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Gov. Douglas unveils a new budget counter-proposal

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By JOHN FLOWERS

MIDDLEBURY — Gov. James Douglas on Tuesday released his own proposed fiscal year 2010 state budget to counter the $4.5 billion spending plan he vowed last week to veto, but it appears as though the counter-proposal will not avert a legislative override vote slated for June 2.

The Middlebury Republican’s plan recommends further cuts, account transfers and raising $13 million in new revenues — roughly half the amount the General Assembly had endorsed to help bridge what had been a looming $281 million shortfall.

“This approach demonstrates that we can build a responsible budget that protects needy Vermonters, invests in job creation to grow our economy and provides the middle class income tax cut that I have been fighting for,” Douglas said in a statement following release of his budget counter-offer on Tuesday afternoon. “My proposal is sustainable because it addresses the $67 million deficit in the Legislature’s budget; it establishes a balanced interim plan to deal with the unemployment insurance trust fund deficit, and it provides a roadmap for containing property tax increases.”

Douglas’s proposal, among other things:

• Generates $13.44 million in new revenues, including $7 million through a boost in the cigarette tax (45 cents); $1.8 million through taxes on other tobacco products; $2.1 million through bumping the liquor sales tax to 6 percent.

• Makes what Administration Secretary Neale Lunderville said is another $32 million in cuts in human services and other sectors beyond what the Legislature approved. The budget recommends additional general fund savings by shifting $40 million in teacher retirement fund obligations to the education fund — a move that will result in such an expense being borne largely by property taxes in the future. The Douglas administration is proposing to use some federal stimulus funds to blunt the property tax impact of the transfer in the short-term. Come fiscal year 2011, the administration is recommending that school boards anticipate level funded per-pupil allocations from the state in order to neutralize the property tax impact of the transfer.

“It gives districts time to adjust to this change,” Lunderville said.

• Lowers the “income sensitivity” threshold under the state’s education funding law from the current $90,000 per household to $75,000. That means that households earning more than $75,000 annually will not receive any property tax break for education expenses.

• Gives a middle-class tax cut through capital gains tax changes to Vermonters in the form of lower income tax rates. It also restores the “sales tax holiday” — a day in July when the state does not collect sales tax — instituted last year that had not been reauthorized this year by the Legislature.

• Restores several of Douglas’s priority programs that hadn’t made it into the Legislature’s version of the budget, including a “Next Generation” scholarship program and various economic development initiatives.

House and Senate leaders were still reviewing the governor’s budget counter-offer as the Addison Independent went to press, but they did single out some areas of concern late Tuesday.

“Overall, the governor’s proposal amounts to little more than shifting responsibility to someone else,” reads a statement from Sen. Susan Bartlett, D-Lamoille, and Rep. Martha Heath, D-Westford. Bartlett and Westford are the chairwomen of the Senate and House Appropriation Committees, respectively.

Heath and Bartlett said 13,000 middle-income families would, on average, pay $1,100 more in property taxes if the income sensitivity threshold of the state’s education finance law is lowered from $90,000 to $75,000.

“Overall, the governor’s proposal amounts to little more than shifting responsibility to someone else,” Heath and Bartlett content.

House Speaker Shap Smith could not be reached by press time.

Sen. Claire Ayer, D-Weybridge, also voiced concerns — particularly about the proposed shift of teacher’s retirement fund expenses to the education fund, which is funded through property taxes.

“It is a sneak attack,” said Ayer, vice chairwoman of the Senate Finance Committee and Senate majority whip. “We’ll all feel it.”

LEGISLATURE’S PLAN

Douglas was candid in his criticism of the budget approved by the Legislature on May 9 during an extensive interview at the Addison Independent on May 15, the day on which he confirmed his veto intentions.

The budget Douglas has vowed to veto features $26.1 million in new revenues to help patch what had been a $281 million shortfall. In addition to that new revenue, lawmakers proposed to patch the shortfall by cutting $59.3 million from state programs and services, while hoping to collect $4.8 million in unpaid taxes; generating $21.3 in new taxes; reducing the general fund transfers to the Vermont’s education fund by $18.4 million; using $3.2 million in “rainy day funds”; and applying $174.5 million in federal stimulus funds.

“I sincerely believe there was no need for a general fund tax increase, but I understand you believe it’s important, so somewhere between zero and $26 million, there ought to be a number,” Douglas said. “What did they do? They passed a budget  with $26 million (in new revenues). I wonder if they are sincere about finding that middle ground.”

Douglas is concerned the Legislature’s budget applied too much federal stimulus money — around $174.5 million — to soften an estimated $281 million revenue shortfall in the fiscal year 2010 budget.

Douglas said he had recommended between $100 million and $110 million.

“I’m quite concerned about the sustainability of the budget going forward,” Douglas said. “Even (the Legislature’s) own joint fiscal printouts show pretty significant shortfalls in 2011 and 2012. What’s their plan for addressing that?”

He argued that federal stimulus money is scheduled to last for three fiscal years. Douglas said the state should not count on Congress approving a new round of the American Recovery and Reinvestment Act.

“How many trillions can we spend that we don’t have?” Douglas said. “I think this was designed to help over the course of three fiscal years — part of fiscal year 2009, all of 2010 and part of 2011. We ought to be able to manage that.”

The General Assembly’s proposed revenue package includes closing the capital gains loophole (with a new $5,000 exclusion) to generate $16.2 million in state revenue; raising the estate tax to bring in an estimated $3 million; closing the income tax deduction loophole (with a $5,000 cap) to generate $15.5 million; a bump in the sales tax on liquor ($2.4 million); a bump in the cigarette tax (from $1.99 to $2.24 per pack) to raise $4.1 million; and increasing the tax on other tobacco products to generate $1.8 million. Those taxes would be offset somewhat by lowering the marginal income tax rates to save Vermonters $22.4 million. The net boost in revenues, therefore, would be 26.1 million.

GOV. TAKES AIM

Douglas took issue, in particular, with the capital gains and estate tax proposals.

“The (Vermont) Tax Department estimates that more than 2,000 businesses in the state will pay more than $3,000 more each as a result of this scheme,” he said of the Legislature’s proposed revenue raising plans.

He argued the General Assembly’s proposed boost in the estate tax would be damaging to those inheriting small businesses and farms — situations in which the assets being bequeathed are overwhelmingly property, not cash.

“A lawyer I spoke with said ‘Legislators seem to think the average multi-million-dollar estate is a house for a quarter-million and a stock portfolio,” Douglas said. “But he said, ‘I’ve never seen an estate like that. It’s farms.”

The governor reiterated his warning that increasing taxes — particularly those on incomes, capital gains and estates — could discourage people from picking Vermont as a spot in which to reside and create wealth.

“People have a choice where to live,” Douglas said.

He defended his proposal to cut down general fund contributions to public education at a time when school enrollment is dropping, creating a student-teacher ratio he said is now 100-to-one.

“I think we need to look at the economy of scale; that’s the real problem,” Douglas said. “We have the lowest student-teacher ration in the country. I think we have to exercise some restraint there; it’s out largest single expenditure. It’s $1.5 billion. We have to get costs under control.”

Douglas pointed to a recent report in “Forbes” magazine indicating Vermont has the highest tax burden in the country, and another in The New York Times suggesting Vermont has then most generous human services benefits.

“It’s a matter of balance,” Douglas said “If we have the most generous array of social programs and the highest tax burden, I don’t think it’s unreasonable to say, ‘We’re not going to raise that tax burden, we can trim back little bit.’”

The Douglas administration earlier this month sent out notices to around 110 state employees whose jobs are set to be cut.

“Our target is still 320 (job cuts) over the end of the fiscal year, so these savings will be in place by July 1,” Douglas said.

There are currently around 8,200 workers now on the state’s payroll, according to Douglas.

If the Legislature does indeed convene on June 2, Douglas hopes it will address what he said is a looming deficit in the state’s Unemployment Insurance Trust Fund that could balloon to $160 million by the next fiscal year. The Douglas administration suggested several changes in the state’s current unemployment benefits policy to contain costs, including asking businesses to contribute more and reducing the maximum benefit from the current $425 per week to $409.

For now, the fed is lending states interest-free money to deal with shortfalls in their unemployment trust funds. That will soon change to 6 percent interest, according to Douglas.

“In 2011, when we will have to pay interest, it will be huge,” Douglas said of the budgetary implications. “That (interest) will have to be paid out of the general fund, not out of the unemployment trust fund, so that’s another $10 million or so we’ll have to come up with every year. (Legislators) have got to deal with it, but they didn’t.”

ECONOMIC DEVELOPMENT

Douglas also voiced frustration that the Legislature did not endorse more of his economic development initiatives. Douglas had proposed using $17.1 million in “discretionary” federal stimulus funds to help create new jobs; loan money to struggling businesses; and promote travel to Vermont, among other things. He said that while the Legislature did use some of the money to buy down the interest on loans for farmers, lawmakers used $4 million of the funds “to shore up the public safety budget.” Douglas fears the use of one-time federal money to backfill the public safety budget could create financial problems in future years.

Douglas had hoped the Legislature would endorse his pitches for another sales tax holiday, and a new program calling for research and development tax credits for businesses planning new products.

“The priorities are askew, I think,” Douglas said. “The bottom line for me is that they raised too many taxes, they didn’t cut enough, the spending choices they made were wrong, they didn’t address the unemployment trust fund, they interfered with labor relations and they didn’t pass a comprehensive economic development bill. That’s why I’m going to bring (the Legislature) back.”

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