Like the federal government, Vermont has a progressive personal income tax system. At low levels of taxable income, tax rates are lower and at high levels of personal income tax rates are higher.
The 2016 CAFR reported the precise distribution of individual income tax collections by income level for fiscal year 2015. In 2015, there were 366,504 total income tax filers, $20.0 billion of reported taxable income and $706.2 million of state income tax collected. The taxes paid by income bracket are outlined below.
Distribution of Vermont State Personal Income Tax Collection: Fiscal Year 2015
|Income||% Total Filers||% Total State Income Tax|
|$300,000 and up||0.95%||24.91%|
|$9,999 and lower||31.32%||1.27%|
|Out of state||13.15%||7.26%|
Source: 2016 Comprehensive Annual Financial Report
A Small Number of People Matter: The top 7.75% of tax filers, or about only 28,000 filers, pay 52.97% of total state personal income tax in Vermont. The top 1% pays 25% of total state income tax.
Large Number of People Below $25,000 of Taxable Income: About 47% of Vermont’s tax filers report $25,000 of less of taxable income and pay only 6% of total state personal income tax. Note that taxable income in not equivalent to wages. Taxable income is calculated after the standard deduction (or itemized deductions) and deductions for dependents.
Other State Taxes are Less Progressive: While the state income tax is progressive, other state taxes are less so. To the extent low and moderate- income individuals pay a higher proportion of their income on goods and services, fixed rate taxes such as sales, gas and purchase & use taxes tend to be less progressive. Property taxes are progressive to the extent income levels and home prices are highly correlated, which is not always the case. When incomes decline (say upon retirement), property taxes remain the same and represent a higher proportion of income.
The table above simply shows the percentage of state income tax collected by income bracket. To get a better feel for the distribution of the tax burden based on income, the effective tax rates based on adjusted gross income are a more helpful measurement.
The tax code contains a number of features that greatly impact effective tax rates. First, different types of income are taxed at different rates. Capital gains, dividends and municipal bond interest are all taxed at lower rates than wages and salaries.
Second, there are a large number of deductions that can be taken in determining taxable income, including property taxes, health care expenses, mortgage interest and charitable donations. All of these deductions are worth more to taxpayers in higher income tax brackets (a dollar deduction saves 20 cents for a 20% taxpayer and 35 cents for a 35% tax payer).
Last, there are a large number of tax credits and exemptions that also reduce effective tax rates.
In January 2017, the Vermont Joint Fiscal Office published The Vermont Tax Study 2005-2015. This is a great document for anyone wishing to learn more about Vermont’s overall tax system. Among other things, this report showed the effective state income tax rates as a percent of federal adjusted gross income for fiscal year 2014 after taking account of all the adjustments, deductions, credits and exemptions in the tax code.
Vermont State Income Tax: Effective Rates as a % of Federal Adjusted Gross Income FY 2014
|Adjusted Gross Income ($)||Effective Vermont State Income Tax Rate|
|$0-$24,999||-1.3% to 0.0%|
|$25,000-$34,999||0% to 1%|
|$35,000-$74,999||1.0% to 2.3%|
|$75,000-$149,999||2.3% to 3.0%|
|$300,000-$499,999||4.0% to 5.0%|
|$500,000-$999,999||5.0% to 6.4%|
|$1,000,000 and higher||5.9%|
Source: The Vermont Tax Study 2005-2015, Joint Fiscal Office
The negative effective tax rates at low levels of adjusted gross income reflect the impact of tax credits, particularly the Earned Income Tax Credit.
As noted above, Vermont’s tax code has a number of tax credits, exemptions and exclusions that result in lower tax collections each year. The government refers to these lower collections as “tax expenditures”. In fiscal year 2015, there were $56 million of tax expenditures, as follows:
Vermont State Tax Expenditures Fiscal Year 2015
|Item||% Total Tax Expenditures||$ millions|
|Earned Income Tax Credit||49%||27.4|
|40% Capital Gains Exclusion||18%||10.1|
|$5,000 Capital Gains Exclusion||13%||7.3|
|Municipal Bond Interest||5%||2.8|
|Higher Education Expense||4%||2.2|
|Source: The Vermont Tax Study, Joint Fiscal Office|
The Financial Report of the United States calculates effective federal income tax rates based on adjusted gross income. Date for the 2013 tax year is outlined below.
US Federal Effective Income Tax Rates as % Adjusted Gross Income: 2013
|Adjusted Gross Income||Effective Tax Rate|
|$500,000 and more||27.4%|
Source: Financial Report of the United States, Feb. 25, 2016
The figures above are solely income taxes. They exclude the 6.2% Social Security payroll tax that is payable on all incomes up to $127,000 and the 1.45% Medicare payroll tax (which increases to 2.35% on income above $250,000). If you add these taxes to the table above, you get a flatter curve, but still progressive.
The other major tax paid by Vermonters, directly by homeowners and indirectly by renters, is Property Tax. Vermont has a statewide education property tax and local municipal property taxes. While there are income sensitivity adjustments made to Vermont’s property taxes, the effective rates as a percentage of income are much less progressive than income taxes.
Education Property Tax Rates as a % of Household Income
|Household Income||Education Property Tax as % Household Income|
|$20,000-$60,000||2.00% to 2.50%|
|$60,000-$140,000||2.50% to 2.75%|
|$200,000-$250,000||2.50% to 2.00%|
|$250,000 and Higher||2.00% t0 1.75%|
Source: The Vermont Tax Study, Joint Fiscal Office
While education property tax rates are fairly flat when measured as a percent of income, they do place the highest burden on middle class households earning in the $60,000 to $150,000 range. Above this level of income, effective property tax rates tend to decline as home values become less correlated to income levels. Below this level, income sensitivity provisions act to reduce effective property tax rates.
Vermont also provides a level of income protection with respect to municipal property taxes through the homeowner and rent rebate programs. This protection is only available for those with household incomes of $47,000 or less, as follows:
Vermont Homeowner and Renter Rebate Programs
|Household Income||Property Tax Cap as % Household Income|
|Up to $9,999||2.00%|
Source: The Vermont Tax Study, Joint Fiscal Office