By Jack Hoffman
posted
Feb 20, 2013
Vermont has long been known for its progressive income tax
system. For a couple of reasons, it makes sense to tax higher
incomes at higher rates. Those who benefit most from society have a
responsibility to contribute more, and those with more
discretionary income-what's left after covering taxes and
necessities-can afford to pay more.
But while Vermont's income tax system is progressive, the
overall tax system is not. Which may come as a surprise to many
people.
The Institute on Taxation and Economic Policy in Washington,
D.C., just released its latest "Who Pays?" report-the fourth
edition since 1996. It's an analysis of state and local taxes paid
by people in various income categories. The study shows that
Vermont's tax system is better than many states'-that is, it's one
of the least regressive. But the lowest-income Vermonters still pay
more of their income in state and local taxes than those at the
top.
It's a coincidence that "Who Pays?" has come out right in the
middle of the debate over Gov. Peter Shumlin's proposal to cut the
Vermont earned income tax credit (EITC). But the data in the report
are relevant.
The EITC is a federal tax break for low-income, wage earners.
It's refundable, so if the credit is more than a person owes in
income taxes, the taxpayer receives a cash refund. Taxpayers must
be working and earning income to receive the credit. The federal
credit was made refundable, in part, to offset other regressive
federal taxes, like the payroll tax. And as much as the EITC helps
low-wage families make ends meet-it is cited in studies as one of
the most effective anti-poverty tools-it can also be seen as a
benefit to employers who pay low wages.
Vermont's EITC is piggy-backed to the federal credit. The state
credit is 32 percent of the federal credit, and again taxpayers
receive a refund if the credit is more than the person's tax
liability.
In tax year 2011, according to the most recent available data,
about 44,000 Vermont tax filers received state earned income
credits totaling $25 million. In most cases, people received a
refund for all or some of the credit.
One thing revealed by "Who Pays?" is that Vermont's tax system
would be even more unfair without the EITC. The bottom 20 percent
of Vermont taxpayers now pay 8.7 percent of their income in state
and local taxes. Without the tax credit, their share would be 10
percent. Meanwhile, the top 1 percent of Vermont taxpayers are
paying 8 percent of their income in state and local taxes.
What is also apparent from the "Who Pays?" report is that the
wage earners receiving the earned income credit are paying taxes.
They get a break on income taxes, but they're still paying sales
taxes, fuel taxes, property taxes if they own a home, use taxes,
and rooms and meals taxes. As with the federal EITC, the state
earned income credits were made refundable to help offset some of
the regressive taxes wage earners have to pay. Without the EITC,
their tax bills increase.
Even though Vermont's tax system is regressive, leaving the EITC
intact ensures that it doesn't become more regressive and lean more
heavily on the lowest wage workers.
Jack Hoffman is senior analyst for Public Assets Institute, a
non-profit, non-partisan organization in Montpelier that analyzes
state fiscal policy (www.publicassets.org).
