The House Ways & Means Committee reviewed income tax analysis and the potential for a “wealth tax” on Tuesday with the Joint Fiscal Office (JFO). Chairwoman Kornheiser started the meeting by pointing out the Governor has not proffered a “revenue package” which, according to her, required by statute. When asked, she added that she has never seen one in his time in office.

NOTE: This might be because Governor Scott has never proposed a tax increase requiring a revenue package.

She noted that Institute on Taxation and Economic Policy (ITEP) report showed that the middle class was paying the bulk of the taxes (we know!). In response, she sponsored H.827 and H.828, which the Committee walked through later in the day. She wanted to hear from JFO about wealth distributions and how the tax burden is distributed.

JFO started their presentation with some definitions, which are not always perfect. For example, if you look at only net worth (assets minus debt) nearly every farmer in Vermont would be a millionaire. They are working on federal data here so they can’t always split hairs. Other ways of looking at this might be a subset of assets such as financial or property.

They went on to review a summary of the ITEP report, which overall noted that Vermont’s tax system is somewhat progressive (meaning that higher income brackets shoulder more of the tax burden) but that the middle class pays the most generally (up to 10.6%).

Also see summary of top income earners.

They introduced the concept of “unrealized capital gains,” which forms the basis of the wealth tax bill H.827 which they will be looking at. Essentially these are financial assets that have not been converted so you look at their market value. It was noted that wealth increases somewhat still at ages 65-74 before declining.

The Survey of Consumer Finances (SCF) looked at Unrealized Capital Gains (UCG)s, JFO noted that there were upward swings after the 2008 crash and the 2016 to present. The committee was assured that defined contributions and pension related assets such as mutual funds and equities are specifically not being contemplated here.

There is a summary of H.827 available from Legislative Counsel that provides some overview here. Legislative Counsel mentioned a NYT article recently that covers this and legislators were urged the listen to in house counsel because NYT may have “misrepresented the bill a little.”

Who will pay this wealth tax? Vermonters with net assets above $10M, however certain asset categories may be excluded up to $1M, such as IRAs, 401(k), etc. Taxable gains would be limited to 10% of an individual’s net wealth in excess of $10M.

Representative Branagan if they were merely taxing monies that we would eventually tax as these folks draw down assets in retirement. Kornheiser responded that high net-worth individuals never “realize their gains” and routinely borrow “against their wealth in order to spend” and so the bill “is a way to close a loophole.”

Legislative Counsel added that, conceptually, this is about the value of assets and not about income. In addition to UCGs, you can also have Unrealized Capital Losses. While taxpayers would not be able to claim a refund for these, they could carry them forward to future years as losses.

The Committee moved on to H.828, which would levy a personal income tax surcharge for tax filers with Adjusted Gross Incomes (AGIs) over $500K. This surcharge would be enforced and collected similarly to the income tax.

JFO also offered some analysis of this. The surcharge would almost exactly cover the top 1% of income earners.

On Thursday the House Ways & Means Committee did a deep dive on a new Institute on Taxation and Economic Policy (ITEP) report on the fairness of Vermont’s tax system.

Carl Davis (Research Director,) gave a lengthy introduction of the methodology of the study and data they provided while also pointing out areas where individual state practices may not be reflective or relevant for comparison to others. However they take “great pains” to be accurate and rationale in their data analysis.

Reviewing a shortened version of the report, he noted that an approach to achieve more progressivity can be accomplished either through tax rate increases at one end or by tax cuts at the other.

The regressivity index in the report will not provide all the details in one index, comparing across a set of states and their policies will provide more perspective and context.

Vermont, D.C., and Minnesota are the three top for progressivity, but all three have some regressivity at the top 3-4 percentiles.

Representative Masland questioned why they have been led to believe our state “very progressive, but your analysis leads to a different conclusion.”

Davis pointed to the overall analysis that includes a comprehensive look at tax structures. While he agrees the Vermont income tax is very progressive, some excise and sales taxes here are more “meager” in progressivity.

Representative Demrow noted that it seems to be that most states are “a bit regressive across the board.”

A general discussion ensued about Vermont being a progressive system. It seems the misperception is based around the income tax system, which is quite progressive,  compared to other more regressive taxes the state has levied. Factors mentioned were the small size of the population, the need for a younger in-migration and retention to provide a workforce, as well as a growing tax base to provide services.

Representative Beck commented that it appears four states have moved up in the progressivity rankings and all have increased high-end tax rates to achieve this. He wondered if any had reduced rates on the low end? New Mexico was the only one Davis could remember

Representative Anthony asked about capital gains being a way to raise the score here. Davis noted that mobility and other tracking issues with capital gains are hard to track, many simply disappear from the system. Anthony also inquired about the “inheritance tax” as another issue. Davis sees this as “undoubtedly a very progressive tax” and about seventeen states have such at tax, but the estate planning industry has become very good at sheltering assets and finding loopholes.

Stephanie Yu (Executive Director, Public Assets Institute) asserted the state should strive for a progressive tax system. She believes the best strategy is to both reduce taxes on the low and increase them on the high end of the income spectrum to achieve the best results.

Yu believes the current system results in “lower income Vermonters (the middle class) effectively subsidizing those highest income taxpayers.”  She also suggested that out-migration is a myth and overstated. Increasingly it is the middle class, not wealthy Vermonters who are leaving due to economics and housing costs. Those who are wealthy often have deeper economic roots, such as owning a business or having deep professional ties.

While she applauds the progressive trends in the states taxation policy, especially income taxes, while also suggesting it is “still not enough.” She mentioned the Basic Needs Budget that the Joint Fiscal Office produces every year and suggested we should be using it to ensure better taxation.

Demrow wondered about in/out migration because of progressive tax systems, “have we seen benefits on the workforce inflow issue?” Yu saw in 2021 “more high income young people (under 45) moving to Vermont.” While she doesn’t like to get “caught up in one year” she suggested there are no trends that show on-net wealthy people move out when the tax system becomes more progressive. 

Joyce Manchester (Senior Economist, Joint Fiscal Office) agreed that Vermont is well thought of as progressive income tax state with our Education Fund and property tax system based on income and that we benefit from that reputation. However, she did speak about the “political economy of taxation” and the effect on people’s behavior. Admittedly, she hears a lot about people who live in Vermont “less than six months per year” on purpose due to tax policy.

She highlighted that taxpayers over $1M are responsible for 20% of net income tax revenue and there are only 1,050 returns in the category. She noted that she wanted legislators “to be aware that it’s a relatively small number of people who are paying 20% of the taxes.”

Tax filers with $500K or more of income are paying 30% of the income tax revenues. She again urged caution because many may be over the age of 65 and perhaps more mobile. JFO is also concerned that more workers are mobile in general and high earners are part of that demographic.