At his Wednesday news conference, Gov. Shumlin reiterated his opposition to higher taxes on top earners. This time, his argument was: hey, our income tax is already progressive!
“We have one of the most progressive and highest income taxes on wealthy people in the nation. …we have a high marginal rate at the top, 8.9 percent.”
Actually it’s 8.95, but that’s not my point here. The point is, all 8.95 percents are not created equal. This was pointed out below my previous post by commenter “azvox”; I also got an e-mail from Jack Hoffman of the Public Assets Institute on the same subject. (And if you don’t follow PAI’s work, you should. Visit their website, sign up for their RSS feed.)
See, Vermont is one of only six states that levies its income tax on “federal taxable income.” (The others: Colorado, Minnesota, North Carolina, South Carolina, North Dakota.) The vast majority of state income taxes are based on “adjusted gross income.” AGI is your income before itemized deductions; “federal taxable income” is your income after itemized deductions. That’s a significantly smaller figure.
How much smaller? By one source, Vermont’s total AGI is roughly $15 billion. Our total “taxable income” is about $10 billion. Quite a difference.
New York and New Jersey, the two states mentioned in Wednesday’s presser, are two of the many states that levy income tax on AGI. Which means that New York’s top rate of 8.82%, and New Jersey’s top rate of 8.97%, take a much bigger bite out of top earners than Vermont’s 8.95%.
And Governor Shumlin is fully aware of this. In January, VPR reported that the Governor was open to considering a shift to AGI as the basis for the state income tax — partly to make the tax fairer, and partly to eliminate a PR problem for the state. Because we assess income tax on “taxable income,” we have one of the highest top-bracket tax rates in the country. But the actual tax bite, or “tax burden” as it’s usually called, of Vermont’s income tax is in the middle of the pack.
Okay, so how much of a difference does this really make?
The Institute on Taxation and Economic Policy (ITEP) recently released a study that breaks down the tax burden in each state by income level. The wealthiest 1% of Vermonters pay — not 8.95% — but 5.2% in state income tax.
The main reason they don’t pay more? The fact that we base our income tax on “taxable income” instead of AGI.
In New York, the top 1% pay an average of 6.7% in state income tax. In New Jersey, they pay 6.6%.
(Vermont’s overall tax system, to be fair, is actually more progressive — er, let’s say less regressive — than New York’s or New Jersey’s. That’s mainly because of Vermont’s relatively generous Earned Income Tax Credit program, which eases the tax burden on the lower brackets. And which the Governor wants to cut. If he got his way, our tax system would become a lot less progressive.)
Assessing our income tax on “taxable income” is a big break for top earners, because almost all of them itemize deductions. According to the Tax Policy Center, nearly 90% of taxpayers in the top federal bracket itemize deductions. Only 4% of taxpayers in the bottom bracket do so. And those itemized deductions make a big difference: Taxpayers in the top federal bracket enjoy a 4.4% increase in after-tax income thanks to itemization.
And that’s before they even get to their Vermont taxes.
In sum, Governor Shumlin is technically correct when he says that Vermont has one of the highest top tax rates in the country. But it’s a misleading claim, because our effective top tax rate isn’t nearly that high.
He’s also technically correct when he asserts that Vermont’s tax system is relatively progressive. But that’s kind of like being the cleanest Porta-Potty at the state fair; most states have regressive tax systems. Going back to the ITEP study, Vermont’s top 1% pay 8% of their income in state taxes (including income, sales, and property taxes). Low- and middle-income taxpayers actually pay a higher percentage of their income: 8.7% for the first quintile, 9.1% for the second, and 10.4% for the third.
If we had a truly progressive system, the top earners would pay the highest rates. They don’t. And if we switched to AGI as a basis for our income tax, our system would be fairer than it is now.
Great analysis and sources. Yes, it’s certainly disingenuous to make a claim which on its face is true, but then becomes patently false & completely untrue when the details are clarified.
it’s leading to a terrible and morally wrong dependency. Just think of how we’re holding by those one percenters in the same way we’re holding back the economic potential of the working poor.
Yes the 99% of all Vermonters are subsidizing the top 1%, to the detriment of the resto of the state including the most vulnerable, many of who are families where both adults are minimum wage earners struggling as Mr Shumlin continues to stubbornly support his ‘compassionate’ back-breaking policies.
Tax code should be revised this session asap. There is now no excuse not to.
Shumlin complains that the Democrats are not on board with his ‘Screw The Poor’ tax plans:
To which I say:
I strongly oppose the Governor’s plan to greatly increase taxes on the poorest Vermonters to specifically protect the wealthiest Vermonters from paying one thin dime more in income taxes, taxes that they could so easily afford that they wouldn’t even know their taxes had been raised. Instead the Governor wants to take away my EITC refund, which would mean $2000 a year(!) LESS than I have now, when I have a family of five and our gross adjusted income for 2012 was $18K!
And just where does the Gov expect me to get money to pay the increased gas tax? Since I am not one of those almost-not-taxed-at-all obscenely wealthy Vermonters, that means I can’t afford a nice shiny new 50MPG hybrid car that he says are to blame for lower gas tax revenue. I am driving my mom’s 1996 Nissan Pathfinder with 243,000 miles on it and that get 15 MPG when I drive carefully. So my gas taxes are subsidizing the wealthy’s hybrid cars.
The Governor’s plan is to drastically increase the tax burden on the poorest Vermonters in order to protect the richest and make the poor subsidize the wealthy. Can someone please tell me how is Shumlin a Democrat, when his policies are solidly right-wing? With Democrats like Shumlin, who needs Republicans anymore?
The Gov has said he doesn’t want to raise the top marginal rate because the rich would flee Vermont. I guess that means with all the austerity cuts and regressive tax burdens on the lower classes, he wants us schmucks to leave.
Did a lot of rich folks flee when Snelling and Wright raised the top rate? Hmm…
I agree with all of your analytical points: Vermont’s tax system as a whole is actually regressive, and SHOULD be progressive. Long story short, we agree that wealthier Vermonters should bear more of the tax burden.
While it’s true that taxing AGI instead of taxable income is one way to get there, it is not necessarily the best way. For example, three other simple ways would be 1) raise the top marginal rates, 2) create more tax brackets at the upper levels, or 3) raise the exemption level to drop off the poorest taxpayers at the bottom (presumably while doing one or both of the previous 2). These are just off the top of my head.
In short, there are numerous ways to do this, and if there is a political will to do it (currently lacking), we should do so more deliberately than your article suggests.
Moving to AGI is likely to have numerous unintended consequences, since AGI already includes numerous business deductions (taken on Schedule,C, E, etc.), capital gains reductions, etc.
Tax laws are complex. If we can muster the political will to place the burden where it belongs, then we should make the effort to do it thoughtfully.