“Per-capita tax burden” is misleading

Is Vermont a high-tax state?  It depends on whether you look at the taxes Vermonters pay, or the taxes the state collects? There’s a difference, which we should keep in mind when we see information like a recent item in the Burlington Free Press “Innovate”  section.

The article cited 2009 Census data, the latest available, on taxes collected by state and local governments. For Vermont, the total was $2.9 billion. And as the article said, if you divide that by the number of people in Vermont, you get a per capita “tax burden” of $4,650. And when you compare that to the per capita taxes in the other states, Vermont is the 11^th highest.

But before you jump to the conclusion that the residents of 39 other states are paying lower taxes, you might want to read what the Census has to say about this kind of per capita tax calculation, which it stopped publishing after 2005.

“[U]sing total taxes or per capita taxes as a measure of tax burden on the citizens of that state can be misleading because different states use different approaches to taxation,” the Census warns, “comparing only the total taxes collected by each state is not enough to understand the economic impact of those states’ taxes–one must also understand how those taxes are collected.”

Whether you divide total tax collections by a state’s population or the personal income of the state, you’re assuming all of the taxes are coming from state  residents. But of the $2.9 billion collected by Vermont state and local government in 2009, for example, about $580 million—20 percent—was property tax paid by corporations or out-of-state residents. If we want to know how Vermonters’ taxes compare with taxes in other states, we should be looking at the taxes paid by the residents. Unfortunately, it’s not an easy task to separate resident taxes from non-resident and corporate taxes in every state.

We have written about this problem before, and once again we’ll point to another annual report that more accurately reflects the taxes Vermonters pay relative to their counterparts in other states. The District of Columbia does a nationwide comparison each year of the taxes paid by typical taxpayers in the largest city in every state. The study looks at income, property, sales, and automobile taxes (gasoline taxes and registration fees) for hypothetical families of  three with incomes of $25,000, $50,000, $75,000, $100,000 and $150,000.

The 2010 study, released last fall, is the latest. When the cities are ranked highest to lowest in overall taxes, Burlington ranks in the middle to the bottom nationally for taxes paid by the families in each of the income categories as shown in the table below.

If we look at Anchorage, Alaska, in the DC study, it’s near the bottom for all income categories because the state has no income tax and no general sales tax. But Alaska collects billions in severances taxes each year from the oil companies, so in the per capita rankings, it’s typically at or near the top of the list.

Alaska can’t be called a high-tax state on the basis of what Alaskans pay. That’s the measure we should use in assessing whether Vermont’s taxes are high or low compared to other states.