Joyce Manchester (Senior Economist, Joint Fiscal Office) presented a wealth tax proposal to the Senate Finance Committee on Tuesday. The bill is also referred to as the "Fair Share for Vermont" proposal. The proposal is to increase taxes on the wealthiest Vermont residents to "build a better Vermont." The proposal will increase taxes on the top 2% of Vermont taxpayers, and raise nearly $100M each year in state revenue. According to Manchester, a wealth tax is usually defined as an annual tax levied on the net worth, or total assets net of all debts, of an individual or household above an exemption threshold.

She noted that a House bill, H.827, would include half of unrealized capital gains for income tax purposes on tax returns with more than $10M in new worth, after allowing for $1M in exemptions for real estate, interests in business entities, property held in trust, and personal and intellectual property

          1, Most retirement accounts are fully exempted

          2, Total taxable gains cannot exceed 20 percent of the taxpayer’s net worth greater than $10M.

Net worth is made up of:

1. Financial assets such as bank accounts, bonds, stocks, and mutual funds, as well as
2. Non-financial assets including tangible assets such as real estate, equipment, and family heirlooms as well as intangible assets such as intellectual property—patents or goodwill.

Advocates of a wealth tax argue that it would raise revenues in an effective and progressive way to address wealth and income inequality. It would affect only a very small fraction of Vermont households and likely have only a small effect on efficiency. Critics counter that a wealth tax would negatively affect efficiency and innovation, be difficult to enforce. and lead to tax evasion. Further, it would likely fail just as it did in many European countries, and possibly be unconstitutional. The Constitution says direct taxes must be apportioned by state population , however the 16th Amendment says an income tax does not have to follow the direct tax rule

A look at wealth inequality in the United States in the third quarter of 2023 showed that 70.5% of the total wealth in the United States was owned by households in the top 20% of the income distribution. Households in the bottom 40% of the income distribution owned only 7.7% of the total wealth.

Economists generally agree that the tax system is a useful vehicle for addressing the nation’s income and wealth inequality, but they disagree on an optimal approach. The Organization for Economic Co-operation and Development (OECD) issued a report in 2018 that concludes “from both an efficiency perspective, there are limited arguments for having a net wealth tax in addition to broad-based personal and equity capital income taxes and well-designed inheritance and gift taxes.”  European countries had net wealth taxes in 1990, but only three European countries still levy recurrent taxes on individuals’ net wealth: Norway, Spain, and Switzerland. From an economic efficiency perspective, resources should be allocated in a way that maximizes the production of goods and services. An ideal tax system does not distort that allocation. However, under the concept of equity, taxes paid are a greater share of income for those with greater ability to pay.

Joyce also talked about the “economic effects of an income tax surcharge,” which is included in another House bill, H.828. She noted that this income tax surcharge would impose an additional income tax on certain taxpayers, on top of the usual tax rate structure. The proposed bill would place a 3% surcharge on federal adjusted gross income (AGI) at or above $500k. That surcharge would be in addition to the ‘usual’ personal income taxes. The top marginal rate today is 8.75% (under the proposal it would increase to 11.75%).

Data for 2022 shows that 3,560 returns were filed with $500k or more of AGI represented 9,347 individuals and accounting for:

• 1% of all VT tax returns
• 7% of all VT AGI
• 4% of all net VT personal income tax paid

How does federal AGI differ from VT taxable income?

• Vermont income taxes start with federal AGI
• Vermont AGI ‘apportions’ income derived from activity in Vermont.
• Vermont taxable income makes further adjustments for personal exemptions, the standard deduction, charitable contributions, etc.
  • For all tax filers, VT taxable income is 80% of federal AGI.
  • For tax filers with $500,000+, VT taxable income is 97% of federal AGI

Manchester continued that these bills could discourage high-income individuals to work, save, and invest in Vermont. However, this could possibly be offset by better opportunities for lower income individuals to do the same. It could also incentivize high income individuals to shift how they receive returns to labor, savings and investments. It could also incentivize high-income individuals to shift wage income to deferred compensation or wait longer to realize capital gains from investments. It could also be a factor in decisions about where to live (encourage tax flight or discourage in migrants). She noted that evidence of tax flight in Vermont is a mixed bag, but caution is likely warranted.