to a close a six-year debate over this topic.
- On April 6, Governor Scott signed H.722, which solidifies the House and Senate districts for the next 10-years using the new information from the latest census.
- The House Committee on Commerce and Economic Development got an update on the health of the Unemployment Trust Fund. An overview of what was presented can be found here.
- The House Committee on Commerce and Economic Development took up H.124 to make changes to the Vermont Employment Growth Incentive (VEGI) program, such as increasing wage requirements and abolishing “green VEGI,” the environmental focussed part of the program, reducing incentives, and removing diversity from the board. The Committee members are worried that the program might not be as necessary for the current job market and want to be able to “switch gears” as the labor market changes.
- About 30 Vermont developers sent a letter to Senators this week opposed to the changes to Act 250 governance proposed in H.492, which has passed the House and has yet to be taken up by the Senate.