Vermont Household Budget Affordability Analysis
PDF VersionDouglas Hoffer and Paul Cillo (October 2006)
This analysis looks at two hypothetical three-person Vermont households to see where the families’ money goes. Both households have two adults and one school-aged child. One family (Household 1) lives in the median-value Vermont home ($176,000) and, based on information from the Vermont Department of Taxes, has a gross income of $52,000. The other family (Household 2) has a gross household income equal to the average of the top five percent of Vermont income tax filers ($357,934) and lives in a home assessed at $280,578.
The charts below show the percentages of each budget needed for common household expenses in Vermont. In Household 1, there are eight budget categories that each consume more than five percent of the household budget. Four of these (transportation, mortgage, food, and health care) taken together account for over half (53.3%) of the household budget. This family has no money left for savings or discretionary spending. In fact, even after paring it down, this budget slightly exceeds household income.1
For Household 2, only three of the budget categories consume more than five percent of the household budget. The two largest budget categories are federal income tax (20.7%) and state income tax (5.3%). However, after all the budgeted expenses are covered, this household has nearly forty percent left over in uncommitted funds to use for savings or for discretionary spending.
Comparing these two households sheds some light on the issue of affordability. An affordability policy that focuses on state income and school taxes as the problem misses the mark. For Household 1, the largest budget categories are not taxes, but transportation, housing, food, and health care, each consuming more than ten percent of the household budget.2 In addition to being among the largest budget items, housing and health care costs have increased faster than inflation in recent years. This means that this household cannot continue to afford its current standard of living without increasing income or taking on debt. The other choice is to cut spending, which will likely reduce their standard of living.
For Household 2, affordability is not an issue. Even though federal and state income taxes are its largest fixed expenditures, considering that uncommitted funds amount to nearly forty percent of income for this household, taxes or any of their other budget categories cannot reasonably be called a burden.
The comparison of these two households also illustrates the relative progressivity of various taxes. Federal and Vermont state income taxes are progressive – those with higher incomes pay higher rates. For example, Household 1’s state and federal income taxes amount to 6.5% of household income compared with 26% for Household 2. The FICA/Medicare tax is regressive — the lower income Household 1 pays nearly four times what Household 2 pays as a percentage of income. School and municipal taxes on homes, even after income sensitivity is applied3, are also regressive. Household 1 pays a higher percentage (2.4%) of income for these taxes compared to Household 2 (1.4%).
END NOTES
1One way that households like this deal with expenses that exceed income is to take on debt. According to the Federal Reserve’s 2004 Survey of Consumer Finances, a household with income between $40,000 and $60,000 had an average of $5,200 in credit card debt.
2By comparison, state income and school taxes combined consume 4.3% of Household 1’s budget.
3Income sensitivity allows Vermont households with income of $85,000 or less to pay the school taxes on their primary residence based on the amount of their household income rather than on the value of their home.
