Flemming: Guilt for underfunded pensions lies with Legislature, not taxpayers

By David Flemming

In testimony provided to the Pension, Benefits, Design and Funding Task Force on September 9, Paul Cillo, President of the Public Assets Institute, came to testify about the “fiscal issues related to the state’s public employee pension systems.” He suggested that “it’s irresponsible to not raise revenue” to pay for the pension underfunding crisis. According to Cillo, “Many Vermonters at the top, with much greater amounts of discretionary income, still pay less as a percentage of their income in state and local taxes than their lower-income neighbors, according to a 50-state analysis by the Institute on Taxation and Economic Policy” (a left-leaning think tank).

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Over the course of two decades, the Legislature has managed to squander their massive revenue advantage in taxing all of us more than citizens of other states, resulting in severely underfunded pensions.

The 2018 50-state analysis which I assume Cillo is referencing, attempts to combine all of the taxes non-elderly Vermonters pay: Income, Property, Sales and Excise taxes. These are compiled into one number, which is the percent of income that an individual will pay in taxes for a given year. This analysis suggests that Vermont’s workers making less than $21,200 (in the bottom fifth) are taxed at 8.7% of their income. Those making between $21,200-$39,100 are taxed at 9% of their income. Both of these bottom income quintiles are less than the top quintile of Vermonters (making over $94,000), who are taxed at 10.4%. Perhaps some “Vermonters at the top” pay less a percentage, but on average, Vermont’s high income earners pay more.

In fact, according to the Institute on Taxation and Economic Policy, Vermont’s is the second most “equitable” (progressive) state and local tax system in the country, behind only California. Sadly, an especially equitable income system is not resulting in much income growth. Perhaps in part because all Vermonters are taxed pretty heavily. Colorado, Utah, Montana, South Carolina and Delaware each tax the lowest 20% and highest 20% of income earners less than Vermont does, and most other states tax the highest 20% less.

To quote the Public Assets Institute again, “in 2020 the typical Vermont household income dropped $8,000 from the previous year, to $66,902—below the US median for the first time since 2007.”

Worse still, the Public Assets Institute noted in its 2020 report The State of Working Vermont, “at the end of the recovery, Vermont didn’t have much to show for its efforts to reduce poverty. The poverty rate came back down after it shot up in the Great Recession. But by 2019, there were just as many Vermonters in poverty as in 2007: more than 60,000.” Our taxation strategy is not making poverty any better.

The highest quintile Vermonters already pay a higher percent of their income than their lower income peers. We are at a point in time in which it is becoming easier to work remotely, especially for white-collar workers who only need a laptop to do their jobs. Any rise in taxes for that upper quintile will encourage those higher income earners to move to one of the 40+ other states which have lower effective tax rates.

Over the course of two decades, the Legislature has managed to squander their massive revenue advantage in taxing all of us more than citizens of other states, resulting in severely underfunded pensions. Raising taxes on a highly taxed and geographically mobile group like Vermont’s high-income earners is dubious when paying for those ‘shiny new government programs.’

The fact that the Legislature is considering raising revenue after they underfunded longstanding government programs (teacher and state employee pensions) is even more fiscally egregious. Only through making painful cuts to spending can the Legislature ‘admit guilt’ to taxpayers in their willful neglect of fiscal responsibility. Let’s not let them shift the blame for underfunded pension to taxpayers.

David Flemming is a policy analyst for the Ethan Allen Institute. Reprinted with permission from the Ethan Allen Institute Blog.

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3 thoughts on “Flemming: Guilt for underfunded pensions lies with Legislature, not taxpayers

  1. As I remember the origin of this fiasco started with Howard Dean. He was about to run for president and wanted a balanced budget in Vermont to show the country how fiscally responsible he was as governor of Hooville. So, his administration pulled dollars in from every corner of the state department budgets including transportation as well as a few others and the pension fund was under funded as part of the fuzzy math to balance the budget. Since he was able to pull this off, the can has been kicked down the unfunded road ever since. I haven’t looked but I bet that was the only year on record that the Vermont budget was balanced. An example of more Democratic magic by using a Ouija board, imagined gain on investment and progressive shenanigans. It’s the Vermont way. Similar to congress putting an avowed socialist, who never had a job or ran a company, as chairman of the congressional budget committee.

  2. This situation is simply criminal……..the people in State government who made these decisions to under fund or not fund these pension accounts that were paid into are the ones who should be held accountable. I for one feel we the public should not be held responsible for these mistakes or worse criminality. If we did this with our own income and shorted paying taxes to the State, they would not like this at all, oh just wait, maybe they need to be held accountable and be audited. Government has lost it’s way and needs to be disbanded or reduced and someone must pay for their lack of responsibility. As for the pensions………hey folks that money is long gone. Enjoy your retirement.

  3. Okay, Fuzzy math strikes again. Vermont’s top rate is 8.95% and Vermont disallows some Federal tax deductions.(Meaning the effective tax rate is higher yet for many, mostly small business owners) The analysis referred to above says “rich” Vermonters pay 10.4%. That’s either a whole lot of income to have property tax, sales tax and all the other fees Vermont collects to make that 1.45% difference, or Cillo is playing a game with the truth. What else is Cillo playing truth games about?
    Vermont’s taxpayers are not responsible for the State Pension fund problems, the Legislature is solely responsible for the mess created decades ago and allowed to continue. EAI, in 2008 published “Off the Rails” warning all that State government was- well, Off the Rails. 13 years later- all of the issues remain, all have grown as problems- and yet here we are- with legislators more concerned with teaching racism in schools as a mandatory curriculum, wearing of masks and listening to liberal policy wonks tell them lies about taxes. Then again, maybe it’s the Vermont voter- electing these elitist socialists for the past 3 decades.

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