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.