Art Woolf is a columnist for VTDigger. He recently retired as an associate professor of economics at the University of Vermont.
With the arrival of Covid-19 and the partial shutdown of the Vermont economy, the state’s tax revenue picture for the balance of this fiscal year and for next is bleak.
Revenue forecasters estimate the general fund, which supports almost all state spending except for K-12 education and transportation, will be short about $50 million in the current fiscal year, which ends June 30. The big hit comes next year, with $250 million less revenue than was previously expected for fiscal 2021.
The general fund had been expected to have $1.595 billion in tax revenues this fiscal year. More than half of that comes from the personal income tax, which was forecasted to bring in $894 million this year and $909 million next year. That’s not going to happen. Now it looks like income tax revenues will be $50 million below that this year and $150 million less next year.
The personal income tax is a very volatile revenue source. It does very well when the economy grows and poorly in an economic downturn, like right now. That’s in large part because most of the income tax is borne by upper income Vermonters.
In 2018, the latest year for which we have information, 13,200 taxpayers made over $200,000. That’s only 4.1% of all the taxpayers in Vermont. Those people paid $342 million in Vermont income taxes, nearly half of all the income taxes paid. So a very small slice of Vermonters pays a very large share of income taxes, and income taxes are more than half the general fund.
When the economy does well, high-income people do well. In 2018, for example, Vermont income taxes grew by $22 million. People earning over $200,000 paid $36 million more in income taxes than they had the year before, which means more than 100% of the growth in income taxes came from that small group of taxpayers. In 2017, income tax receipts rose by $68 million and three-quarters of that came from those high-income taxpayers.
What about when the economy declines? In 2008, the first year of the Great Recession, Vermont income taxes fell by $36 million. All of that came from high income taxpayers. The following year, the second year of the Great Recession, total income taxes fell by another $36 million and half of that was due to lower taxes paid by that small group of taxpayers.
Everyone would agree that anyone earning over one-half million dollars is rich. That is an even smaller group of Vermonters. Only 2,065 filers earned that much in 2018, less than1% of all taxpayers. Yet that tiny group of taxpayers paid nearly one-quarter of all Vermont’s income taxes.
Who are those high income and rich Vermonters? The first group, those earning over $200,000, could include a married couple, both college-educated professionals with good jobs. Two 40-year-old Chittenden County teachers can make close to $200,000 from their salaries alone. Add in some extra income from extracurricular activities like coaching and some summer work and they cross the $200,000 threshold. An accountant married to an attorney or physician fits the bill as well.
That means that the revenue picture in fiscal year 2021, which starts this coming July 1, is going to be grim. Many people have lost their jobs — temporarily we hope. The vast increase in unemployment benefits will moderate the income loss for lots of those people, and therefore the loss of income tax revenues for the state next fiscal year.
Consider a moderate-income worker who has lost her job. She was making $1,000 per week, about the average weekly household income in Vermont. She will get about $500 weekly in state unemployment benefits and an additional $600 from the federal government.
Her income while unemployed is higher than it was when she was employed. Unemployment insurance benefits are taxable so she’ll pay about the same amount of Vermont income taxes as she would if she was still working. That won’t be true for everyone unemployed, but it will limit the downside risk for the state treasury in fiscal year 2021.
But income for many higher income professionals will be less. Consider dentists, who haven’t worked or earned any income since mid-March. Or physical therapists or chiropractors or owners of restaurants, bars and other small businesses. Their 2020 income will be less than usual and hence they will be paying less income taxes than normal.
The situation is even more dramatic for rich Vermonters, those earning over $500,000. Although many people’s mental image of the rich is of an unchanging group of people, the reality is that most rich people have very high incomes in only one year. Very high incomes often come from the sale of an asset such as a business someone has spent a lifetime building or selling stocks or other assets that have appreciated tremendously over the years.
After a huge decline in March, the stock market is now down 10% for the year. How it will do the rest of this year is anyone’s guess. But it’s likely fewer Vermonters will be earning high capital gains from the sale of their stocks. And given the economic shutdown, many Vermont small business owners will be reconsidering selling their businesses this year. They will wait until the economy improves and their businesses are worth more.
That means a big decline in income, and income taxes, from the very rich, who are responsible for a very large share of all income taxes collected.
Vermont has an unusual income tax structure. We levy very high taxes on rich people, one of the highest rates in the nation. But middle-income and low-income Vermonters pay lower income taxes than they would pay in just about every other state with an income tax. That’s the nature of a progressive income tax. Today we’re seeing the downside of that structure.
