June 17, 2018 veto override update

Legislative Update, June 17, 2018

H. 13 Veto Override Vote

Rep. Anne Donahue

This will be a somewhat meandering, think-aloud commentary on the budget stalemate and pending veto override vote. I’m sharing it with those who have written about the vote and those of you on my email list, but not in the Northfield News or Front Porch Forum, because you can better engage in dialogue if it generates more questions than answers. There is too much complexity for sound bites, and I’m sharing thoughts that I’d might not want to share in a more public forum (understanding, of course, that email is a public forum …)

Near the end of our regular session, I voted for the fy 2019 budget and against the tax bill. If the reason for opposing the tax bill was the increase in property taxes, that would be an inconsistent vote, since the money to prevent the tax increase was being appropriated elsewhere in the budget bill.

That wasn’t the reason for my vote. The budget was a good, reasonable, restrained budget. The increase in property taxes reflected the education budget decided upon by voters, with the primary state role only being to come up with the money through the traditional combination of a standard share of the general fund plus by setting an adequate property tax rate.

We had some bonus money from a tobacco case settlement, ergo called “one-time money” since it won’t repeat in the annual revenue cycle. Investing it in artificially reduced property taxes for a year, rather than putting it into a one-time investment, didn’t make much sense to me. Among other things, it would exacerbate the existing problem of the disconnect between local budget votes and tax rates: increase the budget but get no tax increase.

I voted against the tax bill for other reasons, primarily because it failed to add aggressive steps to deal with future education spending. We have a big problem when we try to say that local spending determines local property taxes, because it is false in significant ways. We have a statewide property tax that pools the money and pays out to high spending towns at the expense of low spending towns. That’s why the focus on maintaining “local decision-making” over schools is a false construct. They aren’t just local decisions, but we’re allowing them to be made locally. We need a different split between state and local shares. There are other complex problems that further add to the inequities – including the challenges of the “common level of appraisal” that attempts to compare values across the state -- and we continue to punt on solutions. It was not just that I had a theoretical desire to see progress on these issues. Some steps were included in earlier versions of the bill but dropped out, and were in proposed amendments that were rejected.

I was also concerned (though I wouldn’t have voted against the tax bill on this issue alone) about the lack of transparency regarding the tax shifting that we did with the state income tax. We claimed to adjust rates to, on average, make people whole for the increase in state taxes that would have occurred as a consequence of the mechanics of the federal tax reduction. If we hadn’t, there would have been a big bonus to the state coffers, and the benefits people are getting from the federal cut would have been reduced. But we didn’t actually give it all back. We used a small piece of it for two other (worthy) goals: eliminating the tax on Social Security for low income retirees and increasing the earned income tax credit for low income workers. The problem is that we didn’t tell the public that this was how we funded those two pieces of resulting reduced state revenue.

But the bottom line in terms of the budget is that I would not have voted to sustain the veto of the budget we passed in May. I would have gone against the governor because I disagreed with his position. I would have voted to sustain the veto of the tax bill. I would have stayed consistent with my prior votes on both bills.

But there was never going to be a veto override vote. That was a plan made by the Democratic majority of the House and Senate. They laid down the gauntlet early on, ending the session without scheduling an override vote date and thus telling the governor that if he vetoed the bills, he would have to call a special (new) session. That created the opportunity to renegotiate everything and anything. We are now in a new session, and all bills from last session that did not get passed and signed are dead. Everything must start over.

This is where the news media sound bites and blame game began in earnest. There has been talk about the governor throwing in last minute proposals and demands. That simply isn’t true. He presented a comprehensive, balanced budget in January that incorporated all the mechanisms to achieve his aim of not raising taxes or fees, including property tax rates – and that was before anyone knew about the extra settlement money.

The legislature didn’t like some of it. That’s its prerogative. The new budget spent more on assorted items but remained balanced, in part thanks to higher-than-projected tax revenues and in part due to the bonus money. The governor did not threaten to veto the budget saying, “I am opposed to your spending choices and any increased spending.” He met the legislature half way, saying, “Go ahead with your added spending, but keep the tax rates level by using some of the increased revenues to stay with my original budget target of not increasing taxes.” He presented ideas about how that could be achieved without cutting the other spending through using the one-time money as a loan based on planned future saving – savings through combining some of the plans already discussed earlier in the session. I thought that was not a great idea to rely on planned future savings, which is part of why I did not support it, but these were direct responses to the legislature’s decisions to try to avert a veto, not last-minute new proposals.

Ironically, part of the jump in property tax rates this year is that the legislative majority opted last year to use one-time money (from the reserves) to equalize the money not saved when it rejected the governor’s proposal for a statewide teacher’s healthcare benefit. Those reserves had to be refilled this year. Using one-time money was not a good idea then, either; it was not a good compromise, but the governor lost any room to push for a stronger resolution by responding to news media inquiries immediately after that budget veto regarding whether a stalemate would create the risk of a government shutdown. He said it would not – because he would compromise his position before he would allow that to happen. (Any wonder why he refused to say the same thing this year – and thus was being blamed almost immediately for creating the supposed risk of a shutdown?)

The Democratic majority wants to invest the settlement money into the debt we owe on the teacher’s retirement fund, which raises the question of how we have such a staggering debt – and why anyone would not want to try to begin to address it. The shortfall came from underfunding what the actuaries said we needed back in the 1990’s. But just a few years ago, we adopted an aggressive plan not just to meet current payments, but to begin restoring the shortfall. That is now part of the budget every year, including this year. In other words, the proposed use of the extra revenue to put towards the retirement fund would be an extra investment – and it’s not a bad idea. But failing to do it is not a shortchanging of the fund, which we are already rebuilding.

Now both sides are involved in what I think is a foolhardy game of blaming each other for the specter of a shutdown. It’s foolhardy because I don’t think the public cares who would be at fault if it happened. The public would be mighty mad at both sides for failing to resolve the stalemate; no one wins on that one. And in fact, both sides would share the blame. I think the media gets a share of the blame on this as well, by early and often raising the “what if” question, long before it was really any threat at all. Given last year, the governor was bound to say, “I’m not changing my position but it will be the Democrats at fault,” and of course the Democrats had to push back and say “we’re willing to compromise so it will be his fault.” The prospect of a shutdown has now become a big focus in the media and thus the public eye and has helped back both sides into corners and contributed to a stalemate that now brings us to the point of brinksmanship.

One immediate result that has been a major distraction and that has delayed progress has been the legislature’s passage of H. 13 – the budget created during the new session – and its inevitable veto, leading to the vote on whether to override it that is expected this week. I already referenced that we can’t have a veto session, because the legislature ended the session without holding a date open. But we can, in this new session, pass new bills that can be vetoed, and we can have a veto override vote of that.

The anticipated process was that there would be negotiations resulting in a new, compromise, tax bill and budget bill, and we would be called in to take it up and vote on it (as occurred last year during the veto session, after a veto override vote failed.) Instead the Democrats, frustrated by perceived intransigence of the governor and unwilling to compromise themselves, parlayed the “shutdown threat” into a sound bite solution: let’s pass a new budget that only has all the things both side agree on, and thus be able to reassure everyone there won’t be a shutdown, and then negotiate just the areas of disagreement. (Among other things, that would allow for accusing anyone who voted against it as not caring whether there was a government shutdown.) The new “budget” bill included all the regular budget items but held aside the disputed surplus money. It then also included all the items in the tax bill that had consensus – the state income taxes changes. Plus one other thing: it included a flat tax rate for residential property (something already achieved with some of the added revenue), but left in the increase for the non-residential property tax rate. So it did not include only items not in dispute. It included a default position – barring a future compromise and revision – of the underlying tax increase.

The legislature said that suggesting that this meant they would allow that default to occur by not resolving the tax dispute was an unfair suggestion that it would fail in its commitment to find a solution, and that the governor was rejecting it purely because he wanted “all the cards” for negotiating the tax solution. But that is a two-way street. The Democratic majority was not willing to have the default in H. 13 to be a level tax rate because it would mean trusting the governor to still be motivated to resolve the dispute, and the legislature wants to be the one to hold the cards.

Just as a reminder, non-residential doesn’t mean out-of-stater. It means Vermonters who run businesses and provide jobs; it means renters who pay property tax indirectly through their rents; it means folks with a camp; yes, also (a minority of the total), out-of-state property owners. The irony of leaving the residential tax rate flat and increasing the non-residential rate is that part of the reason for two rates is that the residential rate is tied to actual budget decisions under the theory that those who don’t get to vote on the budget shouldn’t have their taxes tied to that vote. A business owner, for example, may live in another town (where their residential tax is impacted by their vote), but they don’t vote in the town where the property is being taxed. So agreeing to keep residential taxes flat but increasing non-residential is the reverse of any move to try to refocus voters on why they need to be vigilant about cost containment.

There is something else that has changed between passing the original budget and what is in front of us now with the new combination budget and tax bill. Last week, we received yet another revenue upgrade. For the first time in years, the economy is perking up, and instead of facing rescissions due to lower-than-projected revenue, we have an increase in regular revenue. This is no longer about “one-time” money from a lawsuit settlement.

If we are taking in more taxes than we need to fund our planned expenditures, we have two choices: add to our spending, or return it to taxpayers. In the ideal world, we would return it to those who paid it (income tax payers and business tax payers), but that would be hopelessly complex. But it could be used to hold property taxes down. It’s not enough to keep property tax rates completely flat, but if in combination a part of the one-time funds were used to pay some of the one-time education fund expense that exist (namely, the tax incentives given to towns under Act 46 mergers), we could achieve the compromise that has been eluding us.

In light of that, it would make no sense whatsoever to proceed with a budget that injects the non-residential rate increase as the default position. It also would make no sense to argue for a budget that leaves a flat rate as the default. There is no reason to pass a bill (assuming there ever was) that creates this confounding additional dispute on a “default position” in order to achieve a claimed relief from the threat of a shutdown. There is less reason than there ever was to respond to the red herring of a shutdown with anything short of addressing the actual dispute: whether we should or should not – need or do not need – to increase property tax rates.

So I will be voting to sustain the governor’s veto of H. 13, the false consensus bill, and hoping that getting that distraction out of the way clears the way to start the real route to problem-solving. The real route is almost always to address the problem head on.