The state’s tax system is better than most, but more changes are needed to make it fair
Public Assets Institute and Institute on Taxation and Economic Policy While most state and local tax systems worsen inequality with the wealthy paying a far lesser share of their income to taxes than low- and middle-income families, Vermont’s tax code is progressive through the bottom 80 percent of income distribution and regressive through the top 20 percent. That’s according to the latest edition of the Institute on Taxation and Economic Policy’s Who Pays?, the only distributional analysis of tax systems in all 50 states and the District of Columbia.
This relative progressivity in Vermont’s tax code is largely driven by the state’s use of personal income taxes and targeted, refundable anti-poverty tax credits.
However, declining progressivity in higher-income brackets and the reliance on property taxes for higher-income taxpayers for education funding leave room for improvement.
Lawmakers could help fix this imbalance by making all residential education taxes income-based and by requiring the wealthiest Vermont residents to pay their fair share.
“Vermont has a fairer tax system than most states, but we still have work to do. Vermonters should be proud that our tax code does not exacerbate inequality, but this report shows us that we can do more to ensure that our tax code works toward a Vermont where we can all flourish,” said Stephanie Yu, President and Executive Director of the Public Assets Institute. “State and local tax policies play a critical role in addressing racial and economic disparities, funding vital programs and services, and providing economic security for all families and communities. By continuing to strengthen state anti-poverty tax credits like the Vermont Earned Income Tax Credit and the Vermont Child Tax Credit and moving forward with proposals like Fair Share For Vermont’s 3 percent surcharge on income above $500,000, Vermont lawmakers can ensure that our state continues to be a leader in tax policy that reverses inequality.”
The report’s key findings for Vermont:
- Despite its relative progressivity compared to other states, Vermont has a tax system that is progressive through the bottom 80 percent of income distribution and regressive through the top 20 percent. Vermont still taxes the top 1 percent less than the fourth 20 percent.
- The average effective state and local tax rate is 6.3 percent for the lowest-income 20 percent of individuals and families, 9.6 percent for the middle 20 percent, and 10.1 percent for the top 1 percent.
- Vermont has the 3rd least regressive tax system in the nation.
Many of the states with tax codes that reduce inequality, or at least do less than average to widen inequality, have made strides toward more progressive tax policies in recent years.
Massachusetts, Minnesota, New Jersey, New Mexico, New York, and the District of Columbia, for instance, have taken steps to raise taxes on more affluent households and lower taxes for low- and moderate-income families.
“We’ve seen a lot of states shift their tax systems to become even more regressive in recent years by enacting deep tax cuts for the wealthiest. But we know it doesn’t have to be like this. There is a clear path forward for flipping upside-down tax systems and we’ve seen a handful of states come pretty close to pulling it off,” said Aidan Davis, ITEP’s State Policy Director. “The regressive state tax laws we see today are a policy choice, and it’s clear there are better choices available to lawmakers.”
About the report:
Who Pays? is the only distributional analysis of tax systems in all 50 states and the District of Columbia. The comprehensive 7th edition of the report assesses the progressivity and regressivity of state tax systems by measuring effective state and local tax rates paid by all income groups. No two state tax systems are the same; this report provides detailed analyses of the features of every state tax code. It includes state-by-state profiles that provide baseline data to help lawmakers and the public understand how current tax policies affect taxpayers at all income levels. Over 99 percent of all state and local taxes, measured by their revenue contribution, are included in the analysis.
About ITEP:
ITEP is a non-profit, non-partisan tax policy organization. We conduct rigorous analyses of tax and economic proposals and provide data-driven recommendations on how to shape equitable and sustainable tax systems. ITEP’s expertise and data uniquely enhance federal, state, and local policy debates by revealing how taxes affect people at various levels of income and wealth, and people of different races and ethnicities.
About Public Assets:
A nonpartisan nonprofit founded in 2003, Public Assets Institute is an independent research organization that works to improve the wellbeing of all Vermonters and advance racial, social, and economic justice through research, fiscal analysis, and public engagement and empowerment. It focuses on education funding, family economic security, and making state tax and budget decisions transparent, inclusive, and responsive to Vermonters’ needs.
Source: January 9, 2024. Public Assets Institute
