How We’re Doing: Paying the tab for Vermont health care program

Payroll taxes could rise steeply to foot the bill

By: Art Woolf

(View original post at Burlington Free Press)

One billion dollars used to be a lot of money in Washington. Today , it’s merely a rounding error in a $3.8 trillion (that’s $3,800 billion) federal budget. But in Vermont, $1 billion means something. In fact, around here it is still a lot of money.

 

That’s why the Legislature and governor have been taking a long time to tell us how they’re planning to pay for the state’s single payer health care system. The latest estimate is that the state will need to raise around $2 billion in new taxes to fund its share of the plan’s costs.

 

How will state policymakers come up with that amount of money? There are only a few possible sources, so let’s run them down, but make the assumption that we need to raise only half the needed amount—$1 billion.

 

First, let’s look at the sales and use tax. Currently at 6 percent, the sales tax raises about $350 million. An additional 17 percent tax would raise about $1 billion, which would make the total Vermont sales tax rate 23 percent.

 

No U.S. state has a rate anywhere near that level, although many countries have value added taxes (VAT), which are similar to sales taxes, at that rate or higher. Quebec’s VAT, for example, is 15 percent, Ontario’s is 13 percent, and many European countries have VATs of more than 20 percent.

 

A 23 percent Vermont sales tax would no doubt drive a lot of Vermonters to New Hampshire and even more to Amazon.com.

 

The meals and rooms tax might be a good candidate, since a lot of that tax isn’t paid by Vermonters. We could “ask” tourists to finance some of our health care costs.

 

But that would be problematic, because in order to get $1 billion out of the meals and room tax we’d have to levy a 64 percent tax rate, which would result in a 73 percent total meals and rooms tax rate.

 

Most Vermonters would not be happy seeing a $10 meal turn into a $17 meal. And that’s not including the tip. Moreover, a 73 percent hotel tax would discourage more than a few tourists from staying in Vermont.

 

Many Vermonters might like to sock it to businesses and raise the corporate profits tax. But that tax raises less than $100 million. I don’t think many corporations would be very happy paying ten times what they now pay, essentially giving the state all of their profits. There wouldn’t be much reason to be in business in Vermont if you couldn’t make any money here.

 

That leaves the personal income tax, which raises over $700 million. Now we’re talking real money. The state would have to more than double everyone’s income taxes to raise $1 billion. If you’re now paying $2,000 in Vermont income taxes, you would pay $3,500 for the health care tax, and your total state income tax liability would be $5,500.

 

Legislators don’t get re-elected for doing things like that, so suppose they only raised income taxes on the 8,300 Vermont households earning over $200,000. To raise $1 billion, those rich Vermonters’ taxes would have to be four times higher than they are now, which means the state would take a quarter of their income plus what they now pay. They would end up giving nearly one-third of their income to the state, even more than they owe Uncle Sam.

 

The only other alternative, the one the legislature is actually considering most seriously, is a payroll tax.

 

The current federal payroll tax, used to finance Social Security and Medicare, amounts to 15.3 percent. By law, you pay half of that and your employer pays half. The economic reality is different. The entire tax is ultimately paid by workers, as the legislative committee studying this found out, much to their chagrin.

 

The state would have to levy a new payroll tax equivalent to the amount you now see deducted from your paycheck as “contributions” for Social Security and Medicare. For an average Vermont worker, that would be about three times their current state income tax liability.

 

There are no easy ways to fund the state’s health care plan and all of them have massive and serious consequences. There may not even be any economically or politically viable choices available to policymakers to finance the plan’s cost.

 

And one last thought. This whole discussion was about how to raise $1 billion. The state needs to raise twice that amount.

Note: Art Woolf is associate professor of economics at UVM and editor of The Vermont Economy Newsletter.

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