This year, Montpelier, the capital of Vermont, is buzzing with a series of proposed tax increases. The proposals include adopting the nation’s highest corporate income tax, second-highest individual income tax, and an aggressive treatment of foreign earnings. Additionally, lawmakers are considering implementing an unusually high tax on property transfers. While these proposals offer a plethora of options for raising taxes dramatically, the question remains whether these policies serve Vermont’s best interests.
One bill under consideration proposes adding a new, 11.75 percent top marginal individual income tax rate and increasing the property transfer tax to 3.65 percent for properties valued above $750,000. Another measure aims to raise the top marginal corporate tax rate to 10 percent and aggressively treat international corporate income. Individually, each of these represents bad tax policy; taken together, they could yield one of the least competitive tax systems in the nation, to the detriment of Vermont residents and the state’s economy.
Currently, Vermont’s top marginal individual income tax rate is 8.75 percent. A top marginal rate of 11.75 percent would be the second highest in the country, behind California’s 13.3 percent. Proponents of raising taxes on high earners often claim that these residents are less mobile and not particularly sensitive to higher marginal tax rates. However, these claims should be critically analyzed, particularly as the post-pandemic economy has seen increases in remote and flexible work arrangements.
Even more concerning for Vermont is the research showing the negative relationship between income tax rates and gross domestic product. By contrast, reducing income tax progressivity is correlated with a growth in the real rate of wages, just as cutting marginal rates is with lower unemployment rates. Correlation does not equal causation, but these trends are noteworthy, and lawmakers would do well to consider them.
If Vermont were to increase the top marginal corporate income tax rate to 10 percent, it would be the highest in the country. This new marginal tax rate would be markedly higher than neighboring Massachusetts (8.0 percent), New Hampshire (7.6 percent), and New York (7.25 percent). The state’s corporate tax code is already uncompetitive, and raising the top marginal corporate tax rate compounds this and disincentivizes investment in the state.
In 2017, the federal Tax Cuts and Jobs Act (TCJA) ushered in key updates to the way the United States taxes international corporate income. However, Vermont lawmakers now seek to decouple from this treatment and add back the entirety of a company’s global intangible low-taxed income (GILTI) and income earned from foreign sales related to intellectual property held domestically, known as foreign-derived intangible income (FDII). This would overly burden businesses and further erode the state’s competitiveness and growth opportunities.
When property is transferred, government provides services to facilitate the transaction. A well-designed property transfer tax should act as a user fee to compensate government for reasonable costs incurred. However, the proposed increase in the property transfer tax to 3.65 percent for properties valued above $750,000 lacks the justifications that a property tax has.
Whether it is a question of mobility or of gross domestic product, Vermont cannot afford to gamble with the risks of raising the top marginal individual income tax rate so high. The tax might fall on the highest earners, but the economic impact would be borne by Vermonters at all income levels. The proposed tax increases, if enacted, could leave the state less competitive both regionally and nationally, with potential long-term consequences for Vermont’s economy.