On March 13, 2024

What is a ‘fair share’ to pay in state taxes?

Editor’s note: The following article is republished from the lieutenant governor’s March 6 newsletter.

Today, I have an exceptionally important topic to talk about: taxes!

Taxes have become a dirty word, and in many ways for good reason. Since the 1980’s there has been a significant shift in how much everyday people pay in taxes. Wealthy and high-income individuals have seen their marginal tax rates drop precipitously, while working class people have been asked to shoulder more of the costs of funding a functional government.  

It is important to remember that we collect taxes in order to fund our government, public services, and programs. From maintaining public lands, funding public safety and the judiciary, protecting our waters to expanding childcare opportunities, economic development, and social services, there is a massive range of essential functions that your tax dollars support for you and the broader community. As Vermonters’ needs shift and as we learn more about our collective impacts, we must adjust what we fund and determine how to allocate those costs across taxpayers fairly.  

I have long been a proponent of progressive taxation, meaning that the more money an individual makes, the higher the rate at which those higher incomes are taxed. Vermont has done a relatively good job at creating and maintaining a progressive tax system. But as the income gap between the top and the bottom continues to widen and as more and more wealth gets concentrated at the top, thus squeezing everyday working people, it is time to think about how we can make the system more equitable. 

The Legislature just passed H.850 to work to address some aspects of the projected education tax increase. Additionally, there are two proposals currently in the House of Representatives that would move us in a more progressive direction by taxing high-wealth individuals’ unrealized gains and implementing an income tax surcharge on income over $500,000/year. Before we get into the details about those two bills, here is some background information about how our tax system currently works. 


Data source from 2023 Vermont Tax Rate Schedules 
The chart shows our current (2023) tax rate schedule for single individuals. It is important to note, the “base tax” is the sum of the tax rate applied.

 

How the current tax system works

Taxes are generally split into three broad categories: income, property, and consumption (sales and excise).  According to a report by the Institute on Taxation and Economic Policy (ITEP), Vermont currently has the third least regressive overall local tax system in the country, just behind Washington D.C. and Minnesota. We are one of only six states and the District of Columbia that have overall progressive tax systems. Forty-four states have tax systems that are regressive and help exacerbate income inequality. 

As you can see from the chart below, Vermont’s tax rates increase gradually but become regressive for the top 5% of income.

Today, I want to focus specifically on income taxes. As an individual makes more money, their increased income is taxed at a higher rate.

Our top tax bracket applies to all income over $229,550, so whether you make $250,000 per year or $2 million per year, there is no difference in the rate at which you pay income taxes. This makes the overall tax burden lower for people with higher incomes because their other taxes (property and consumption) become a smaller and smaller share of their income. 

Vermonters are struggling with many basic needs, including affordable housing, accessible childcare, flood recovery, and so much more. These costs are hitting working people, especially for those with lower incomes. As we look to find ways to fund these programs, I believe it is time for those with excessive incomes and wealth to pay their fair share.

Income tax surcharge 

One of the proposals in the Legislature is H.828, An Act Relating to the Creation of a Personal Income Tax Surcharge.This bill proposes a 3% income tax surcharge for adjusted gross incomes (AGI) over $500,000. To put it another way: the money an individual makes over $500,000 in a calendar year would be taxed an extra 3%. 

As you can imagine, this would not impact the vast majority of Vermonters. Only 1.1% of tax returns filed by Vermonters in 2022 had an AGI of $500,000 or more. Despite this low additional rate, it is estimated that this surcharge would bring in an additional $71.4 million in revenue for the state. This money could help fund affordable housing, workforce development, flood resiliency, mental health services, drug recovery, public safety, and so many other programs that help support everyday working Vermonters. 

This would also fix the issue of our regressive tax structure at higher income rates. It’s true, some of the taxes paid (in the chart at the bottom of this page) may look like a lot to most of us who annually make less than those figures. However, it is important to look at the next column where it shows their net income after taxes. From that you can see that the top 1% should still be able to pay their bills! 

 


Courtesy David Zuckerman
Chart shows the estimated impact of 3% Income Tax Surcharge on adjusted gross incomes (AGI) of varying levels over $500,000. The last column shows the percent of income paid if implemented.

 


Data sourced from the Institute on Taxation and Economic Policy 
Chart shows total state and local taxes as a share of family income for Vermont compared to the states and districts with the least regressive tax system (D.C. and Minnesota), those with the most regressive tax system (Florida, New Hampshire and Washington), and some neighboring states. Note: Washington state does not tax personal income. These rates reflect property and consumption taxes compared to household income only.

 

Wealth tax 

Another proposal is H.827, An Act Relating to Applying Personal Income Tax to Unrealized Gains.This bill is essentially a wealth tax that would be imposed on residents with net assets in excess of $10 million. Again…this would only apply to people with more than $10,000,000 in assets!

An “unrealized gain” is an increase in value that the owner has not yet taken by selling their asset. For example, if an individual purchases a house for $10 million one year, and the next year the value increases to $11 million, then that individual has seen a $1 million unrealized gain. This applies to stocks as well. Many rich people avoid paying taxes on these gains because when they die, most, if not all, of those gains are untaxed when the assets are passed on. Under current law, this is a form of income that is almost never taxed. This is a tax benefit that everyday working people do not get.

This bill would require individuals to pay personal income tax on 1/2 of their unrealized gains. In the example above, that would mean taxes would need to be assessed on $500,000 of the $1,000,000 gain. 

Like the income tax surcharge, this would NOT affect the vast majority of Vermonters, just a small percent with excessive wealth. We are still waiting on an estimate of how much additional annual revenue this would generate. 

Reflections 

As I indicated at the beginning of this update, this is an important topic. Our tax system, at the federal and state level, essentially penalizes or rewards different people in society. Generally, our tax system penalizes working people by making them pay a higher percentage of their income in fees, consumption taxes and splinter taxes, while wealthier people avoid taxes through lower (or no) taxes on capital gains and wealth accumulation. It costs working people extra by passing on societal costs such as school buildings, roads, bridges, and more onto regressive sources of revenue like property taxes and fuel taxes.

It is true, some people go to school longer, or work harder, or chose more lucrative professions. These people can and should be rewarded for that extra effort. However, the question remains: how big should the difference be? Do we value those that are critical to the everyday society we live in? Are janitors worth that much less? How about early childhood educators? What about those folks that support the mental health of our youth?  Or those that are helping raise foster kids from families that have been afflicted with substance abuse disorder? While working hard every day, these folks are struggling to pay their basic needs. 

We can do better. 

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