By David Flemming
What public policy has the best chance of convincing 20-somethings to stay in Vermont? Is it (A) adopting a $15 minimum wage, (B) passing paid family leave/payroll tax, or (C) exempting those age 25 or younger who make $22,000 (or less) annually from Vermont’s income tax?
If you answered A or B, you might be right, if you could create never-ending, well-paying jobs out of thin air. If you answered C, you might be on to something. This is exactly what Bernie Sanders’ fatherland of Poland has decided to do. They trashed their “personal income tax for young employees (25 or younger, earning less than $22,000 a year), as part of a drive to reverse a brain drain and demographic decline.”
Wait a minute, isn’t fewer young workers the thorniest problem Vermont is currently facing? Vermont has nearly 5 years on the average American’s age. How would such a proposal work for Vermont?
While most young Vermonters making less than $22,000 are already eligible for the federal and state Earned Income Tax Credits (EITC), there is one important difference: Everyone pays taxes on their income throughout the year. However, you can only get these taxes back if you file your income tax with the IRS and Vermont Department of Taxes. And since part-time, low-income students making less than $10,000 annually are not obligated to file, they often choose not to, gifting Vermont’s government the income they could receive with an income tax refund.
Even low-income young Vermonters who get a large refund after filing would likely prefer to have a steadier income throughout the year. Income volatility is one of the chief predictors of financial hardship. Scraping by in 11 months of the year in hopes of receiving an unknown large tax refund annually fits that scenario all too well.
Regardless of our income levels, it is human nature to spend through cash windfalls quicker than income we receive on a regular basis. And since we build our financial habits when we are young, relying on tax refunds as opposed to slightly higher incomes with every paycheck can have financial reverberations well into many a young Vermonter’s future, even after their first raise that pushes them into the middle class.
Low-income earners should not have to deal with the complexities of the US income tax system until they reach a certain standard of living. This is why all Vermonters 25 or younger making less than $22,000 should be exempt from Vermont’s income tax. While such Vermonters would still have to pay 6.2 percent of their paycheck for the previous generations’ Social Security and 1.5 percent for Medicare, they would no longer be forced to pay Vermont’s 3.3 percent income tax.
A recent UVM grad washing dishes for $22,000 would receive $660 extra over the course of the year, without the added stress of filing a state tax return. That’s a small chunk of revenue our government can afford to forgo, with potentially large long-term dividends — especially if those 20-somethings see that tax exemption as a peace offering from our government and decide to make Vermont their long term home. This is a chance for Vermont to get younger for pennies on the dollar.
David Flemming is a policy analyst for the Ethan Allen Institute. Reprinted with permission from the Ethan Allen Institute Blog.