Vermont Has a Fairer Tax System Thanks to EITC

MONTPELIER—Almost all state tax systems are tilted heavily in favor of the wealthy, but Vermont has one of the least unfair systems, in part because of the earned income tax credit it offers to low-wage workers.

That was one of the findings of a new study released today by the Washington, D.C.-based Institute on Taxation and Economic Policy (ITEP).

“Vermont’s tax system is among the least regressive in the nation because it has a highly progressive income tax and low sales and excise taxes,” the study said. “Vermont’s tax system is also made less unfair by the size of the state’s refundable Earned Income Tax Credit (EITC)—32 percent of the federal credit.”

The ITEP study, “Who Pays?,” analyzes state and local taxes paid by people in various income categories in all 50 states. In Vermont, the bottom 20 percent of taxpayers pay a larger share of their income in state and local taxes than the top 1 percent of taxpayers, but the disparity is smaller than many other states. Taxes consume 8.7 percent of the income of Vermonters in the bottom fifth of taxpayers compared to 8.0 percent for the top 1 percent.

In Florida, which ITEP ranked among the “Terrible Ten” states with the most regressive tax systems, the poorest taxpayers pay 13.2 percent of their income in state and local taxes while the top 1 percent pay just 2.8 percent of their income.

“Because Vermont’s income tax is progressive, many people have the misimpression that our overall system is also progressive,” said Paul Cillo, president of Public Assets Institute. “While Vermont is not as bad as Florida and a lot of other states, we still have a growing income inequality problem in Vermont, and creating a progressive tax system is one way to begin to ease that problem.”

Even though Vermont doesn’t tax food, medicine, and some clothing, the sales tax eats up a bigger share of the income of poorer taxpayers than of the wealthy. Vermont’s property tax is also regressive, though less regressive than in most other states, which is due largely to a provision that allows many resident homeowners to pay school taxes as a percentage of their income rather than on the value other homes.

Vermont’s income tax, on the other hand, is one of the most progressive in the country. Thanks to the EITC and other credits, the poorest fifth of Vermont taxpayers—with income less than $20,000—receive slightly more money than they owe in income taxes. For the top 1 percent, Vermont income taxes are equal to 5.2 percent of income. Overall, however, Vermont’s tax system is still regressive: the wealthiest Vermonter’s pay a lower percentage of their income in taxes than low and middle income Vermonters.

The latest edition of “Who Pays” was released almost a week after Gov. Peter Shumlin proposed a substantial cut to Vermont’s earned income tax credit. The state credit is piggy-backed to the federal Earned Income Tax Credit, and both programs were designed to supplement the income of people working in low-wage jobs. The credit is based on earnings and the number of people in the family. The higher the earnings, the smaller the credit. The state credit is 32 percent of the federal credit amount.

The Vermont credit reduced state income taxes for qualified taxpayers by about $25 million in 2011. Because it is a refundable credit, many low-income, working taxpayers who claimed the credit received money back from the Tax Department. Shumlin has proposed cutting the Vermont EITC by $17 million in order to fund an expansion of subsidized child care for low-income families.

Public Assets Institute is a nonprofit, nonpartisan organization that promotes sound budget and tax policies to benefit all Vermonters. Additional information is available at www.publicassets.org 

The Institute on Taxation and Economic Policy is a 501(c)(3) non-profit, non-partisan research organization that works on federal, state, and local tax policy issues. ITEP’s mission is to ensure that elected officials, the media, and the general public have access to accurate, timely, and straightforward information that allows them to understand the effects of current and proposed tax policies. Additional information is available at www.itep.org 

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