MONTPELIER, Vt.—Gov. Jim Douglas called his plan to scale back the state's tax exemption for capital gains income and use the new revenue to lower tax rates on wages an issue of fundamental fairness.
But as the plan the governor described in his State of the State address gets more scrutiny, concerns are being raised that it could scare wealthy people with high capital gains income away from Vermont, and that it could hurt such middle-class taxpayers as farmers selling heifers or woodlot owners selling timber.
Douglas announced in his speech to lawmakers he wanted to close a "loophole" in which capital gains income is subject to a 40 percent exemption from taxes. He said the result currently is that the state taxes people who earn wages or a salary at rates up to nearly 50 percent higher than those whose income is from a stock portfolio, for example.
He called the higher rate on earned income "an unfair penalty on an honest day's work."
Tax Commissioner Tom Pelham later told members of the House Ways and Means Committee, "The principle at play here is equal tax for equal income."
The governor said he would maintain the current capital gains exemption for people over 65, since many retirees rely on that type of income. And he said he would still exempt the first $2,500 in capital gains income so as not to penalize middle-income Vermonters with a few investments.
Ending the exemption otherwise would raise about $20 million a year, money that would go toward reducing the state's highest income tax bracket, as well as rates imposed on those making between $53,150 and $195,850 a year.
The proposal is getting mixed reviews.
"I don't think this is a particularly good idea," said Richard Mallary, former legislator, congressman and Douglas' first tax commissioner.
Raymond Cota, a certified public accountant in Williston, said he feared that people with high capital gains income might declare residency elsewhere to avoid sharply higher taxes.
"If they think they are being overtaxed to the point they can't stand it, they will leave," he said.
Others, including House Speaker Gaye Symington, question using the money from eliminating the capital gains exemption to lower income tax rates. She argued that Vermonters are much more in need of property tax relief.
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Information from: The Burlington Free Press, http://www.burlingtonfreepress.com
