The controversial proposal by Gov. Peter Shumlin to reduce earned-income tax credits for low-income Vermont workers has served to underscore the pervasive unfairness of state and local tax systems throughout the nation, including Vermont.
It is an axiom of our tax system that progressive taxation is fairer because it calls on wealthier taxpayers to pay a higher percentage of their incomes in taxes than low- or middle-income taxpayers do. The big battle at the federal level at the beginning of the year was over whether to raise the top marginal income tax rate, in order to demand a bit more from those who have the ability to pay.
At the state level, however, no state asks the rich to pay more. In every state, poor and middle-class taxpayers pay a higher percentage of their income than rich taxpayers do. That includes Vermont.
Vermont is among the fairest states, largely because of its progressive income tax rates. But when all taxes are combined ó including property and sales taxes ó even Vermont demands less as a percentage of income from the rich than from the poor.
These are the conclusions of a study on state taxation by the Institute on Taxation and Economic Policy, a nonpartisan research organization based in Washington, D.C. The principal finding of the report was that lack of a progressive income tax and overreliance on consumption taxes tended to skew state and local taxes to benefit the wealthy.
Nationally, the bottom 20 percent of taxpayers pay 11.1 percent of their income in combined state and local taxes. The middle 20 percent pay 9.4 percent. The top 1 percent pay 5.6 percent.
The most regressive tax system is in Washington state, where the poorest 20 percent pay 16.9 percent and the richest 1 percent pay 2.8 percent.
Vermont is among the most progressive states, and one of the reasons, according to the report, is the stateís earned-income tax credit, which is pegged at 32 percent of the federal credit. Even so, wealthy taxpayers in Vermont do better than poor ones. The bottom 20 percent of taxpayers pay 8.7 percent of their income in state and local taxes. The middle 20 percent pay 10.4 percent. The top 1 percent pay 8 percent.
Itís easy to understand why states favor the wealthy. Ordinarily, state government is not closely scrutinized by the public, and lobbyists and special interests often have a free hand to influence policy decisions in state capitals. Public awareness of decision-making in Austin or Tallahassee is probably not acute. In Montpelier, by contrast, public involvement is more prevalent, and the state has a history of paying attention to low-income residents. Even at that, the myth persists that rich people are somehow punished in Vermont. That is so only comparatively. If progressive taxes are a sign of fairness, then fairness is lacking, even in Vermont.
That is why Shumlin is going to have a hard time persuading legislators to make Vermontís tax system less progressive. He was right to point out that Vermont has a progressive income tax and a progressive residential property tax. These have mitigated the advantages enjoyed by wealthy taxpayers because of favorable treatment they receive on capital gains. But despite the stateís income-sensitive property tax system, the stateís heavy reliance on property taxes places a heavy proportional burden on low and middle-income taxpayers.
Shumlin had wanted to take $18 million from the earned-income tax credit to make child care and early education available for everyone. It is a worthy goal, but it would have the effect of shredding one of the most important measures making Vermontís system one of the most progressive among the statesí regressive tax systems.
There are those who argue against progressivity, saying fairness would be achieved if everyone, rich and poor, paid the same tax rates. Flat taxes are common among those states where taxes are mostly severely tilted toward the wealthy. When everyone pays a 7 percent sales tax, it takes a much larger chunk of the incomes of poor taxpayers. It turns out the flat tax is generally far from flat.
Incidentally, New Hampshire taxes its poorest citizens at 8.6 percent, close to the same rate as Vermont does, but rich taxpayers have a much easier time of it in the Granite State. They pay only 2.4 percent of their income, compared to 8 percent in Vermont.
The economic disparities between rich and poor in the nation are wider now than at any time since the 1920s. A tax system that favors the wealthy only perpetuates those disparities. The point is not to punish the wealthy but to apportion the taxes in a way that is not crushing to any particular group and allows people up and down the income scale to flourish. Making the system less progressive for the poor does not help.