Home State of Vermont Taxes: 2. Who’s Paying Vermont’s State Income Tax?

Taxes: 2. Who’s Paying Vermont’s State Income Tax?

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Taxes: 2. Who’s Paying Vermont’s State Income Tax?

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%
$150,000-$299,999 2.54% 14.96%
$100,000-$149,999 4.26% 13.10%
$75,000-$99,999 5.28% 10.42%
$50,000-$74,999 9.55% 11.79%
$25,000-49,999 17.35% 11.51%
$10,000-$24,999 15.62% 4.78%
$9,999 and lower 31.32% 1.27%
Out of state 13.15% 7.26%

Source: 2016 Comprehensive Annual Financial Report

 

Key Observations

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%
$150,000-$299,999 3.0%-4.0%
$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
All Other 11% 6.2
TOTAL 100% 56.0
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
Under $15,000 2.7%
$15,000-$29,999 2.8%
$30,000-$49,999 5.5%
$50,000-$99,999 8.7%
$100,000-$199,999 12.6%
$200,000-$499,000 19.6%
$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%
$140,000-$200,000 2.75%-2.50%
$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%
$10,000-$24,999 4.50%
$25,000-$47,000 5.00%

Source: The Vermont Tax Study, Joint Fiscal Office

 

7 COMMENTS

  1. “When incomes decline (say upon retirement), property taxes remain the same and represent a higher proportion of income.” Not completely accurate. Education portion of property tax is income-sensitized for residents.

  2. By only showing the aggregate amounts by income class, and not noting anything about what percent of their income the high income people pay, we get a very incomplete picture, possibly misleading, but I’d have to see those numbers to know. If for example a very wealthy person pays 3% and a moderate income person 12%, then it is not quite as progressive as the numbers presented would appear to show. In order to show a realistic picture, you’d need to show gross income, not just taxable income, as wealthy people have far greater ability to shelter income from taxes.

    • I couldn’t agree more. First, certain types of income, like capital gains, ordinary dividends and municipal bond interest, are taxed at rates that are well below the top marginal federal income tax rates. Also, deductions, like home mortgage interest, are worth more to high bracket tax payers.

      While an analysis of taxes as a percent of adjusted gross income for Vermont could not be found ( I will keep looking), this information is made available by the IRS for federal taxes. In 2015, filers in the $30-50k adjusted gross income range paid an average federal income tax of 5.5% and those with adjusted gross income above $500k paid 27.4%, which is well below the 39.6% top marginal rate. Keep in mine that these number EXCLUDE FICA payroll taxes. Including FICA pushes the average tax rate of the $30-50k band up to 13.15%. As Social Security tax is zero after $127k of income, the increase in the top bracket is only to 29.75%.

      Last, as pointed out in the article, fixed rate taxes such as sales tax and gasoline tax tend to represent a higher portion of income for low and moderate income tax payers.

  3. Re property tax and retirement: Property Taxes do in many cases decline on retirement if annual income drops significantly. Ours were adjusted downward 74% when my wife and I retired.

    Re Your Table: Distribution of Vermont State Personal Income Tax Collection: Fiscal Year 2015
    I urge you to add a column for the % share of total state income earned by each income group. This helps to balance the data on % of total taxes state income (you earn more of the income, you pay more of the taxes).

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