Guest Column2/5/09

Pay cut or tax increase: What’s the difference?

Feb. 5, 2009

By Jack Hoffman

The word “taxes” has become so toxic that it’s impairing our ability to talk rationally. Here’s an example: According to the governor, some middle-income Vermonters can afford to give up 5 percent of their salaries to help balance the state budget. Meanwhile, he says, asking others with the same income to pay far less than 5 percent in additional taxes would make living in Vermont “unaffordable.”

In his budget address, Gov. Douglas hinted that certain nonprofit organization employees could afford to help balance the budget. Later, Rep. Patty O’Donnell fleshed out the governor’s suggestion. She outlined a plan to impose a 5 percent pay cut on people making $60,000 or more from nonprofit organizations that receive state funding. The governor proposed a similar pay cut for state workers above the same income threshold.

One thing we learn from this plan is that its proponents believe that Vermonters with incomes over $60,000 have the capacity to give more to balance the state budget. What is harder to understand is why they see a pay cut as less onerous than a tax increase. For the people affected, it’s no different. It reduces their incomes and increases the state coffers.

A 5 percent pay cut for someone making $60,000 would be $3,000. For a single person, that would be more than his entire Vermont income tax bill for last year. Even for those with higher incomes — people the governor described as “nonprofit executives (with) robust compensation packages” — the pay cut would be equivalent to a 75 percent or 80 percent tax increase.

Neither the governor nor Rep. O’Donnell has explained what distinguishes a public or nonprofit employee from anyone else who makes $60,000 or more a year when it comes to stretching their own household budgets.

So, just for a moment, let’s assume there is no difference, and everybody making $60,000 or more could give up 5 percent of their income. Collecting that in the form of a surtax would generate $573 million — and just about double Vermont’s current income tax collections.

The state is facing a revenue shortfall, but it doesn’t need that kind of money, and no one has suggested anything like a 5 percent surtax. All that critics of the current budget-balancing strategies have proposed is to look at the kind of tax increases Vermont imposed in the last two major recessions, in the early 1980s and early 1990s. These tax hikes were much less than 5 percent of income and in the 1990s were tilted toward people in the higher income brackets. Back then we weren’t afraid to ask all Vermonters with a greater ability to pay to help us through the crisis.

Take 5 percent out of some workers’ paychecks and that’s called “shared sacrifice.” Take a fraction of that and call it a tax, and suddenly people can’t afford it. With our leaders using this kind of logic, how can Vermonters trust that we’re all in this together?

Jack Hoffman is an analyst for Public Assets Institute, a nonprofit, nonpartisan organization that does not receive state funds. The pay-cut proposal would not affect him or the institute.