Vermont's Number One - In Tax Burden  
By John McClaughry

Americans enjoy rankings. They enjoy David Letterman's "Top Ten.", scan the New York Times Best Seller List, and study the rankings of colleges and universities.

So it was no surprise when Vermonters were interested to discover that their state had reached a national number one ranking. Unfortunately our high ranking was not in job creation, median income, or per capita retirement savings. Vermont climbed the charts to Number One in State and Local Tax Burden.

The respected Tax Foundation computed the rankings based on economic data from the standard U.S. Department of Commerce sources. State and local tax burden is the total amount of taxes paid by Vermont individuals and businesses, divided that by the total income earned by Vermont individuals and businesses.

This data is then adjusted to account for states that export their severance, corporate income and tourism taxes throughout the country. The net effect of these adjustments was quite large for oil-rich Alaska, but very small (tenth from the bottom) for Vermont.

The legislative Joint Fiscal Office was quick to point out that Vermont imports tax dollars from many non-Vermonters who pay property taxes on their second homes here, and that non-Vermont corporations pay the state $22 million a year in captive insurance premiums. But even with such adjustments it's hard to see how Vermont could escape being at least one of the top three in the nation in tax burden.

Liberal critics of the report were quick to point out having the highest tax burden in the nation leaves open the question of the distribution of that burden among Vermonters. They argue that Vermont's tax system is very progressive, a point made with much fanfare by Gov. Madeleine Kunin 20 years go.

And they are quite right. The lower income population in Vermont pays almost no income tax, not much property tax on their apartments, and not much sales tax, since food is exempt. If they avoid buying liquor and tobacco, don't eat out much, and don't own a vehicle, they are living as close to tax free as is possible in a modern society.

The Left thinks this is a very good thing. They like it that nearly 70% of Vermont households pay around two percent of their household income instead of a larger education property tax based on their residential property's fair market value. For those households the Act 60 residential property tax increases have little effect.

The Left especially likes it that the top five percent of Vermont income tax payers pay around 50% of all income tax collections. And of course, they love it that the couple hundred thousand Vermonters who pay almost nothing in taxes consume lots of free (to them) tax-financed benefits. Politically, these minimal taxpayers can't be mobilized to vote against tax rate increases, because they pay so little of any increase, and they can easily be persuaded to vote for politicians who promise to use the increased tax proceeds to distribute more benefits.

From the standpoint of Vermont's future economy, this is a pernicious situation.

Compare Vermont and New Hampshire. Vermont's per capita income (estimated for 2007) is $38,306. New Hampshire's per capita income is $43,745, 14% higher. The same Tax Foundation, in an October 2006 report, found Vermont to have the 46th best business tax climate in the nation. New Hampshire's was 7th best.

And now, for both 2006 and 2007, Vermont's tax burden is Number One in the nation. For both years New Hampshire comes in 49th.

So why would a rational business decision maker choose Vermont over New Hampshire (or Tennessee or Delaware)? Does Vermont have enough of an edge in environmental quality, educational quality, personal security, beautiful views, recreation, small town amenities and personal security to win such a competition? Almost certainly not, and when it comes to business opportunity, regulatory cost and risk, transportation and telecommunications, and mandates and taxes, New Hampshire is a clear winner.

Add to that the perception that Vermont's current legislature is obsessed not with increasing economic opportunity, but with taxing, regulating, mandating, and redistributing, all with an eye to making "the Rich and the Big Corporations" pay for a cornucopia of benefits for a large fraction of the state's population that is living close to tax free, and our state is in serious competitive trouble.

When the Left tries to blow all this off as right wing ranting, just remember this: if Vermont had the U.S. average per capita income, an average Vermont family of four would have $8000 more in pre-tax income. That would still be $13,588 less than the average New Hampshire family. That's the extra cost of our increasingly unaffordable high-tax-burden welfare state.

John McClaughry is President of the Ethan Allen Institute