(Jon Margolis writes political columns for VTDigger.)
[V]ermonters (this will not come as a shock) pay somewhat more in state and local taxes than do residents of most other states.
Especially affluent Vermonters, because the state’s tax structure is relatively progressive.
No, Vermont’s tax system is not really progressive. People in households at the top 1 percent of the income distribution scale ($391,000) paid a lower percentage of their incomes in state and local taxes (in 2015, according to the Institute on Taxation and Economic Policy) than did people in low-income and middle-income households.
But in most other states, taxes are even less progressive. So compared with their counterparts even in such relatively high-tax neighbors as New York and Massachusetts, upper-income and upper-middle-income Vermonters are heavily taxed.
That’s important because wealthier people have more political clout. They contribute to candidates and to organizations. They can get public officials on the phone, and they know how to influence the political discussion, or at least to hire people who do.
The one apparent exception – last year’s election of Republican Gov. Phil Scott – is actually a confirmation. One reason Scott defeated Democrat Sue Minter was that he was seen as more likely to hold the line on taxes. But “hold the line” is not the same thing as “eviscerate.” Neither as candidate nor as governor has Scott proposed deep spending cuts, perhaps because he knows that wouldn’t be good politics in this state. The governor wants state spending to rise no faster than growth in the state’s economy. If he succeeds, Vermont would still be a high-tax state.
There are at least two reasons why so many affluent Vermonters have accepted the current tax structure. From polling and from election results, it’s clear the political views of most Vermont taxpayers range from moderate to moderately liberal. A typical affluent Vermonter is no leftist and may not even be left-of-center. But he or she is left-of-right, generally in favor of government spending on good schools, services for the mentally ill, clean air and water, well-maintained parks, and protection for vulnerable children.
But there’s another reason: Those affluent Vermonters get back some of their state tax payments, and they know it. If a household pays $5,000 in state income taxes, those taxpayers deduct that $5,000 from their federal taxable income. If their state tax bill is that high, they are in at least the 28 percent marginal federal income tax bracket. The deduction lowers their federal income tax bill by $1,400.
Presto! That $5,000 state tax bill is really $3,600.
All this seems to be about to change, and the change could have a profound impact on Vermont — its politics, its government, its society. Congress is on the verge of eliminating deductions for state income taxes and capping property tax deductions at $10,000. Throughout the 104-year history of the income tax, the federal government has in effect subsidized state governments by making most state and local tax payments deductible. Now it is about to slash that subsidy.
Vermont Tax Commissioner Kaj Samsom said 30 percent of Vermont tax filers now itemize their deductions, including their state income taxes. If the deductions are eliminated, Samsom said, “the modeling we did indicates it would shrink to 15 percent.”
If taxpayers can no longer deduct their state income tax payments, Samsom said, “it’s reasonable to think that their propensity to support state and local taxation would diminish.”
Actually, it is all but inevitable that such propensity would diminish, though how soon and by how much remains uncertain. Economic incentives matter, and political liberals who favor clean water and adequate services for the poor and disabled are not immune from self-interest. If that $5,000 income tax payment is really going to cost a household $5,000 instead of $3,600, the folks in that household are going to be unhappier about paying it.
At that level of taxation, these taxpayers earn something like $150,000 a year. That’s not rich, but it’s more than twice the state’s median household income ($57,677 last year), so they certainly qualify as affluent.
That means they have political clout, and it seems certain that more of them will decide to use that clout to pressure state government not just to contain state spending, but to reduce it.
If they have any impact – and it’s hard to see how they would not have some – state government would be smaller and less generous. It would provide fewer services. It would impose fewer restrictions.
Welcome news to some, who point out that about 500 more people work for the state now than in fiscal year 2010, and who argue that the current level of government restrictions obstructs economic development.
They may have a point. But fewer restrictions also usually means dirtier lakes and streams, and at least two state agencies – Education, and Agriculture, Food and Markets – have recently been unable to complete studies required by the Legislature because of insufficient staff. Michelle Fay, the associate director of Voices for Vermont’s Children, said caseloads at the Department for Children and Families “are still not at an appropriate level.” And Ed Paquin, the executive director of Disability Rights Vermont, said staffing for programs to serve people with disabilities and mental illness is “I think smaller than it was 15 or 20 years ago.”
The same thing is true of environmental protection, said Brian Shupe, the executive director of the Vermont Natural Resources Council, who said the number of positions in the Department of Environmental Conservation’s water quality division was actually cut last year.
Jack Hoffman, the senior policy analyst at the liberal Public Assets Institute, agreed that doing away with state income tax deductions provided “another arrow in the quiver for people looking to lower taxes.” But Hoffman said he doubted that “there is going to be a taxpayer’s revolt” against state spending.
Perhaps not, at least for a while. In exchange for eliminating specific deductions, the tax bill (still to be adjusted in a House-Senate conference) raises the standard deduction, and for most middle- and upper-middle-income Vermonters, federal taxes will be slightly lower for the next few years (and much lower for the very wealthy), which could end up making them feel more generous.
But advocates of lower spending and lower taxes are sure to keep reminding them that their state taxes are now costing them every penny they pay. The likely result is more pressure to cut spending at all levels of government, perhaps just what the leaders of Congress intended.
