Updated May 21, 2019, at 12:20 p.m. to note Senate passage of the plan.

Legislative leaders on Monday floated a plan to fund clean water projects in the state not by raising new taxes, but by siphoning off one-time funds and existing revenue streams — and figuring out later how to plug the hole that will blow in future budgets.

The last-minute maneuvering, conceived in a closed-door meeting Monday morning and approved that afternoon by the Senate Finance Committee, would give legislators a way to claim victory in identifying a long-term source of funding without really doing so. By Tuesday morning, the full Senate backed the proposal on a voice vote and sent it to the House for consideration.

“This is a solution for now," said Senate Finance Committee chair Ann Cummings (D-Washington). "It gets us our money."

It would also obviate the need to immediately impose a new "cloud tax" on online software or raise the rooms and meals tax by 1 percentage point — two previous proposals that met resistance from industry lobbyists.

The plan calls for dedicating 6 percent of the general fund’s allotment of the rooms and meals tax — or about $12 million — annually to the Clean Water Fund to augment about $40 million in existing state and federal spending.

Sen. Chris Pearson (P/D-Chittenden), a member of the Finance Committee, seemed pleased with the optics of the last-minute plan, which had proved elusive all session.

“We’re doing it out of existing revenue but we’re satisfying the charge of a dedicated source,” he said.
In theory, the proposal would meet the state’s commitment to find a long-term, stable source of the $50 million to $60 million necessary to comply with a 2016 Lake Champlain cleanup order from the U.S. Environmental Protection Agency. In reality, however, the deal largely postpones the potentially painful decision of how to make up for the funds diverted from other sources.

Stronger than expected revenues from personal and corporate income tax returns may take some of the sting out of those decisions. The state now estimates it will bring in about $50 million more than it anticipated this fiscal year, according to Steve Klein, chief fiscal officer for the legislature's Joint Fiscal Office.

That extra revenue will effectively allow legislators to “borrow” from the current year's budget surplus to pay for extra spending next year.

“Some of us are not overly happy to do this, but there seemed to be an agreement that we could take $10 million of that and book it now with the idea that it would be repaid in July,” Cummings explained.

She was referring to an agreement reached earlier Monday between Senate President Pro Tempore Tim Ashe (D/P-Chittenden), House Speaker Mitzi Johnson (D-South Hero) and the chairs of the legislature's four tax and revenue committees. The morning meeting, which also included Joint Fiscal Office staff, was not open to the public or media.

The plan calls for putting $7.5 million of the $10 million available from this year’s budget surplus into the general fund. That would fill the hole created by the diversion of 6 percent of the rooms and meals tax to the Clean Water Fund beginning around October.

The real problem for budget writers begins the following fiscal year, when a full $12 million in rooms and meals revenue would be diverted to clean water projects.

Of the $50 million in extra revenue expected this year, about $15 million is projected to recur in the future. That means the state can bank on some additional revenue, but, given its other budget needs, not all of it can go to clean water.

“There’s a hole in the budget if we do the $12 [million], so the budget people are a little panicky about that right now,” Cummings said.

Assuming $7 million from the higher than expected revenues could continue to be tapped for clean water, another $5 million would need to be raised from new funds to reach the $12 million, she said.

That’s when one or more of the new revenue sources bandied about this legislative session would likely be revisited, Cummings said. Some ideas include increasing trash franchise fees, hiking the property transfer tax on homes worth more than $500,000, or levying a $1 per night occupancy fee on hotel rooms.

The latter fee would raise about $3 million per year and would differ from the rooms and meals tax, which the Finance Committee considered raising by 1 percent last week. That prompted howls of protest from the tourism lobby.

“It doesn’t hit meals,” Cummings said of the occupancy fee idea, “which means it doesn’t hit most Vermonters.”

She noted the House still favors a "cloud tax" on software downloaded from the internet, though Senate leaders are cool to that idea.

Tax Commissioner Kaj Samsom said it sounded reasonable for the legislature to look for clean water funding from within existing sources since revenue growth was so robust. Samsom's boss, Gov. Phil Scott, had proposed using $8 million per year from the estate tax, but that plan went nowhere.

The Finance Committee voted 6-0 support the plan. The voice vote on the Senate floor appeared to be unanimous.

Disclosure: Tim Ashe is the domestic partner of Seven Days publisher and coeditor Paula Routly. Find our conflict-of-interest policy here: sevendaysvt.com/disclosure.