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Income Taxes: Vermont is in the Middle of the Pack

September 28, 2010

A new fifty-state analysis of state income taxes by Public Assets Institute shows that Vermont ranks in the middle of states in the rest of the country. While much has been made of Vermont’s high tax rates, the amount taxpayers actually pay in Vermont is lower than in many other states because of deductions and other adjustments and the state’s progressive rate structure. This analysis looked at the total income taxes paid in each state in 2008 and divided it by the total adjusted gross income (AGI)—that is, income before deductions and other adjustments.

Using this “effective tax rate” measure, Vermont was 23rd among states when they were ranked highest to lowest. Forty-three states levy a personal income tax; seven do not.

“We hear a lot about Vermont’s top income tax rate, which is relatively high because Vermont has a long traditional of progressive income taxes. Those who get the greatest financial benefit from society’s public structures are expected to contribute the most to maintaining them,” said Paul Cillo, president of the Public Assets Institute.

“But few people pay that top rate because it applies only to taxable income above about $372,000, after deductions and exemptions have been subtracted.

“If we want to see how Vermont’s income tax stacks up against the other states, the most straightforward way is to look at the amount Vermonters actually pay and divide it by their adjusted gross income, which is based on federal tax laws and is, therefore, the same for every state.”

The Public Assets report shows that Vermont’s effect tax rate was 3.9 percent in 2008. Among the states with an income tax, the effective rates ranged from 0.2 percent in Tennessee to 7.0 percent in Oregon.

“Because we have progressive income tax rates, people in the higher income brackets have an effective tax rate that is higher than 3.9 percent; the rate is lower for those in the lower brackets,” Cillo said. “How taxes are distributed is an important consideration. But it’s also useful to look at how much of Vermonters’ income goes to pay state income taxes, and how that stacks up against other states.”

Another common method of state tax comparison is to look at all taxes collected within a state—taxes paid by residents as well as those paid by businesses and non-residents. The U.S. Census used to publish annual reports calculating state taxes or state and local taxes on a per capita basis. However, the Census stopped issuing those reports, explaining that they presented a distorted picture for states, such as tourist states, that collect a lot of revenue from non-residents.

An annual report published by the District of Columbia and two studies done by the Vermont Legislature’s Joint Fiscal Office compare the taxes typical Vermonters pay with taxpayers in other states. The DC study compares the amounts paid by taxpayers in the largest city in each state. According to latest DC study, Vermont—as represented by typical Burlington families—falls in the middle when it comes to taxes paid as a percentage of income.

The Legislature made modest tax changes in the last two years, a blue ribbon commission is studying the state’s tax structure, and taxes are likely to come up again in next year’s budget discussions. The state income tax is the largest source of state General Fund revenue. The tax generated $622.3 million in fiscal 2008, which was 52 percent of all General Fund receipts.