Policy Documents

Research & Commentary: Vermont Tax Hikes

April 12, 2013

The Vermont Legislature is considering a vast new array of tax changes and increases that could have a major effect on Vermonters. The proposals under House bill 528, which recently passed through the Vermont House of Representatives, would increase income tax rates for higher-income earners while adding new sales taxes that affect all consumers on purchases such as candy, vending machine items, heating oil, and tobacco products. According to the Vermont Legislative Joint Fiscal Office, the total estimated cost to Vermont taxpayers will be $27 million in 2014 and $32.3 million in 2015.

The first part of the proposal would eliminate Vermont's 8.8 percent tax bracket and move those earning $178,651 or more into the top, 8.95 percent tax bracket. Currently, this bracket is limited to those earning more than $388,351. The bill would also cap itemized deductions at 2 1/2 times the standard deduction. These changes constitute a significant tax hike on higher-income earners but are an unreliable source of revenue because they could encourage the wealthy to move to lower-taxed states, bringing much of their income, capital, and tax revenues with them. 

The second component of the tax package is an extensive increase in regressive sales taxes on items such as candy, soft drinks, and tobacco products. Under the proposed bill the state sales tax of 6 percent would be expanded to include products such as bottled water, clothing over $110, candy, soft drinks, and dietary supplements. 

The bill would also increase the tax on cigarettes and smokeless tobacco (cigarettes by 50 cents and smokeless tobacco by 88 cents). Like most sin taxes, tobacco taxes are a notoriously unreliable and shrinking source of revenue because of the decreasing number of smokers. Cigarette taxes are highly regressive, with 95.8 percent of tobacco expenditures being made by consumers earning less than $150,000 a year. 

Finally, the proposal would “temporarily” increase the Meals and Rooms Tax from 9 percent to 9.5 percent for a year and impose the tax on vending machine items. Also included is elimination of the current $10,000 annual revenue threshold for collecting the 0.5 percent gross receipts tax on heating fuels such as heating oil, propane, and coal. 

Vermont lawmakers should advance pro-growth policies that focus on reducing spending and strengthening the economy instead of taking more money out of the pockets of Vermonters, which will only serve to slow economic growth. 

The following articles examine Vermont’s tax proposal and the related taxes from multiple perspectives.

Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Taxing the Rich Will Bankrupt Your State
http://heartland.org/policy-documents/research-commentary-taxing-rich-will-bankrupt-your-state
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets. 

Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
http://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-raise-tobacco-taxes
John Nothdurft argues that the use of targeted tax increases serves only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned with the public health effects of tobacco should encourage the use of readily available smoking cessation products and services, instead of supporting bad tax policy. 

Rich States, Poor States
http://heartland.org/policy-documents/rich-states-poor-states-alec-laffer-state-economic-competitive-index 
The fifth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.  

Sin Taxes: Size, Growth, and Creation of the Sindustry
http://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries. 

Ethan Allen Institute’s 2013 Legislative Issues Guide
http://heartland.org/policy-documents/ethan-allen-institutes-2013-legislative-issues-guide
This booklet from the Ethan Allen Institute examines the issues facing the 2013 Vermont legislature and makes several recommendations on how the state can solve its current problems. 

Multiple Taxes: House Passes Tax Reform Legislation
http://www.cchgroup.com/wordpress/index.php/tax-headlines/state-tax-headlines/vermont-multiple-taxes-house-passes-tax-reform-legislation/
The CCH Group examines tax reform legislation that recently passed the Vermont House, which would, if enacted, make significant changes to Vermont tax law, including changes to the personal income tax rate and deductions, expansion of the sales and use tax and meals and rooms tax base, elimination of the employer’s health care fund contribution effective April 1, 2014, expansion of the fuel gross receipts tax, creation of a new property tax exemption for blighted property, and increases to the cigarette tax and certain tobacco product tax rates. 

Seven Myths About Taxing the Rich
http://heartland.org/policy-documents/seven-myths-about-taxing-rich
Curtis S. Dubay of the Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay notes raising taxes on the rich increases the progressivity of an already highly progressive tax code. It damages economic growth by stifling job creation, further slowing the growth of already stagnant wages. Whereas some see raising taxes on the rich as a silver bullet for fixing fiscal woes, the tax hikes actually do severe damage to the economy. 

Taxing the Poor
http://www.heartland.org/policybot/results/21582/
The National Center for Policy Analysis’s Task Force on Taxing the Poor exposes how government unduly burdens its low-income citizens with regressive taxes. It concludes, “Policymakers who consider raising excise taxes at the federal, state or local level—regardless of the good they think they are doing—should consider the disproportionate burden their lower-income constituents will bear.” 

The Sin Tax: Economic and Moral Considerations
http://www.acton.org/publications/occasionalpapers/publicat_occasionalpapers_sintax.php
Acton Institute President Robert Sirico examines the economic and moral considerations of “sin taxes” and concludes that they are not mutually exclusive. He warns, “We ought to consider fundamental issues regarding the interplay between private morality and public policy.”

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.