Vermont, known for its commitment to progressive issues, has new goals in mind. It would add new taxes targeted at the wealthiest residents to address growing income inequality and ensure the wealthy pay their fair share.
Lawmakers in the state introduced two bills this week that would add two wealth taxes. The first would impose a 3% tax on individuals with adjusted gross income of more than $500,000. The second would add taxes to capital gains on assets over $10 million.
Vermont is not the first state to propose a wealth tax, with eight states proposing one last year. Propose additional taxes on the wealthy It has a goal of raising billions of dollars to fund social programs. On the national front, President Joe Biden and Senator Elizabeth Warren are calling for the creation of a federal wealth tax.
But even though polls show that most Americans support raising taxes on the wealthy, wealth tax proposals have so far failed to gain significant legislative support. One exception is Massachusetts, which introduced a so-called “millionaires tax” that would add a 4% tax to annual incomes above that threshold in 2023.is funded by revenue collected from taxes free school lunchIt has uses such as.
The rich get richer in Vermont too.
Vermont may not have as large a wealth gap as larger states like Massachusetts or California, but inequality is widening in the New England state of about 650,000 people.
“Vermont has significant unmet needs and we need to raise even more revenue to adequately address those needs,” said Vermont Representative Emily Kornheiser, the bill's sponsor. Yes,” he told CBS Money Watch. “At the same time, we know that economic inequality is widening. Vermont's wealthiest residents are getting richer, but wages for the majority of Vermonters have not kept pace with rising costs of living. yeah.”
Vermont's tax system “concentrates wealth at the top, prevents the state from collecting enough revenue, and places an unfair burden on middle-class families,” said Kornheiser, a Democrat. added. “Our tax system also leaves a significant amount of wealth untouched.”
Across the United States, wealthy people generally pay a lower percentage of their income in taxes than lower-income people, according to the Institute on Taxation and Economic Policy (ITEP). A recent analysis by a left-leaning think tank found that the average effective rate of state and local taxes that residents pay to their home state is 7.2% for the top 1% of earners. For the lowest 20% of people with incomes, the rate is more than 11%.
In Vermont, the top 1% pays a total effective tax rate of 10.1%, while residents with incomes between $83,300 and $135,900 pay a tax rate of about 10.5%, the ITEP study found. found.
“Vermont's wealthiest people pay lower interest rates than some middle-income people,” said Karl Davis, ITEP's research director. “We know that wealthy people receive a large share of their total income, so if we choose to tax all that income at a lower rate, we will be paying less for schools, parks, infrastructure, and all other public services. could have a significant impact on the state’s ability to fund.”
Will the rich run away?
Vermont has a Democratic legislature, but Gov. Phil Scott, a moderate Republican, has said he would not approve measures that would raise taxes. He also expressed concern that the wealth tax could cause some wealthy Vermonters to move to lower-tax states, according to Vermont Public Radio.
However, it is unclear whether wealthy people are motivated to migrate solely for tax purposes. In recent years, some Americans have moved to low-tax states such as Florida and Texas, but they may be choosing to move for factors such as better jobs or warmer weather. be.
IEP's Davis said that wealthy Americans actually move less frequently than the general population “because they have already achieved economic success.” Instead, people moving to new states tend to be people seeking better wages, cheaper housing, or wanting to live in a warmer climate.
“We've all heard anecdotes about wealthy people moving because they didn't like their tax bill, but data shows that these stories are the exception and not widespread. '' Davis said.
At least some research supports that view. In a 2016 study that examined the tax records of all U.S. billionaires over a 10-year period, researchers at Stanford University and the U.S. Department of the Treasury found that: Only 2.4% of millionairesThose who moved to another state during that period compared to 2.9% of the total population.
“The study's most surprising finding is how few elites in the United States are willing to take advantage of tax breaks across state lines,” they wrote at the time.
Another hurdle the proposal faces is imposing a wealth tax on capital gains. Most retirement accounts are exempt, but investment accounts with more than $10 million that have unrealized gains of $1 million (the account's value increases to $11 million even though the owner has not sold any stocks or assets) ) will pay a top tax rate of 8.75%. . Realized gains over $10 million will also pay a new wealth tax.
A case currently pending in the Supreme Court is examining whether unrealized gains are subject to taxation.
“However, there is no reason to expect this litigation to have any impact on state taxing authorities,” Davis noted.
