LETTER: Don't Tax Small Business Owners

February 20, 2024

House Ways & Means Committee,

We agree that the ‘Who Pays’ report showing that our state’s tax burden is flat, and even slightly regressive, for taxpayers with incomes in the top 40% is concerning. Middle class Vermonters are struggling to make ends meet and inflation, taxes, and other impacts on cost of living have not been kind to them. Learning that they also shoulder an outsized share of the tax burden adds insult to injury. It is also important to highlight, as the report authors did, that this distribution of tax burden is not because our income tax system is inadequately progressive, but rather that we have a number of other taxes that are quite regressive.

We would encourage an approach that re-examines the distribution of taxes and perhaps finds ways to shift tax revenues away from mechanisms that disproportionately impact low- and middle-income Vermonters. This should be our first priority as a state, making sure our existing taxes are distributed fairly before we seek new revenues.

Some groups have called for taxing the rich to pay their “fair share.” We agree, but it needs to be done carefully and thoughtfully as there are a number of potential unintended consequences. This “tax the rich” troupe is not a new one. In fact, the state did a deep dive on this topic over a decade ago with the Blue Ribbon Tax Commission. They found some very useful information.

Page 39 of their final report shows an exercise in tracking income taxpayers over time. What they found is that most payers with AGI’s over $500k were event-based. Over half of this cohort only sustained this level of income for one year.

The Commission determined that “the top income brackets [are] not a fixed population each year but rather, in most cases, event driven. Whether from the sale of investment property or a business, high income is often a one-time event.”

Given these findings, we would strongly recommend that an income tax surcharge mechanism would have a delay built into it so that the surcharge only applies after three years of sustained income levels above the threshold. Otherwise, we are likely taxing the retirement incomes of small business owners (and even farmers) who are selling off their assets. This is not the group we want to be going after.

Reviewing the 2004 report from Cristobal Young regarding Millionaire Tax Flight, we agree with Joyce Manchester and the Joint Fiscal Office’s assessment that there may be capacity to tax wealth through an unrealized capital gains tax or other mechanism but restraint should be exercised. Much has changed in the way people work in the past 20 years, and particularly in the last 5. Workers, particularly high-income ones, are much more mobile today than in decades past. How much more mobile and how price sensitive is still unknown. We would categorize this report as useful context but not gospel.

There are also other mechanisms, such as a property tax surcharge on out-of-state property owners, which warrant further investigation. Again though, we would urge a thorough review of each for potential loopholes and unintended consequences.

Finally, and perhaps most importantly, any revenues extracted from wealthy Vermonters should be returned to middle class families. There are a number of mechanisms to do this, including a reduction in income tax rates, consumption taxes, or an expansion of the Earned Income Tax Credit. The cohort of small business owners we referenced above likely falls into this category of solidly middle class except for the year they sell off their business to prepare for retirement. Again, adding insult to injury when they are already paying the largest share of the tax burden normally and then get hit with an income tax surcharge when they go to sell.

The important thing to focus on here is that the middle class is bearing the brunt of the tax burden today and any reduction in their cost of living would demonstrate that the Legislature acknowledges and cares about this cohort of Vermonters. We urge you to be thoughtful about the way you move forward on H.827 and H.828.


Best Regards,

Ben Kinsley
Campaign for Vermont Board Member

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