Vermont has long been known for its progressive income tax system. For a couple of reasons, it makes sense to tax higher incomes at higher rates. Those who benefit most from society have a responsibility to contribute more, and those with more discretionary income — what’s left after covering taxes and necessities — can afford to pay more.
But while Vermont’s income tax system is progressive, the overall tax system is not. Which may come as a surprise to many people.
The Institute on Taxation and Economic Policy in Washington, D.C., just released its latest “Who Pays?” report — the fourth edition since 1996. It’s an analysis of state and local taxes paid by people in various income categories. The study shows that Vermont’s tax system is better than many states’ — that is, it’s one of the least regressive. But the lowest-income Vermonters still pay more of their income in state and local taxes than those at the top.
It’s a coincidence that the report has come out right in the middle of the debate over Gov. Peter Shumlin’s proposal to cut the Vermont earned income tax credit. But the data in the report are relevant.
The EITC is a federal tax break for low-income wage earners. It’s refundable, so if the credit is more than a person owes in income taxes, the taxpayer receives a cash refund. Taxpayers must be working and earning income to receive the credit. The federal credit was made refundable, in part, to offset other regressive federal taxes, like the payroll tax. And as much as the EITC helps low-wage families make ends meet — it is cited in studies as one of the most effective anti-poverty tools — it can also be seen as a benefit to employers who pay low wages.
Vermont’s EITC is piggy-backed to the federal credit. The state credit is 32 percent of the federal credit, and again taxpayers receive a refund if the credit is more than the person’s tax liability.
In tax year 2011, according to the most recent available data, about 44,000 Vermont tax filers received state earned income credits totaling $25 million. In most cases, people received a refund for all or some of the credit.
One thing revealed by the report is that Vermont’s tax system would be even more unfair without the EITC. The bottom 20 percent of Vermont taxpayers now pay 8.7 percent of their income in state and local taxes. Without the tax credit, their share would be 10 percent. Meanwhile, the top 1 percent of Vermont taxpayers are paying 8 percent of their income in state and local taxes.
What is also apparent from the report is that the wage earners receiving the earned income credit are paying taxes. They get a break on income taxes, but they’re still paying sales taxes, fuel taxes, property taxes if they own a home, use taxes, and rooms and meals taxes. As with the federal EITC, the state earned income credits were made refundable to help offset some of the regressive taxes wage earners have to pay. Without the EITC, their tax bills increase.
Even though Vermont’s tax system is regressive, leaving the EITC intact ensures that it doesn’t become more regressive and lean more heavily on the lowest wage workers.