Flemming: Two tax increases proposed to lessen Vermont’s pension crisis

By David Flemming

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.

David Flemming, policy analyst at the Ethan Allen Institute

On Nov. 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 of the possibility of personal income tax increases. 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 (Hawaii, California, 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. 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 two 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 Nov. 10, click here.

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

Image courtesy of Flickr/401kcalculator.org
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3 thoughts on “Flemming: Two tax increases proposed to lessen Vermont’s pension crisis

  1. It is time we elect people to represent us who have the fortitude to trim Government back to the point of making sense, and pay down the pension problem with the savings accrued by what any reasonable individual would do to take care of obligations, in his/her own area of responsibility.
    Being everything to everybody in a state this size is not going to work, particularly when it is time to pay the bills. Robbing Peter to pay Paul is something Howard Dean played with out of the transportation funds; we are still behind the power curves on maintenance and repair delays caused because of those very unwise moves. Vermonters paid their portion of the pension bill once as required. Making them pay twice is not going to work either. ELECT PEOPLE WHO KNOW HOW TO MANAGE WISELY!! The D/P crowd does not qualify as per their track records; The Federal Scene??

  2. Same knee jerk reaction as every other state tax law consideration for the last several decades. We must tax the Rich more ! We must make them pay their Fair Share !!!! This incessant clarion cry amongst the ignorant is responsible for running many wealthy (and not-so wealthy) people out of Vermont. If VT keeps this up, all we are going to have left living here is recipients of the VT government largess that the legislature will be unable to fund.

    With regard to the capital gains issue, I hope they are not proposing to tax the sale of businesses as ordinary income. This would be a reversal of the legislature’s agreement with the business community over a decade ago to tax the sale of family business’s at the preferential 40% exclusion rate.

  3. 11•30•2021

    A first step would be to stop hiring more & more people into this extremely wasteful, expensive, mostly useless gigantic State Government that is seemingly being packed at all levels with tons more seditious, subversive, treasonous authoritarian Marxists, Fascists, Communists, & Socialist hypocritical pathological liars! Like any other job make these employees pay for or pay more for their own pensions and whatever else these greedy power hungry leftists want.

    A second step would stop signing these taxpayer hurting contracts between the State & the Communist state employees unions like VSEA including the teachers union which is an expensive do nothing but indoctrinate not teach Vermonts children! Stop signing these contracts that protect & make it nearly impossible to fire & get rid horrible workers even those caught lieing on applications whom have sickening criminal records from out of state or how they get away with keeping people on workmens comp for years..

    A third step would be let these highly indoctrinated idiots collapse the system then they wont have to worry about it because we know the Vermont Republican party & national G O P (with a few exceptions) arent going to never have and never will straighten this BS out!

    The only difference between Progressively Communist Demoncrats & the G O P is the D or R before their name otherwise like now Demoncrats will say they want new taxes & rhinos like Governor Benedict Scott will say no new taxes or no more tax increases while quietly voting in favor of and signing them into law.

    Andrew Cotrel
    Brattleboro VT US Army Combat Veteran OEF/OIF. Constitutionalist Patriot Freedom loving American

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