By Shay Totten | Vermont Guardian
Posted April 5, 2007
WASHINGTON — Vermonters have been ranked the smartest and healthiest in the nation, and are told they live in one of the safest and most livable states, too. Now, Vermonters have another top accolade, the most taxed.
Vermonters shoulder the highest state and local tax burden, as a percentage of their income, than residents of any other state in the nation, according to a new report. Vermont, which ranked second last year, edged out Maine by a mere one-tenth of a percentage point to take top honors this year, according to a report issued Wednesday by the Tax Foundation.
According to the report, 14.1 percent of Vermonter’s income will go to pay all state and local taxes. Maine was second with 14 percent, New York was third with 13.8 percent.
Since October, Vermont has received top honors from the Kansas-based Morgan Quitno Press, which ranks cities and states in a variety of ways. Vermont has been named the “smartest” two years in a row, and has been the “healthiest” in six out of the last seven years (for a full list see the bottom of the article).
Nationally, the foundation found that the average tax state and local income tax burden was 11 percent, putting Vermont 27 percent above the average.
Alaska has retained the lowest tax burden every year this decade, with New Hampshire, Tennessee, Delaware, and Alabama completing the list of the five lowest tax burdens — no changes from last year.
Since 2000, five states have experienced double-digit drops in their tax burden rankings — New Mexico, Idaho, Utah, Georgia, and North Dakota. New Jersey has seen the highest increase since 2000, moving up the ranks from 24th to 10th. Arkansas and Indiana have both risen 10 spots, the report found.
Gov. Jim Douglas was quick to seize on the report’s findings and raise concerns about the Legislature’s lack of progress on providing property tax reform, and action on raising taxes.
Douglas pointed out that the report attributes Vermont’s unusually high tax burden to, among other things, skyrocketing property taxes.
“I will continue to urge the Legislature to seek more meaningful reform,” said Douglas. “In addition to underestimating the burden of property taxes on working families, the Legislature has also tinkered with a new income tax for education, a higher tax on home sales, a tax on home heating fuel, and a tax on vehicles like mini-vans and light trucks. They’ve also rejected my proposal to limit growth in the state’s budget to inflation, plus population growth.”
Douglas has previously said whether Vermont is ranked first, third, fifth, or even tenth is of no concern — taxes in Vermont are too high.
However, some are questioning whether actually reflects what most Vermonters pay in taxes.
“The Tax Foundation's report provides no useful information for policymakers,” said Doug Hoffer, a Burlington-based policy analyst and primary author of the Job Gap Study series. “The only way to fairly compare the burden is to look at taxes paid by filers at different income levels. In this regard, Vermont looks pretty good. The governor's use of this information is a cynical attempt to mislead Vermonters. He should be ashamed.”
Hoffer, along with the Legislature’s Joint Fiscal Office (JFO), claim the Tax Foundation’s report ignores the state’s progressive income tax, which means many people pay at the lowest rate, and property taxes are paid based on income for most filers.
The JFO responded to the Tax Foundation’s report. A copy of that response, obtained by the Guardian, noted that Vermont’s per capita property tax burden is overstated by as much as $171 when you take into account the fact that many Vermonters receive some rebate on their taxes based on their income.
“While taxes are not low in Vermont, there is some important information not included in the report that makes these statistics misleading,” the JFO analysis said.
The JFO also notes that the state collects $37 per person in Vermont from captive insurance companies, an industry that Vermont has heavily recruited in recent years, and was recently featured in the New York Times. Vermont collects more in premiums for this industry than all but two other states, and most of these businesses are multinationals not headquartered in Vermont.
According to a Tax Foundation economist, who authored the report, they tally up all the income generated in Vermont, and then compares that against all the taxes collected in a state — consumer, personal, and business.
“We use national figures from federal government sources and there is no implicit bias in those figures,” Curtis Dubay. “It’s just a percentage of income after looking at taxpayers as a whole. Many groups will look at one quintile or another from different perspectives, but this is an average.”
Dubay said the foundation has also published a study recently that shows the average burden is close to the median tax burden, so he believes the criticism that this report isn’t a fair representation, while partially accurate, it not a fair assessment.
And, Dubay said a state like Vermont — with a statewide property tax and a progressive income tax — is likely to be ranked higher in this report than states that do not rely on a statewide property tax, or use a progressive income tax.
“What we are seeing is that property tax burdens are growing rapidly around the country for everyone,” said Dubay. “But, we are also seeing tax burdens growing more rapidly in states with progressive income taxes. And, that’s because when the economy is doing well, as it is now, they take in more income taxes.”
Vermont is a high-tax state compared to all other states, but when it comes to use of the property tax it ranks below its New England counterparts — a group that, on the whole, relies more on the property tax than other regions of the country to fund programs, according to a report issued earlier this year by the JFO.
In FY 2004, according to U.S. Census Bureau figures, Vermont’s education property tax revenue was $1,531 per person, placing the state eighth nationally. This ranking was unchanged from 1996, according to a JFO study issued earlier this year.
A second phase of this tax analysis, due out soon, will take a sharper focus on how tax filers — both businesses and individuals — actually fare in Vermont and in comparative states.
Though Vermont has the second-highest top marginal tax rate in the country after California, it only applies to one half of one percent of tax filers. In fact, 56 percent pay the lowest marginal rate of 3.6 percent, and 20 percent pay no taxes at all. Only 3.6 percent of tax filers, or about 10,000 households, pay the top three marginal rates, according to the JFO.
For example, the JFO report found that while Vermont has a high marginal rate for upper-income business filers, not all businesses pay the top rate.
For example, according to the JFO study, of the 23 out-of-state companies with Vermont taxable income of more than $1 billion, two paid only $250, which is the alternative minimum allowed by the state. In the $100 million to $1 billion taxable income group, 22 of the 140 companies only paid $250, and 25 of the 111 companies with taxable income of $50 to $100 million paid $250.
Meanwhile, Vermont companies of the same size pay based on their taxable income, and it’s not until you get into taxable income below $10,000 that you see Vermont companies taking advantage of the alternative minimum.
In fact, of the 860 companies with taxable income of $10,000 to upwards of $50 million, only two filed for the alternative minimum payment of $250. Both of those companies were in the $10,000-$25,000 income group.
Aside from on which end of the wealth scale the tax burden actually hits, Hoffer said the Tax Foundation’s report also fails to address what Vermonters receive in services for the money they shell out.
“The foundation [also] ignores the other side of the ledger. That is, what do the states buy with their tax dollars? We could lower taxes and be more like Texas and Alabama but be careful what you wish for. Quality of life is dependent on public expenditures for public health and safety, education, and infrastructure,” added Hoffer.
Dubay said the report doesn’t pass judgment on a state’s ranking only what it is compared to others.
“There is nothing in the report that quantifies the burden, we never say that 14.1 percent is too high, we just say its’ the highest,” said Dubay. “It’s for the people of Vermont to decide. If you are paying that level and getting wonderful services that you value highly, then you might not think you might think it’s a high burden. Or, at least that it’s a burden you’re willing to pay.”
In this regard, Vermont has some feathers in its cap. The state has ranked tops in a number of areas,, all of which are touted by politicians when they are doled out.
• For two years running, Vermont has been ranked the nation’s “Smartest State” by the Kansas-based Morgan Quitno Press. This educational ranking is based, in large part, on achievement scores and low teacher-to-pupil ratios;
• Six out of the last seven years, Vermont has been named the nation’s “Healthiest State” by Morgan Quitno Press in part because of access to primary care doctors, a low teen birth rate, and the rate of citizens covered by health insurance;
• Vermont is considered the second safest state in the nation, up a place from a year ago, also a ranking bestowed by Morgan Quitno;
• Vermont was named the seventh most livable state in the nation by Morgan Quitno, based on a series of 44 factors;
• The National Assessment of Educational Progress (NAEP) ranked Vermont second nationally in the organization’s evaluation of states’ public schools’ academic accomplishments;
• Education Week reported that Vermont schools performed third best in the nation in achievement and achievement gains; and,
• The Earth Day Network ranked Burlington the second-best city to live in the country, and Country Home magazine ranked Burlington the “greenest city” in the country.