When Vermont’s Legislature appointed the Pension Benefits, Design, and Funding Task Force, there was a good chance tax increases would be discussed at some point. Now, Vermonters have a little clearer idea of what those could look like.
On November 10, Graham Campbell of Vermont’s Joint Fiscal Office (JFO) testified before the Pension Benefits, Design, and Funding Task Force. He had been asked by the PBDTF to examine methods for increasing tax revenues to cover Vermont’s growing pension deficit.
Campbell rolled out 3 possibilities for a personal income tax increase. First, Campbell pointed to JFO estimates of an additional 3% tax rate on taxpayers earning income over $300,000 that would raise $60-70 million per year. Another possibility lay in an additional 1.5% tax rate on income over $150,000, raising $30-40 million per year. Finally, the JFO estimates a 3% tax rate on income over $500,000 would raise between $40-50 million per year.
Campbell did show the committee the downsides to such an increase. He noted Vermont’s personal income tax is “already quite top heavy,” indicating Vermont is very reliant on high income Vermonters to fill the state coffers. Consequently, Vermont is “more vulnerable to volatility” in revenues from year to year. His conclusion: increasing Vermont’s personal income tax would make us “one of the highest in the country (joining Hawaii, California and Oregon)” for the highest income earners. Not a concern if you think job creators don’t respond to tax incentives, but certainly a point of alarm for those who think people respond to incentives.
Another possibility: remove the capital gains tax exclusion, which would be equivalent to another tax increase. Without the freedom to exclude some capital from income on their 1040 income tax forms, Vermont taxpayers would have ended up paying an additional $20.6 million in fiscal 2019. The capital gains exclusion gives Vermont taxpayers 2 options when filing their income taxes each year. They can choose to exclude $5,000 of any capital gain or exclude 40% from a sale, such as their farms, timber or business assets.
Surprisingly, it appears Vermont’s capital gains exclusion is a comparative advantage relative to other states, at least for lower incomes earners. Campbell testifies, “if you have capital gains that and make below $100,000, if your goal was to minimize your taxes on capital gains, the best place you could live is in Vermont.”
While the JFO downplayed the risk in removing the capital gains exclusion to lower income earners, banishing our ‘good uniqueness’ in a state with generally higher taxes than our neighbor states seems like a risky gamble to me. And of course, removing the capital gains exclusion for higher income Vermonters would make our capital tax relative to our neighboring states even less competitive than it already is.
If the Legislature decided to act on both the income tax increase and the removal of the capital gains exclusion, we are looking at another (at most) $90 million in the state coffers annually. That’s less than 29% of the $316 million Vermont will need to pay just to meet our scheduled payments in the pension system and post-employment benefits for fiscal 2022.
It becomes evident fixing the pension crisis with tax increases alone would likely cripple Vermont economically. Vermont needs to figure out a way to spend less on pensions, reaching for higher taxes only as a last resort.
To watch the Pension Task Force on November 10, click here.