Vermont is at risk of losing income tax revenue as baby boomers, the largest segment of its tax base, are set to retire in the coming years, according to a new report from the Tax Structure Commission.
The state has benefitted from older workers hitting their prime earning years — and paying more in taxes — since 2000. But those earners are projected to retire in the next 10 to 15 years.
Right now, younger baby boomers in the 55-64 age range make up more than a fifth of tax returns and more than a quarter of income tax dollars in Vermont. But as they retire, their incomes will decline, leading to potential trouble for state revenue, according to the report.
“It’s a reason for concern, and it’s important to recognize this is not a one-year problem we can push off until next year,” Deb Brighton, the chair of the commission, said this week.
But Brighton stressed that Vermont’s aging population will not cause a “trainwreck” for the state’s tax base, as she had feared going into her research.
Policymakers say the findings mean that Vermont should double down on efforts to attract new residents, and some say the state should consider measures to trim state spending or broaden sources of revenue.
The tax commission analyzed a 2013 report from the Federal Reserve of Kansas City, which estimated the state would only see a 4% decline in per capita income tax revenue by 2030. States across the country will see revenues drop as baby boomers age, with some estimated to see per capita income tax dollars fall by as much as 10%.
“It may be little consolation, but several states will see larger revenue drops,” the commission’s report said. The commission did not come up with its own projection for how much revenue Vermont could lose in the coming decades.
Vermont retirees now are wealthier than their counterparts from 30 years ago, which mitigates some of the drop in income.
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The commission also does not expect the state’s consumption taxes, like the sales tax, will see declines in the coming years.
It believes that as more people retire, wealthy older Vermonters and out-of-state visitors will spend more on tourism and entertainment. The commission plans to examine the outlook for Vermont’s property tax in an upcoming report.
‘Dark clouds on the horizon’
The Tax Structure Commission’s report does not include policy recommendations to address the revenue the state may lose as a result of its aging population.
But Gov. Phil Scott’s office said the report underscores the need for Vermont to reverse demographic trends — a key priority of his administration.
Rebecca Kelley, Scott’s spokesperson, said the projections were even more concerning given that spending pressures are already rising faster than revenue for the state budget and school budgets each year.
The administration expects the state will have to close a $70 million gap between state spending and revenue in the next fiscal year’s budget.
Among the upward pressures are rising state employee salaries, growing demands on social services, and Vermont’s massive teacher pension debt.
“The impacts highlighted in this report further illustrate why the Governor has made reversing these trends a top priority of his administration, and in our work with the legislature,” Kelley said.
Art Woolf, a recently retired associate professor of economics at the University of Vermont, said the aging boomer population will strain state coffers in multiple ways.
“The tax base is going to be growing more slowly at the same time that the demands for state services are going to go up, and that’s not a recipe for success,” he said.
Woolf said the state should look to find efficiencies, and cut spending in anticipation of the shrinking revenue, pointing to education as an area where he believes Vermont spends more than is necessary.
“The best way is to look at the expenditures and try to figure out how to adjust your expenditures to account for what you’re going to need in the future,” he said.
Sen. Randy Brock, R-Franklin, said the Legislature can see the “dark clouds on the horizon.” He believes luring people to Vermont is the answer, and that the state needs to invest in job creation, worker training programs and financial incentives for remote workers to live in the state.
“We’re in competition with everybody else,” he said. “Can we be more attractive? Can we craft messages and outreach to make this trend positive?”
The report notes that because Vermont has fewer tax exemptions for the elderly than other states, it won’t lose as much revenue from older residents as other states with aging populations.
But the state did add a new exemption for older Vermonters in 2018, when lawmakers and the governor moved to slash taxes on Social Security benefits for lower and middle income seniors. The change has resulted in seniors paying between $5 million and $8 million less in taxes per year.
Sen. Michael Sirotkin, D-Chittenden, said one of his takeaways from the report is that the state needs to look at expanding its sales tax by broadening levies on internet sales and short-term rental services, like Airbnb.
“The tax commission suggested we need to focus more on services because we’re a service economy. Our sales tax is under pressure because people buy a lot of things off the internet. Our sales tax base is being eroded very quickly.”
Like Brock, he believes the state needs to continue to work on policies aimed at attracting a workforce and new residents.
Senate Majority Leader Becca Balint, D-Windham, said attracting new Vermonters is tough because of the state’s housing bottleneck. In her home county of Windham, there are low vacancy rates, and the housing stock that is available doesn’t match the needs of residents.
“They’ll come here for an interview and love the area, but when they look at the local housing options there’s nothing that meets their needs,” she said.
As the state ages, seniors are also seeking housing that fits their health and lifestyle, she said. “There’s not single-level housing for seniors, so they’re aging in place or moving into homes designed for young families,” she said.
“We have to look really hard at Vermont aging,” said Balint said. “How do we allow Vermonters to age gracefully without economic fear?”
Balint said the predicted negative impacts of Vermont’s aging population were not surprising. However she was encouraged that the report noted that the trend will be cushioned because some boomers are working to older ages. “It’s not as much of an immediate hit,” she said.
Hope for the future
Although the entire nation will see the effect of aging demographics, Vermont is older on average than the rest of the United States, and that disparity is likely to get worse, according to population projections from the University of Virginia.
But Rep. Scott Beck, R-St. Johnsbury, a member of the House Ways and Means Committee, said he’s not worried about the state losing revenue as its population ages.
He expects retirees are contributing a lot of the state’s tax dollars, and in some cases, giving more revenue to the government than people who are of working age.
“Just because we have more people in their 50s and 60s, 70s, than we do in their 20s and 30s and 40s, I don’t necessarily think that you’re going to see a loss of revenue,” Beck said.
“I do think it’s a problem because basically you’re banking on people that want to retire finding your state attractive.”
According to the report, however, retirees generally earn less income and pay less in taxes than younger people.
Beck added that state should focus on reducing its spending, so that it can ease its tax burden, which he said is an essential step to attracting working age people to the state.
“We need to look at different avenues to make this state more affordable for our younger generations,” Beck said.
Brighton, the chair of the tax commission, said there’s no indication Vermont will see an influx of new residents any time soon. The state has stagnant national and international immigration compared to larger, more diverse states to its south.
But she said there’s wiggle room in the future. The commission can’t predict the effects of coming technological and environmental changes, but they may be even more important than demographic trends.
“Few people in 1950s Vermont would have looked back at the state’s lackluster population growth of the previous decades and predicted rapid growth over the following decades, as baby boomers from other parts of the country flocked to the state,” the report said.
Brighton said there’s one trend that the Tax Structure Commission can predict: “We’ve got a lot of people who are going to get a year older in a year.”
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