Douglas, lawmakers split on capital gains rollback
Gov. Jim Douglas and the Democratic legislative leadership failed to reach an agreement last night on the budget.
Negotiations, which have been held privately in the governor’s office,apparently broke down over the governor’s demand that lawmakers restore a 40 percent capital gains tax break for certain Vermont businesses.
The deal breaker came down to semantics over what constitutes a small business. House Speaker Shap Smith and Senate President Pro Tem Peter Shumlin defined a qualifying small business as Vermont-based and family-owned, with fewer than 10 owners. Douglas’ parameters were broader – he included any company, regardless of size, that pays taxes in Vermont.
The amount of tax-break revenues in dispute ranged roughly from $1.5 million (Democrats) to $3 million (Douglas), according to Secretary of the Administration Neale Lunderville.
Both sides expressed disappointment over the failed compromise.
Adjournment, which has already been delayed twice, appears to hinge on this issue.
The legislative session is in limbo while Democratic leaders and the Republican governor work out a compromise. The negotiations are necessary because Douglas has threatened to veto major bills affecting the state budget, taxes, Challenges for Change government restructuring, health care reform and current use bills.
The governor has also been pushing the Legislature to repeal estate tax and capital gains tax increases that were enacted last year in a first-ever budget veto override session.
Recently, Douglas has appeared headed for a rerun of that veto fight, holding a series of press conferences criticizing lawmakers’ actions and laying out his administration’s alternatives.
Smith and Shumlin have been in talks with Douglas for days. Their latest tack was to pitch a separate capital gains tax break developed by the House Ways and Means Committee for what they characterize as small Vermont-based family owned companies with 10 or fewer directors.
Shumlin said the negotiations were very close, and “we had reached agreement on most of the items.”
Even so, the legislative duo emerged from the governor’s ceremonial office after 9:30 p.m. sporting identical green baseball caps with the word “Vermonter” emblazoned across the top (a parting gift from the governor) – but no deal in hand on the budget and the other money bills.
“It’s disappointing to us it didn’t work out,” Shumlin said.
“We did try to reach an agreement on the capital gains issue by working with the small business exemption that had been placed in the House tax bill,” Smith said.
Shumlin said they haven’t decided what steps to take on Wednesday, and he said, in reference to a revenue backup plan discussed by lawmakers, “The rainy day fund is not a big obstacle to our agreement with the administration. The challenge we’re having with the administration is,they want a bigger exemption on the cap gains than we can agree to and still have a conference committee that will sign and still have an affirmative vote.”
So, will there be a budget veto? Both sides hedged. “We’re taking this minute by minute, hour by hour,” Shumlin said. “Obviously, we wish we had an agreement.”
Douglas contended the Democratic leadership “reneged” on the $3 million capital gains exclusion deal his staff had prepared. “We didn’t reach an agreement during our deliberations tonight, and I regret that,” Douglas said. “I particularly regret it, because we had a deal earlier.”
The governor had originally proposed a complete repeal of the 40 percent capital gains exclusion, which generates about $10 million in tax revenues for state coffers. Smith said Tuesday that a repeal would benefit the wealthiest 3 percent of Vermonters.
The administration said it had found savings to cover the cost of the tax break without further reducing human services. “They were here tonight,” Douglas said. “And they said the deal was off. I don’t understand that. That’s a real disappointment, because $3 million in capital gains tax savings for last year is far less than my original proposal, which was $10 million.
“As a compromise, in the context of everything else, I did agree with this, and then they came in tonight and reneged. And that was very disappointing.”
Douglas said “the basis of our agreement on the cap gains tax was to recognize we’d only be helping small businesses, not folks with huge homes with large primary or secondary real estate assets of various kinds, but just small businesses.”
Douglas argues that the more-than-10-owners cutoff is arbitrary and unreasonable. “You can have a very large business with fewer than 10 owners, and you can have a very small business with more than 10,” Douglas said. “An arbitrary cutoff of the number of principals seems unreasonable to me.”
Neale Lunderville, secretary of administration, said the proposal Smith and Shumlin favored would roll back about $1.5 million in taxes for small businesses, as opposed to $3 million, which would be extended to a larger group of companies that operate in the state.
When asked how he would define a small business, Lunderville said, “we just define it as business. The majority of Vermont businesses are small businesses. (None of the businesses are publicly traded, and they all pay taxes in Vermont.)
Though a budget deal is still pending, Douglas said, “The door is open, and I don’t know what their plans are.”
As Senate President Pro Tem Shumlin headed to House Speaker Smith’s office for another strategy session on the budget earlier that evening, when asked if he’d shaken on a deal, he remarked in passing: “My hand is empty. I have no one to shake with.”