Public Assets Institute > Policy Areas > Vermont Taxes > Fear of flight—tax flight

Fear of flight—tax flight

The fear that rich people will leave the state has been driving Vermont tax policy for years. The idea is that the state’s taxes should be competitive with other states’ so that taxpayers, especially those at the top, don’t leave. But this worry is unfounded, and the result is that low- and moderate-income Vermonters pay higher taxes than they should and the state’s revenues are inadequate to meet the state’s needs.

The latest proposal that relies on this fear involves Vermont’s estate tax. As part of his fiscal 2020 budget proposal, Governor Scott proposed raising the threshold for Vermont’s estate tax, a change that would cost Vermont as much as $10 million a year in state revenues.

As it stands now, the 16 percent tax kicks in for every dollar over $2.75 million in an estate—very few estates pay the tax (typically around 1 percent of estates per year). But Governor Scott would like the tax to apply to even fewer—only estates above $5.75 million.

His reasons for this, as communicated in Tax Commissioner Kaj Samsom’s recent testimony in the House Ways and Means Committee, seem to be twofold: 1) we have to stay competitive with other states so we don’t scare off high-income Vermonters and 2) our tax system is already progressive enough. VT Digger reported that those arguments seemed persuasive for some members of the committee.

The tax commissioner noted that 422 Vermont taxpayers with incomes over $200,000 had left the state in 2017. That may sound like a lot, but it’s only one side of the story. It does not include the number of high-income taxpayers moving into Vermont. We don’t have data yet for 2017, but in tax year 2016, a similar number of Vermont taxpayers at that income level left the state: 420. But in the same year 401 moved to Vermont.

That’s right, roughly the same number moved in as moved out. And that has been true for as long as we’ve been tracking interstate migration by income. But despite these facts, and research from across the country that shows state tax increases on high-income taxpayers do not drive them out, the fear keeps driving our tax policy.

Regarding the tax commissioner’s assertion that our tax system is progressive enough, we disagree. In a progressive system, lower income tax payers pay a lower percentage of their income in taxes than higher income taxpayers. A regressive system is the opposite. Most state tax systems are regressive and increase income inequality. Vermont estate taxes and income taxes are progressive. But our regressive sales and property taxes cancel out that progressivity. Reducing estate taxes will make Vermont’s tax system more regressive, putting more tax pressure on low- and moderate-income Vermonters.

Last year, in the wake of the federal Tax Cuts and Jobs Act of 2017, Vermont increased the progressivity of the state income tax by eliminating itemized deductions and increasing the state Earned Income Tax Credit, a credit that goes to low and moderate-income working Vermonters. But the massive federal tax cuts for the wealthiest Vermonters means that inequality still increased.

Unsubstantiated fear of losing high-income taxpayers and the short-sightedness of other states shouldn’t be driving Vermont’s tax policy. If we make competitiveness with other states our top priority, we may be competitive, but we’ll be competing in a race to the bottom.


Posted by Stephanie Yu on March 6, 2019 at 2:30 pm

3 Responses to “Fear of flight—tax flight”

  1. Pat Robins says:

    Paul. I just made a list of 8 individuals known to me with over 25 MM net worth who relocated to either Florida or S. Carolina in the last 2 years and their primary motivation was what they called the ‘death tax’. I always thought this tax was instituted without adequate study of other jurisdictions and too hastily. Pat

  2. Paul Cillo says:

    Hi, Pat,
    As Steph points out in the blog, the number leaving VT and coming into Vermont in the top income category are about the same each year. You may know 8 individuals who left, but you probably haven’t met (at least not yet) the hundreds of wealthy individuals who came into the state over those two years.

  3. Sarah Lyons says:

    Hello Paul-

    Your reply to Pat, and your recent comments in Seven Days seem to completely discount any validity that people are moving from Vermont for tax reasons. (“It’s basically an argument without substance.”). I respectfully couldn’t disagree with you more on this. Though my viewpoint is only supported anecdotally, it has been formed over many years of witnessing people leave the State for that very reason.

    The point you make that we shouldn’t be concerned over the outflows mainly because the inflows offset the outflows is shortsighted in my view. While the statement may be true, it doesn’t change the facts that the outflows that do occur are largely driven by our punitive taxes. Can you imagine how much better the State would be off if instead of driving people away, they stayed here and reinvested in the community and paid taxes in the State? Then the inflows become accretive to our tax base and we effectively have a double benefit.

    I personally find the decoupled Estate tax to be outrageous, and it is a key factor in driving me to relocate elsewhere for residency purposes. How many times do my earned dollars need to be taxed, and why does the State feel entitled to money I’ve saved and already paid taxes on? And taxing me for the privilege of dying here? I don’t think so.

    It’s too bad that the State continues to drive people to other States. Even setting the Estate tax issue aside, Vermont continues to be one of the worst States in the Union when it comes to total tax burden. The legislators should wake up and realize that capital will always migrate to where it is best treated.


    William Thompson