Taxes: 5. Risks to Vermont’s Tax Base


What keeps the governor up at night? There could be quite a few things, but tax revenue uncertainty is probably quite high up the list.

Vermont faces a number of risks with respect to the stability and predictability of its tax revenues, including adverse demographic trends, a small concentration of very large tax payers, volatility of certain taxable events, exposure to federal tax code changes and, of course, recessions. All of these risks will be discussed below.

Demographic Trends

Vermont’s population is aging. Vermont is not the only state with this trend, but here the issue is more pronounced. According to the most recent Census Bureau data, over 18% of Vermont’s population is now aged 65 and older, about 20% higher than the US average. This aging process is a long-term trend that is not likely to peak for many years to come.

Most people reach peak earnings in the 45-65 year age range. As this group increasingly retires, they’re earnings are likely to decline and certain of their spending is likely to decline. This all equates to lower income tax and sales tax revenues for the state, particularly if the remaining working population is not growing at the same pace.

According to the Joint Fiscal Office’s Tax Study Report, the age profile of Vermont changed dramatically in the 2005-2015 period.

First, the total population grew only 0.8% over this ten-year period. The number of people aged 65-74 increased by 57%. The number of people aged 18 or less declined by 14% (Vermont’s future work force) and the number of people aged 35-44 (the core of the current work force) declined by 23%. The total number of employed people has been relatively stable over this period, with the gaps filled by a high growth of people aged 65 or more taking paying jobs.

As a result of these population trends, the Joint Fiscal Office believes that the working age population of Vermont (25-64) will decrease from 328,268 in 2015 to 309,947 in 2025.

To summarize, the demographic trends in Vermont suggest a growing retiree cohort that is likely to pay less tax and a slowly shrinking workforce that is unlikely to fill the gap.

High Concentration of Big Tax Payers

Vermont has a progressive income tax system and the wealthiest residents pay the lion’s share of state income tax. Other states and the federal government show similar concentrations.

In Vermont, the top 10% of tax filers (about 32,000 filers) paid 61.5% of total state income tax in 2015. The top 5% paid 48%. The top 1% (3,140 filers), with annual incomes of $300,000 or more, paid 22.39% of total income tax in 2016.

With such a small group of important taxpayers, the risk of adverse developments is quite high. First, individual earnings are volatile. Over the last ten years, 46% of tax filers reporting income of $300,000 or more only did so for one year. Net migration out of the state is also a consideration. Up until 2010, Vermont experienced a net inward migration of high-income taxpayers into the state. Since 2010, there has been a modest outward migration in this group.

Corporate income taxes are also highly concentrated. There are some 7,200 corporate tax filers in Vermont. The top 13% pay 84% of total corporate tax. All of these big taxpayers are multi-state operators and, for the vast majority, Vermont represents well less than half their total business. Business and tax planning decisions taken by large corporations outside of Vermont can and do have a major impact on the resulting tax revenues.

Vermont’s Income Tax Structure

For both individual and corporate state income taxes, Vermont uses federal “taxable income” as the starting point. As a result, all of the federal tax code deductions, exemptions and exclusions are built into Vermont’s tax base. This structural approach to Vermont’s tax code exposes the state to any changes made in the federal tax code.

Only a handful of states use Vermont’s approach. Many more states use “adjusted gross income” as their starting point, which provides a much greater degree of flexibility to react to federal tax changes.

The Tax Reform Act of 2017 made material changes to both the individual and corporate tax codes. With the reduction in deductions for home mortgage interest and property taxes and the loss of the Personal Exemption, it looks like aggregate individual taxable income in Vermont will increase and generate higher tax revenues.

As a result, the Department of Taxes has recommended a number of changes to Vermont’s tax code to avoid an inadvertent  state tax increase.  First, they have recommended that Vermont adopt “adjusted gross income” as the starting point for Vermont income tax calculations. They have also recommended that Vermont reinstate the $4,000 Personal Exemption for state tax purposes.

Death & Taxes

Vermont is one of only 18 states with an inheritance or death tax. As you might imagine, Vermont is a small state and both the number of people who die every year and the underlying value of their estates is highly variable.

In the 2005-2015 period, Vermont’s annual take from inheritance tax has ranged from a high of $35 million to a low of $10 million. In some years, only one or two large estates make all the difference in tax revenues.


The big risk to tax revenues is negative economic growth and high unemployment. Individual incomes decline, corporate profits decline, consumption declines and property values decline. These circumstances affect most of Vermont’s taxes, including income taxes, sales taxes and potentially property taxes.

The negative affect on income and sales taxes is immediate. Vermont has a safety valve with respect to the education property tax. Tax valuations are done on a rolling three-year basis, so any short term reductions in property valuations might not lead to corresponding reduction in tax revenues.










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