Should Vermont Expand Its State Sales Tax?

Apr 28, 2015

Two Senate committees will put in long hours Tuesday night as they try to finish up work on their budget and tax bills. One of the biggest remaining policy questions centers on the sales tax, and whether to expand it to include services, as well as goods. However, some members of the business community are advising strongly against that proposal.

Back in 1971, when Gov. Deane Davis first signed the sales tax into law, Vermont consumers spent about as much on services as they did on goods. The trend didn’t hold. And by 2007, services accounted for fully 70 percent of consumer activity.

“What we count on to support base funding of state government is a tax on goods, which is not growing with the economy,” says Chittenden Sen. Tim Ashe, the Democratic chairman of the Senate Committee on Finance.

  Ashe is the lead force in Montpelier behind a plan to expand the sales tax to include things like dry cleaning, carpentry, lawn care, funerals, and a number of other services.

Ashe argues that Vermont’s failure to tax the fast-growing service economy is one of the reasons state revenues have failed to keep pace with growth in the state budget. By expanding the sales tax base, Ashe says the state can lower the sales tax rate, from 6 percent to 4.75 percent. And while the plan wouldn’t generate much revenue in the short term, Ashe says it would boost the future yields of a revenue source that now brings in close to $400 million annually, second only to the income tax.

"What we count on to support base funding of state government is a tax on goods, which is not growing with the economy." - Chittenden Sen. Tim Ashe, chairman Senate Finance committee

“We can continue to have this imbalance, which will just grow year after year after year and we can keep coming back looking for this or that splinter tax, or we can try to establish a tax code that will be predictable for many years ahead,” Ashe says.

Some members of the business community argue the sales tax expansion could suppress the very economic activity on which Ashe is relying for those future revenues.

Betsy Bishop, head of the Vermont Chamber of Commerce, says the taxation of services would be especially problematic along the New Hampshire and New York borders. Bishop says service-oriented companies tend to be particularly mobile, and that many might not be willing to absorb a nearly 5 percent surcharge on revenues.

“Often times they’re not … necessarily invested in capital,” Bishop says. “They don’t have facilities. Their capital investment is not as strong as in other types of businesses.”

Bishop also says the 1.25-percent reduction in the overall sales tax wouldn’t be sufficient to undo any of the competitive disadvantage Vermont suffers along the New Hampshire border. New Hampshire has no sales tax.

Other critics say the plan could have unintended consequences on all sorts of consumer behavior. Millie Armstrong works at a small animal practice in Colchester, and is the president-elect of the Vermont Veterinary Medical Association. Armstrong told Ashe and members of his committee that 70 percent of Vermont households have pets – the highest rate in the nation, according to the American Veterinary Medical Association.

“In this weak economy, animal owners are already making tough choices,” Armstrong said. “Adding sales and use taxes to veterinary services will force owners to make difficult choices about the welfare of their pets and food animals.”

Not all businesses oppose the expansion. Dan Barlow, public policy manager at Vermont Businesses for Social Responsibility, says his organization believes applying the sales tax to good would help rectify structural imbalances in the state's revenue system.

Senate President John Campbell says the sales tax proposal likely won’t make the final cut of his chamber’s tax bill. Campbell says the idea has merit. But he says that with less than three weeks left in the legislative session, lawmakers don’t have time to vet the proposal.

Campbell says he thinks lawmakers and others will likely study the issue over the summer.

“And they’ll come back to the Finance Committee this next legislative session to discuss and see if it’s a viable solution,” Campbell says.

The Senate tax bill will end up raising a total of about $35 million. The revenue would come largely from a new cap on the home mortgage interest deduction, and expansion of the sales tax to include soda and candy.

Ashe’s proposal builds off the analytical foundation laid by the Blue Ribbon Tax Commission back in 2010. The three-person panel was created by the Legislature to vet the state’s tax structure, and to propose changes.

Among its top recommendations was one similar to what Ashe is calling for now. Bill Schubart, then-chairman of the Blue Ribbon panel, liked to use the example of his lawnmower to convey the paradox.  

When he buys a lawnmower, Schubart said, he pays the 6 percent sales tax Vermont applies to many goods. When he hires a landscape professional to come to his home and cut the grass, however, Vermont assesses no tax on the transaction.

“There’s no practical … difference between me buying a lawnmower and me paying someone $35 a month to mow my lawn,” Schubart said. “It’s the same practical result. There is no difference to me between residential landscaping and buying a lawnmower.”

The commission’s response to this situation could result in a proposal to broaden drastically the scope of Vermont’s sales tax. Instead of taxing just goods, Schubart said, Vermont needs to consider taxing many services.

Schubart and other advocates of the sales tax expansion said it would create a more equitable tax code that doesn’t favor one mode of consumption over another. More importantly, though, they said it would align Vermont’s tax structure with what has become a services-based economy.

Thirty states, including Connecticut and New York, tax more services than does Vermont.

This story was edited at 9:20 a.m. on 4/29/15