In Fiscal Year (FY) 2016, Vermont collected $3.7 billion in state and local taxes—or $5,947 for every man, woman, and child. While this is an impressive sum of money, it tells us little about whether or not the average Vermont taxpayer can afford this level of taxation?
To better answer this question, this analysis will calculate Vermont’s tax burden relative to the private sector. Ultimately, it is the private sector that creates new wealth and income. A high tax burden means a state is hobbling its private sector relative to other states and reducing their long-run economic growth potential.
Unfortunately for taxpayers, as shown in Chart 1, Vermont’s state and local tax burden (tax collections divided by private sector personal income) was the fifth highest in the nation for FY 2016 at 18 percent—or 27 percent above the national average of 14.3 percent.
As shown in Chart 2, Vermont’s tax burden has increased over time by 63 percent to 18 percent in FY 2016 from 11.1 percent in FY 1950.
To put Vermont’s tax burden into perspective, let’s compare it to size of major industries in the state (as a percent of private sector income). As shown in Chart 3, Vermont’s 18 percent tax burden is greater than these combined industries: healthcare and social assistance (14.9 percent), utilities (1.9 percent), and real estate and rental and leasing (1.2 percent).
One cannot talk about Vermont’s high tax burden without mentioning property taxes. Vermont has the highest state and local property tax burden in the country. In large part because Vermont relies so heavily on the property tax. In fact, state and local property tax collections make up 44 percent of all tax collections—the 4th highest percentage in the country.
Vermont’s property tax system is also unique in that it now mostly resides at the state level. In FY 2016, the state property tax raised 64 percent of the total ($1.1 billion at the state level vs. $588 million at the local level). This is due to Act 60 (Equal Educational Opportunity Act of 1997 (pdf)) which mandated a uniform state-wide property tax in order to “equalize” access to education.
So far Act 60 has certainly resulted in a tax shift to the state from local government, but whether it has resulted in an overall higher and/or lower property tax burden (all else being equal) needs more study. Does anyone know of a good study on this question? If so, please leave a comment below.
On the other hand, Vermont compensates for a high property tax burden with a low sales tax burden of 1.9 percent—the 8th lowest in the country (4th lowest if you exclude the 4 states with no sales tax). However, this may not all be by choice. Rather, it may be a rational response to the fact that neighboring New Hampshire is one of those states without a sales tax.
This dynamic has created a situation where Vermont taxpayers can arbitrage the sales tax differential in their favor through cross-border shopping in New Hampshire. In fact, Dr. Art Woolf found in a recent study on Vermonters cross-border shopping that (pdf):
If the level of retail sales per person had remained identical in the two border areas, which it was in the years before Vermont implemented its sales tax, Vermont’s border communities would have had $540 million more in retail sales in 2007 and 3,000 more retail jobs. This would have contributed to healthier, more vibrant, communities and downtowns.
As such, Vermont’s low sales tax burden may not be solely due to a statutorily limited sales tax, but rather that a significant portion of taxable sales has already shifted across the border into New Hampshire. Of course, it is a chicken-and-egg problem. Perhaps Vermont’s sales tax is statutorily limited because policymakers know that it will drive more taxable sales into New Hampshire—so why bother making the tax bigger.
Whichever the case, taxes matter!
Of course, the tax burdens for local government can vary just as much as they do among the 50 states. As such, we have also calculated the local government tax burden for every county in Vermont—this includes every taxing jurisdiction within the geographic county borders whether it is a city, a special district, or county government itself.
Vermont only has 14 counties and are listed below from highest to lowest local government tax burden:
Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 66 years! See if your state has been above or below the national average?
Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.