FY15 Vermont Tax Proposals Affect Vermont Nonprofits: A Closer Look

Montpelier, VT – Nearly 200 artists and art leaders attended the Vermont Arts Summit on 26 October 2013. To start the day, the Vermont Arts Council convened “Tax Reforms and Charitable Deductions” to discuss the financial pressures facing the state in coming years, impacts of current legislative proposals and options now under consideration in key committees.

Attended by more than 60 arts leaders, the panel was moderated by WCAX Statehouse reporter Kristin Carlson, and featured Senator Tim Ashe (Chair of Senate Finance Committee), Representative Janet Ancel (Chair of House Ways and Means Committee), John Killacky (executive director of the Flynn Theatre), and Lauren-Glenn Davitian (of Common Good Vermont).

The discussion centered around two pieces of legislation at different stages of consideration by the Vermont Vermont Arts Council Arts Awards 2013Legislature. The first proposes to limit Vermont state tax deductions to 2.5 times the standard deduction. The second proposes to replace the process for determining property tax exemptions with a new two-step process. Both of these issues, described in more detail below, below raise concerns in Vermont’s nonprofit community. Sector leaders are concerned that capping Vermont tax deductions will have a chilling effect on donors in all tax brackets, and that changing the property tax exemption process will result in fewer exemptions and higher costs for many organizations.

Scroll down for more detail on the bills and take a look at the numbers behind H.528.

Senator Ashe began the panel by explaining that Vermont’s revenue gaps are a combination of macro-economic issues and decisions made by the state. Over the past five years, these gaps have ranged from $50 – $250 million. The Vermont Legislature has responded by instituting a series of cuts, combined with a “papering over” the problems with available federal stimulus, flood relief and tobacco trust fund dollars. As the Legislature considers a $70 million revenue gap for FY15 budget, they will have no stop-gap revenue sources to turn to.

In the first half of the session, the Legislature was charged with finding $20-24 million to fund FY14 budget proposals. To this end, the Senate Appropriations and House Ways and Means Committees looked to the income tax (where most state revenue comes from) and considered recommendations from the Blue Ribbon Tax Commission, which outlines a strategy for rationalizing Vermont’s tax code.

Vermont is one of the few state’s that provides a “grand array” of state income tax deductions, including real estate, charitable and medical. In seeking to create a solution, the House Ways and Means and Appropriations first took a targeted approach and proposed a bill to cap mortgage deductions. The Committee’s received so much “push back” from realtors, that they drafted a new bill, H. 528 setting a cap on all deductions. Thus, H. 528 was born. It contains a variety of tax revenue proposals, including the 2.5 times cap on the standard deduction (including mortgage interest, charitable deductions, health care expenses).

Senator Ashe explained: “We aren’t trying to ‘sock it to people’–we are trying to create more equity in the tax code. We are trying to address the glaring issues that simply are not fair: mortgage deductions that support out of state/ second homes, and the fact that some of Vermont’s highest earners pay no income tax at all.”

Representative Ancel emphasized, “It is important to understand that we are not eliminating deductions. The fact is that most tax payers don’t reach this level of total deductions. It is also important to note that federal deductions would not be affected by this proposal”.

Ways and Means heard lots of testimony on the H.528—but Vermont’s nonprofit community did not have a presence. The bill ultimately passed the House with a substantial margin. The bill then went to the Senate, which adopted a “surgical approach”, focusing on mortgage deductions and a minimum income tax for the wealthiest tax payers. A Conference Committee was convened to agree on a joint version, which is still under consideration.

While there are concerns about the affect of capping the Vermont charitable deduction on giving, the net effect of the bill is to reduce taxes overall for a significant number of tax payers. The challenge for the nonprofit sector is to show what harm H.528 will generate.

Representative Ancel summed up: “Our goal is to have a tax system that is more fair and equitable. As it stands now we have a regressive system. The more income your household has, the more deductions you are entitled to. When we look at this, and other tax bills, we need to ask: Does this change accomplish something that is important? Will it cause substantial harm? We need to balance these considerations. We need to hear from all of you to learn what the balance is.”

For a look at the numbers behind H.528, have a look at this document.

Discussion turned to the property tax exemption bill. Senator Ashe explained that local property tax exemptions are not evenly applied across the state. The Property Tax Exemption Summer Study Committee is looking for a consistent application of property taxes across the state. In the Senate, the investigation began with large higher educational organizations. There is an increasing appreciation in cities like Burlington for payment in lieu of taxes to cover costs of city services from University of Vermont and Champlain College. They reached it by agreement rather than by the law. There are several communities but they don’t have that deal in place. He added, “The reason you will see more and more concepts like this debated and discussed because fewer and fewer people are paying more and more taxes and people are frustrated by this. As more people move into poverty that becomes a burden on those who pay taxes.”

Flynn Theatre ED John Killacky echoed the concerns of many of the people in the room when he said: “I think capping deductions are fine, but that charitable organizations need to be exempted. We won’t achieve equity in the tax code by discouraging charitable giving.” The Flynn raises $7 million each year– 45% comes from contributions and half of these come from individuals. Of their 2400 members, 14% give us 59% of total income. “If we lose 10% of those people”, John explained, “we are in trouble”. He added that National Council on Nonprofits reports that seven states have tried capping charitable contributions and seven states have rescinded their law. He added, “I am worried that the nonprofit sector is being looked at as if we are not giving back to the state”.

Lauren-Glenn Davitian, of Common Good Vermont, built on the theme of public support for Vermont’s nonprofit sector. “According to the Vermont Community Foundation, we know that less than 25% of the public strongly agrees that Vermont nonprofits spend money wisely. We need to do a better job of using data to tell our stories.”

Citing the Cultural Data Project as a data set that, with 60 arts organizations reporting, shows that the sector is a key economic driver–generating at least $32 million with a payroll of $10 million.

“This is an organizing effort that will take clear understanding of the issues and clear messaging on our behalf. Who do we have to convince of our important work? Our local legislators, the key legislators (on Appropriations and Ways and Means) and folks in the Executive Branch. Who is going to help us? Our supporters, our partners and the people we serve.” She urged participants to gain a greater understanding of the legislative issues on the table and to ask donors at all levels if H. 528’s proposed cap on deductions would discourage them from giving.

General discussion followed, agreeing on the need for greater understanding the proposed legislation and a call for discussions among sector leaders on ways to mobilize in response to the FY15 budget, while raising the profile of the sector in the hearts and minds of Vermonters.

MORE BACKGROUND ON THE BILLS

Changes in Vermont Tax Deductions: H. 528 an Act Related to Revenue Changes for FY14 and 15 includes several revenue generating ideas to address the state budget shortfall, including a cap on the amount of total Vermont tax deductions (mortgage, health, charitable) that a tax payer may declare. Passed by the House, and now in Conference Committee, H. 528 would limit state (not federal) tax deductions to 2.5 times the standard deduction—this would add up to $15,250 for individuals and $30,500 for joint filers in 2013.

Members of Vermont’s nonprofit community are concerned that such a cap would have a chilling affect on donors in all tax brackets.

Here is recent news on the topic.

Eliminating Statutory Tax Exemption for Real and Personal Property: Put forth by the Property Tax Exemption Summer Study Committee, this bill is in draft form and proposes to eliminate the existing statutory tax exemption for real and personal property that is used for charitable purposes and replace it with a new, two-step process. The two step process would requires state (education tax) and municipal (municipal property tax) approval:

  • Education Tax: the nonprofit with tax-exempt property to obtain a certificate from a “certification officer” appointed by the Commissioner of Taxes. The applicant would be required to demonstrate that the property is “owned and operated on a nonprofit basis, dedicated unconditionally to public use and used for the benefit of an indefinite class of the public primarily for charitable or public purposes and to confer a benefit on society.” A certificate could not be granted if the property is “leased for income or profit or used for general commercial purposes.”
  • Municipal Tax: The non-profit would be exempt from the municipal property tax only if it received a certificate from the Tax Department and if the voters of the town voted in favor of the exemption.
  • The committee is also considering a provision that would require exempt nonprofits to negotiate a payment in lieu of taxes (PILOT), perhaps five to 10 percent of what the organization would otherwise owe. This provision targets educational institutions and is informed by current PILOT agreements between the City of Burlington and the University of Vermont and Champlain College.

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