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Misconceptions about Vermont’s Tax Burden

3 min readBy: Curtis S. Dubay

Misconceptions about Vermont’s highest-in-the-nation taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden persist since the Tax Foundation released its annual report on state-local tax burdens.

The misconceptions originate from an Issue Brief from the Vermont Legislative Joint Fiscal Office. Perhaps under pressure to show Vermont’s tax burden is not so high, the Joint Fiscal Office’s report makes several false arguments.

The Joint Fiscal Office asserts that we double-counted some property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es due to the complex give-and-take of Vermont’s rebates and so-called prebates. But Vermont is not alone in this unfortunate complexity of property tax administration. Many states have complicated the job of the Census Bureau who has to reconcile tax collections in each state to make sure they’re comparable. We have double-checked with Census Bureau personnel about Vermont’s property taxes, and they have assured us that all rebates and prebates are netted out of the total collections figure and correctly accounted for.

On another property tax issue, the Joint Fiscal Office argues that we overstate Vermont’s tax burden by not subtracting the property taxes paid by non-residents on second homes located in Vermont. We’d love to do such fine-tuning, and we’re aware that Vermont and Maine have more second homes than other states. But obviously, Vermont residents own second homes, both in Vermont and in other states. For us to calculate non-resident property tax payments accurately for every state, we’d need a nationwide matrix of home ownership and property tax payment. No such dataset exists. The Joint Fiscal Office’s assumption that all second homes in Vermont are owned by non-residents and that no Vermonters own second homes out of state is absurd.

The third argument is even more nitpicking. The so-called captive insurance industry is one of the few growing sectors of Vermont’s economy. It produced $22.7 million in tax revenue in fiscal year 2006 according to the Vermont Legislative Joint Fiscal Office’s brief. For technical reasons, that revenue isn’t lumped in with other corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. revenue, and therefore, we allocate it all to Vermont instead of allocating some of it to other states, as we do with regular corporate income tax revenue. There’s nothing special about this situation. Many states have industry-specific taxes like those levied on the captive insurance industry in Vermont, and we have treated those in the same way. Captive insurance revenue is less than one percent of Vermont’s tax collections.

Finally, the Joint Fiscal Office argues that even if the total tax burden in Vermont is as high as the Tax Foundation finds it to be, that’s no tragedy because much of the tax burden is shouldered by higher-income people. Well, that’s really off the point. The Tax Foundation’s annual state-local burden study is concerned with the entire state. But if we had to speculate, we’d say that despite Vermont’s comparatively progressive income tax, the poor’s tax burden there is higher than in most states. Mostly that’s because dividing up such a large tax burden, 14.1 percent of income, is bound to leave the poor with a larger burden than the poor pay in a state where the total is less than 11 percent of income, the national average. In addition, Vermont by no means ignores the taxes that are known to fall heavily on the poor: sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es (6%, 25th highest) and cigarette taxes ($1.19, 10th highest).

The fact remains that Vermont taxpayers have the highest state-local tax burden in the nation, and no amount of quibbling will change that. Vermont legislators should focus on lessening the tax burden for its residents, since studies have shown that high tax burdens, especially high property taxes, discourage economic growth. See the Tax Foundation’s State Business Tax Climate’s literature review (pg. 5) to learn more.