Committee Work: Education Fund and Taxes

On Thursday we had a presentation from the Joint Fiscal Office (JFO) on Vermont's tax structure. Here's the video and here's the presentation. And if you REALLY want the details about this, here's the full report from the Institute on Taxation and Economic Policy (ITEP).

The big question was: How does Vermont compare to other state with regard to our tax structure? How regressive or progressive are we?

• Progressive tax policies have the rich people paying a greater portion of their income on taxes than the poor. 

• Regressive tax policies are the opposite, with poorer people paying a greater portion of their income in taxes than the rich.

In Vermont, and nationally, progressive tax policies are favored, but there are arguments on both sides:

The argument FOR a progressive tax policy are:

• It reduced income inequality: By taxing higher earners at a higher rate, progressive taxes aim to lessen the gap between rich and poor. This can lead to a more equitable society and potentially better overall social mobility.

• Increased government revenue: The higher tax rates on wealthier individuals generate more revenue for the government, which can be used to fund important public services like education, healthcare, and infrastructure. This can benefit everyone in society.

• Fairness argument: Proponents argue that progressive taxes are more fair than flat taxes, as they ask those who can afford it more to contribute more to the collective good. Part of this argument is that a greater portion of poor people's income is tied up in the basics: food, clothes, etc. Rich people have more income available for non-basic items. Taxing the rich does not impact their dailylives as much.

• Economic benefits: Some studies suggest that progressive taxation can boost economic growth by investing additional revenue in areas like education and infrastructure, which lead to a more skilled and productive workforce. But that argument is more about how the money is spent rather than how it is raised.

The argument AGAINST a progressive tax policy are:

• Discourages investment and job creation: Critics argue that higher taxes on the wealthy can discourage them from investing and creating jobs, potentially harming the economy.

• Complexity and administrative costs: Implementing a progressive tax system can be more complex than a flat tax, leading to higher administrative costs.

• Discourages work and innovation: Some argue that progressive taxes can disincentivize people from working hard and taking risks to earn more, potentially dampening innovation and entrepreneurial spirit.

In committee we did not argue about which is best. We just wanted to see where Vermont stands. In fact, Vermont is 49th, which means we are two-shy of having the most progressive tax structure among the 50 states and Washington DC. Minnesota and Washington DC are 50 and 51 respectively, according to ITEP. Among our neighboring states Maine and Massachusetts are in the 40's while New Hampshire ranks 18th and Connecticut came in at 21st.

Which are the most regressive state? Florida (1), Washington (2), Tennessee (3).

The presentation has some nice charts that illustrate how progressive and regressive tax structures work. The complete list of states is in the full report.

Well, there's tax "avoidance," which is legal, and there's tax "evasion" which is illegal. We heard a bit about both last week.

Tax Evasion

On Wednesday Vermont's commissioner of taxes presented about Vermont's "tax gap." That's the difference between what we should be collecting and what we are actually collecting. Here's the presentation and here's the video. 

The tax gap includes:

• Non-filers who really should be filing tax returns.

• Underreporting income.

• Underpayment of reported taxes. 

• Erroneous credit claims.

In Vermont we have a voluntary compliance rate of 97% which is pretty good. Does that mean we are collecting all the taxes we could be collecting? That brings us to tax avoidance.

Tax Avoidance

I've always wondered how corporations avoid taxes with off-shore tax havens. Last week I found out. 

First, how do Vermont's corporate taxes work. For that we head from the JFO and Legislative Counsel. Here's the video and here's the presentation. The video continues into the portions described further down on page. 

Vermont, like most states, taxes corporate net-income. 8.5% is the marginal corporate tax rate. (BTW: For personal income it's 8.75%). Net-income, of course, is gross income minus deductions. When looking at a Vermont company doing business only in Vermont this is comparatively simply, but with a company outside Vermont it gets messy because we only want to tax the company on the portion of their net-income that is attributable to Vermont.  Before January of last year a three-factor formula was used. The tax policy looked at the payroll, the property and the sales of the corporation and determined what share of those three factors were attributable to Vermont. How much payroll, property and sales of Microsoft's total payroll, property and sales were in Vermont. That proportion (pretty small) was then the portion of Microsoft's net-income that was taxed at 8% and paid to Vermont.

In January of 2023 Vermont changed to a unitary tax structure: the single-factor formula. All we care about now is sales. That simplifies things. Microsoft looks at what proportion of its sales were to Vermonters and uses that to calculate the portion of net-income to be paid to Vermont.

When the tax is on net-income, the best way to reduce taxes is to reduce net-income. That's where tax avoidance comes into play. On Friday the Center on Budget and Policy Priorities explained it all. Here's the video and here's the document. He refers to a diagram at the bottom of the first page of the document, so it's helpful to have that available.

Currently, when states look at a corporation's net-income they only consider net-income that results from activity within the United States. If a corporation has a subsidiary in the Cayman Islands that handles all the revenue received from royalties on trademarks or intellectual property, those revenues are not counted as income to be included in the Vermont tax calculation. What we might consider is to force the inclusion of that off-shore activity into the calculation of Vermont's corporate taxes. That would make the corporation's total net-income larger, so the result of pulling out Vermont's portion would also be larger. We will be hearing more testimony on that in the coming weeks.