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State needs a balanced approach to budget crisis

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As the Vermont Legislature and the Douglas administration work to achieve a balanced budget in light of a significant downturn in revenues, an emphasis on increasing revenues needs to be matched with proposed cuts. That has not happened to date.

Rather, the Douglas administration has focused all of its efforts on making cuts to the current budget. The stated target is to initially cut $20 million, though the Douglas team is hoping for an amount closer to $34 million. What is not being discussed in any substantive way is a proposed increase in revenue.

When Gov. Dick Snelling was in office, he navigated his way through two recessions — one in 1983 and another in 1991 — and both times he used a mix of budgetary tools to get the state through the crisis, including a temporary income tax hike for the highest income brackets.

In approaching today’s challenges, Gov. Douglas and the Legislature need to recognize that the problem is not that the state is spending recklessly on unnecessary programs. Rather, the global recession and financial crisis — which has hit Vermonters particularly hard because of the large amount of passive income (from capital gains, trusts and retirement accounts) that boosts Vermont’s tax receipts — has taken a big chunk out of the state’s revenue. Economists have projected the state will fall $107 million below the previous year’s total, and revenues are expected to be about $100 million below fiscal year 2008 levels through the next two years — a decrease of about 10 percent of the state’s general fund. That’s a big sum to make up solely by whacking away at costs — with important programs being decimated as a result.

The state does have options. It has about $100 million in a rainy day fund which should be tapped, and Vermont can anticipate a federal handout of perhaps as much as $100 million in conjunction with President-elect Barack Obama’s stimulus package.

But tapping the rainy day fund or hoping for federal government handouts, are not the only ways to generate more revenues. As was suggested in this column a few weeks ago, the state should study a proposal to lower the state income tax rate from its current 9 percent to half that. How could such a move possibly generate more income tax revenue? By lowering the state income tax below most of Vermont’s New England neighbors, many second-home owners would consider moving their full-time residency status to Vermont. If a significant number chose to do that, the full amount of their incomes (which are usually much higher than the average Vermonter) would flow into state coffers — plus, they would end up staying a few more weeks in Vermont to boot.

A study could determine in pretty short order how many current out-of-state second-home owners would have to declare full-time residency to make up the lost revenue of cutting the state income tax essentially in half, but it could be well worth the cost and there is little to lose. (Those close to the ski industry, by the way, say the transition could happen quickly because many second homeowners would prefer to live in Vermont if state income taxes were lower.) The downside is that even if it is a solution, it wouldn’t unfold overnight or even in the first year or two of implementation. It is a long-term plan that would evolve over several years.

The important point, nonetheless, is to look beyond simply cutting expenses that will undoubtedly do harm to important programs and services, and to broaden the state’s options by considering ways to also increase revenue.

Angelo S. Lynn

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