3. VERMONT’S REVENUE SOURCES, HISTORY AND COMPARATIVES

 

3.1. THE GENERAL FUND

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As the pie charts above indicate, the largest revenue components of Vermont’s General Fund are: personal income, sales & use, rooms & meals, and corporate income taxes.

The sales tax and rooms & meals tax show the greatest revenue growth over this 20-year period. Excise taxes are the slowest growth areas. Since FY85, corporate income tax revenues and, to a lesser extent, personal income tax revenues trailed the overall growth rates of the General Fund. [ See Appendix 3, Tables 5 and 6.]

The General Fund revenue increase was due to tax rate changes, inflation and economic growth. From FY75 to FY95, the largest increases were the 3% to 5% sales tax rate increase, and the 5% to 7% increase in the rooms & meals tax. The on-premises liquor tax rose from 5% to 10%. [ Rooms & meals taxes were at their highest rate during this 20-year period at 8-8-10%. Prior to the imposition of the 10% (on premises) liquor tax, liquor was taxed at the rooms & meals tax rate.]

As the table below indicates, General Fund growth was greatest from FY80 to FY85. Since FY85, the rate of growth has slowed. The periods from FY75 to FY80 and FY90to FY95 represent those periods of slowest real growth (net of inflation). [ See Appendix 3, Tables 5 and 6. Real growth, adjusted for inflation, is the growth in revenues above the amount which can be attributed to inflation increases alone.]

General Fund

Annual Growth Rate

Inflation Adjusted Annual Growth Rate

FY75-FY95

7.7%

2.3%

FY75-FY80

8.0%

-0.8%

FY80-FY85

11.5%

5.7%

FY85-FY90

8.4%

4.3%

FY90-FY95

3.2%

0.0%

Source: State of Vermont Comprehensive Annual Financial Reports. Inflation adjustment uses U.S. CPI. [ See Appendix 3, Tables 5 and 6.]

 

3.2. INCOME TAX

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HISTORY

Personal income taxes as a percentage of the total General Fund have remained relatively constant, representing 37.1% in FY75 and 37.9% in FY95. [ See Appendix 3, Table 12.] Income tax revenue growth rates were highest during the FY80's. As the chart below indicates, between FY90 and FY95, both years with a 25% Vermont tax rate, revenues dramatically declined net of inflation. [ As stated earlier, FY95 is comparatively free from the income tax tiers which ended in calendar year 1993. Some refund activity, however, may have depressed FY95 income tax revenues, resulting in slightly higher actual growth.]


Income Tax Revenue

General Fund

Annual Growth Rate

Inflation Adjusted Annual Growth Rate

Inflation Adjusted Annual Growth Rate

FY75-FY95

7.9%

2.4%

2.3%

FY75-FY80

8.6%

-0.3%

-0.8%

FY80-FY85

11.8%

6.0%

5.7%

FY85-FY90

11.6%

7.3%

4.3%

FY90-FY95

0.0%

-3.1%

0.0%

Source: State of Vermont Comprehensive Annual Financial Reports. Inflation adjustment uses U.S. CPI. [ See Appendix 3, Tables 5 and 6.]

The income tax revenue decline in the FY90's was a major factor in Vermont’s General Fund weakness during this period because income tax revenues make up roughly 40% of the total General Fund. [ The Vermont income tax rate went from 25% to 28% (31% and 34% for highest-income brackets) for tax years 1991-1993. The change had a negligible impact on FY91 because it was passed into law on May 1, 1991, and few companies changed their withholding practices before July 1, 1991 - the beginning of FY92. ]

NATIONAL COMPARISON

Vermont’s FY95 state income tax revenue per capita ranked 31st nationally. [ See Appendix 4, Table 3.]

As compared to other states, Vermont’s income tax is characterized by a high marginal rate, yet a relatively low effective rate. Vermont is one of three states - North Dakota and Rhode Island are the others - that base their taxes on a percent of federal tax liability. [ North Dakota allows taxpayers the choice of paying 14% of federal tax liability or calculating their tax based on North Dakota ’s independent tax law.] Overall, Vermont’s income tax per capita is lower than national averages and lower than most of the comparison states. These characteristics are discussed below, and more completely in Volume II of this study.

The Marginal Rate

The marginal tax rate is the highest rate that an individual would pay on an additional dollar of earnings. In Vermont, the top marginal rate of 9.9% applies only to taxable income above $263,750 for tax year 1996. [ The federal tax rate is indexed to inflation so that, for 1996, $263,750 is the level at which the maximum rate applies. Vermont ’s tax is 25% of federal liability. The top federal rate is 39.6%. Hence Vermont ’s top marginal rate is 39.6% x 25% = 9.9%. It is important to note that the marginal rate applies to taxable income rather than gross income. A taxpayer would have to earn considerably more than $263,750 before paying taxes at this marginal rate of 9.9%. ] The marginal rate is 9% for single taxpayers earning between $121,300 and $263,750 and married taxpayers earning between $147,700 and $263,750.

As of July 1, 1996, Vermont’s top marginal rate ranked fifth nationally, following Montana, 11%; Rhode Island, 10.69%; Hawaii, 10%; and Iowa, 9.98%. [ This ranking overstates Vermont and Rhode Island ’s actual top marginal rate. Because Vermont and Rhode Island are coupled with federal tax liability and do not adjust for state tax deductions on federal taxes, in essence these states allow deduction of state taxes against state tax liability. This is not common among states. All comparisons of state marginal rates carry some overstatement of marginal impact. Since state taxes are generally deductible against federal taxes, the marginal impact of additional state tax liability is reduced by federal tax liability. See Appendix 5, Table 3. Source: Based on data from the Federal Tax Administrators at Internet Site: http//sso.org/fta/tax_stru.html.]

Vermont’s high marginal rate affects very few taxpayers; less than one-half of 1% of Vermont’s 1995 taxpayers are taxed on any income at the highest marginal rate. However, Vermont received roughly 15% of its income tax revenues from these taxpayers in FY95. [ The Vermont Tax Department ’s estimates indicate that about 800 taxpayers fall into this category.] Other states’ top marginal rates generally start at much lower income levels. This means that they apply to more taxpayers. For example, Iowa’s 9.98% marginal rate applies to income over $48,645. Hawaii’s top marginal rate of 10.0% applies to income over $20,500.

The Effective Rate

The limitations of using marginal rate comparisons are evident by comparing effective rates, or actual taxes paid, at particular levels of income. The most recent national comparison of state income tax rankings, by income level, is a 1994 tax year study done by the Tax Research Division of the Minnesota Department of Revenue. This study indicates Vermont’s rankings on the chart below.

Vermont Individual Income Tax and Ranking by Tax Amount

1994 Income Tax Data

Selected Income Categories

Single Filers

Married One Wage Earner

Married Two Wage Earners

Head of

Household


Tax Rank

Tax Rank

Tax Rank

Tax Rank

$7,500

$19

35

($565)

42

($565)

42

($565)

42

$10,000

$142

29

($632)

42

($632)

42

($632)

42

$15,000

$329

30

($454)

42

($454)

42

($377)

42

$20,000

$494

34

($88)

42

($88)

42

$32

40

$25,000

$640

34

$321

35

$321

34

$441

35

$35,000

$1,102

38

$657

35

$657

34

$749

36

$50,000

$1,821

32

$1,096

37

$1,096

37

$1,226

38

$75,000

$3,193

30

$2,176

36

$2,176

36

$2,591

33

$100,000

$4,705

28

$3,541

33

$3,541

33

$3,956

32

$200,000

$11,622

20

$9,952

26

$9,952

25

$10,759

25

Rankings are from Highest Tax = #1 to Lowest Tax = #42

Source: Tax Research Division of the Minnesota tax study. [ "Comparison of 1994 Individual Tax Burdens by State ", State Tax Notes , June 29, 1996, Mary L. Schmitt, Tax Research Division of the Minnesota Department of Revenue.]

For all but the single filers earning more than $200,000, Vermont ranks 25th or lower among state tax liabilities. For married taxpayers or heads of households earning $100,000, Vermont ranked 33rd and 32nd respectively among states. The results of the Minnesota study mirror the FY95 analysis in Volume II, in which hypothetical tax returns are calculated for taxpayers in Vermont and the 11 comparison states.

The difference in marginal rates, where Vermont ranks high, and actual tax liabilities, where Vermont ranks relatively low, is due to a number of factors:

12-STATE COMPARISON

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Major Source: US Census Bureau. Local information from State Dept.’s of Revenue. See Appendix 6, Tables 1-3 for additional information. (Includes taxes on income from intangibles if applicable.)

Among the 12 comparison states in FY95, Vermont ranked ninth in terms of state personal income tax revenue as a percent of total state and local taxes. The only states with lower dependence on personal income tax revenues were New Hampshire, which has an income tax only on dividend and interest income, and Florida and Washington,which have no personal income tax. [ See Appendix 6, Table 3.]

Among the 12 states, Vermont ranked ninth in terms of state personal income tax revenue per $1,000 of personal income, and on a per capita basis. [ See Appendix 6, Tables 4, 7, 10 and 13.]

Oregon ranked first in revenue per $1,000 of personal income, and New York ranked first in income tax revenue per capita. [ See Appendix 6, Tables 4, 7, 10 and 13. ] Both of these states have local income taxes in selected cities in addition to a statewide income tax. [ New York ’s local income tax is approximately equal to 20% of total state income tax revenues. See Appendix 6, Table 19.]

ISSUES OF STABILITY, PREDICTABILITY AND PERFORMANCE

Federal and state tax law changes impacting the personal income tax have made revenue projection difficult for the Vermont tax system over the past few years. In FY95, the decline in personal income tax revenues from projections led to a serious budget dilemma. For FY95, the personal income tax revenues fell 10.4% from projections, resulting in a further estimate revision for FY96. [ Vermont Legislative Joint Fiscal Office and Administration revenue estimates.]

There are a number of factors that affect the stability and predictability of the income tax. Four of these factors are: tax law changes, the impact of economic cycles, bracket indexing and the progressiveness of the tax.

First, Vermont’s income tax revenues are affected by both federal and state changes to the tax code. In the 1990's alone, five major revisions (two federal and three state) affected Vermont’s income taxes. These tax law revisions made revenue estimation difficult.

Second, as we have seen in recent years, Vermont’s income tax is extremely sensitive to economic conditions and cycles. We are just now seeing a recovery from the impact of the early 1990's recession.

Third, federal tax bracket indexing began in the mid 1980's. Tax indexing to national inflation means that income tax brackets are adjusted for national inflation. [ See Appendix 3, Table 4.] WhenVermont’s inflation differs from national rates, the impact of the indexed brackets can affect revenues. In years in which Vermont’s inflation rate is lower than the national inflation rate, Vermont may lose revenue growth due to rising brackets.

As discussed above, Vermont’s personal income tax, coupled to the federal income tax liability, is highly progressive. For income taxes collected on 1995 income, roughly 35% of the state’s income tax revenue came from the top 3.3% of taxpayers with adjusted gross incomes exceeding $100,000. About 7% of the taxpayers, with adjusted gross incomes exceeding $75,000, accounted for 46% of Vermont’s income tax revenues. [ 1995 personal income tax data, Vermont Tax Department.] At the lower end of the income tax-paying spectrum, Vermont has its own earned income tax credit, which, when coupled with federal deductions, further reduces income tax liability.

A progressive income tax structure means that more tax revenues are drawn from higher-income taxpayers. These taxpayers tend to engage in a greater degree of tax planning and income shifting based on federal tax consequences. For this reason, progressive tax systems are more susceptible to these higher income taxpayers’ actions than a less progressive tax system. [ "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, " Citizens for Tax Justice & the Institute on Taxation & Economic Policy, June 1996, indicated that Vermont was one of the six states with "Quite Progressive Personal Income Taxes. " Vermont ranked fourth after California, New Mexico, and Rhode Island, and before Idaho and Maine.]

Also, the Vermont income tax base is characterized by a higher percentage of non-wage income than the U.S. average. This, coupled with the progressiveness of Vermont’s income tax, makes revenue from the income tax more dependent on less-stable non-wage and capital gains income. Further research is warranted to fully understand the impact of progressiveness on the stability of income tax revenues. [ In addition, the nature of the economic recovery, replacing higher wage jobs with lower wage jobs, may have a slightly larger negative revenue impact on states with progressive tax systems. ]

Actual determination of the relative importance of these factors to stability, predictability and performance will require research beyond this study. If the Legislature decides to do a follow-up study, this is an area where further analysis may be indicated.

 

3.3. SALES TAX/ROOMS & MEALS TAX

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HISTORY

Sales tax and rooms & meals tax revenues are a larger portion of the General Fund today then they were 20 years ago. Sales tax revenue grew from 17.9% of the General Fund in FY75 to 26.3% in FY95. Rooms & meals taxes grew from 5.1% to 8.9% over the same 20-year period. [ See Appendix 3, Table 12.]

That growth was largely due to rate increases, sales growth, and inflation. During the twenty-year period, sales tax rates went from 3% to 5% and rooms & meals tax rates went from 5% to as high as 8% before returning to 7% in FY95. In addition, for FY90, the liquor portion of the rooms & meals tax was separated out and instituted at 10%. [ See Appendix 3, Tables 1 and 2.]

Revenue per percentage point has also increased during this period. Tax revenue from each penny of the sales tax grew from $8.8 million in FY75 to $34.7 million in FY95. After inflation, the per-penny annual growth rate was 1.6% for FY75 to FY95. [ See Appendix 3, Tables 9 and 11.]

Fiscal Year

Sales and Rooms & Meals

General Fund

Unadjusted Annual Growth Rate

Inflation Adjusted Annual Growth Rate

Inflation Adjusted Annual Growth Rate

Sales

Rooms & Meals

Sales

Rooms & Meals


1975 -1995

9.9%

10.8%

4.3%

5.2%

2.3%

1975 -1980

9.0%

12.5%

0.1%

3.3%

-0.8%

1980 -1985

16.6%

15.6%

10.5%

9.7%

5.7%

1985 -1990

9.1%

11.0%

4.9%

6.7%

4.3%

1990 -1995

5.0%

4.4%

1.8%

1.2%

0.0%

Source: State of Vermont Comprehensive Annual Financial Reports. Inflation adjustment uses U.S. CPI. [ See Appendix 3, Tables 5 and 6.]

As illustrated above, without adjusting for rate changes, the growth rate of Vermont’s sales tax and rooms & meals tax revenues exceeded the growth rate of the General Fund from FY75 to FY95. As with income taxes and the General Fund as a whole, the most rapid growth occurred from FY80 to FY85.

At present, the sales tax rate is scheduled to revert to 4% at the end of FY97.

NATIONAL COMPARISON

The census data used to provide information on the relative burden of Vermont’s sales tax per capita, and as a percentage of personal income includes sales taxes, rooms & meals taxes and purchase & use taxes. It indicates that when these three Vermont taxes are combined, Vermont’s relative burden or rank is as follows:

Vermont’s rankings (32nd and 36th), after including all these taxes, are due to several factors.

As this analysis does not examine the exportability of taxes, it may overstate the relative tax burden on Vermonters. Tourism, a major component of Vermont’s economy, causes a share of this "burden" to be paid by out-of-staters. Any further study should explore the exportability of all Vermont taxes.

12-STATE COMPARISON

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Major Source: US Census Bureau. Local information from State Dept.’s of Revenue. See Appendix 6, Tables 1-3 for additional information.

Of the 12 comparison states, 10 have state sales taxes. Vermont’s tax rate ranks sixth among these 10 states. [ See Appendix 6, Table 17.] In addition, six of these 10 states also have local general sales taxes. [ Six states have additional local general state taxes. Other states have additional local selective sales tax revenues which are not included in this report.] When local sales taxes are included, Vermont’s tax burden, on a per capita basis, ranked ninth. [ See Appendix 6, Table 16.]

Vermont ranks ninth for total state and local sales tax revenues per $1,000 of personal income, similar to the tax burden per capita. [ Washington state reported FY95 sales tax revenue of $6 billion, of which $1.6 billion is the business and occupations tax. Even if these corporate tax dollars were subtracted from Washington state ’s sales tax, it would still be first among the comparison states in sales tax per capita. ]

ISSUES OF STABILITY, PREDICTABILITY AND PERFORMANCE

Continued sales and rooms & meals tax growth may be impacted by a number of factors.

As the Legislature considers the future of the sales tax, understanding the impact of the factors above is important. We would urge that such analysis be included in the event the Legislature undertakes further research.

 

3.4. CORPORATE INCOME TAX

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HISTORY

Corporate income taxes in FY95 represent roughly the same portion of total taxes as they did in FY75 . Their share of the General Fund has gone from 6.7% to 6.9%. [ See Appendix 3, Table 12.] However, this understates the instability of corporate tax revenues. Growth has varied dramatically from FY75 to FY95. As the chart above indicates, corporate income tax revenues represented 9% of the total General Fund in FY85.

Corporate tax revenues are extremely sensitive to economic conditions, as the data below indicate. This is due, in part, to corporate tax revenue being extremely concentrated. Of the roughly 25,000 corporate taxpayers, the top 1% of these taxpayers account for 37% of corporate tax revenues. [ Vermont Tax Department estimate.] The top 3% of taxpayers (75 corporations) account for 50% of the total revenues. In addition, 8,800, or 35% of the corporate taxpayers, pay the minimum corporate tax of $150. [ Vermont Tax Department data.]


Corporate Income Tax

General Fund

Fiscal Year Period

Unadjusted Annual Growth Rate

Inflation-Adjusted Annual Growth Rate

Inflation-Adjusted Growth Rate

1975 - 1995

7.9%

2.4%

2.3%

1975 -1980

17.7%

8.1%

-0.8%

1980 -1985

8.5%

2.9%

5.7%

1985 -1990*

-5.3%

-9.0%

4.3%

1990 - 1995

12.0%

8.6%

0.0%

Source: Vermont Comprehensive Annual Financial Reports. Inflation adjustment uses U.S. [ Appendix 3, Tables 5 and 6.]

* [Vermont's corporate income tax rates experienced two rate changes in the period from 1984 to 1988. In 1984, the corporate income tax rates were increased from 5% -7.5% to 6% - 9%. In 1988, the rate was lowered from 6% - 9% to 5.5% - 8.25%. ]

NATIONAL COMPARISON

Vermont has a top corporate tax rate of 8.25% that applies to income over $250,000. For these taxpayers, Vermont ranks 17th overall in statutory corporate income tax rates as of 1996. [ Compiled by Federal Tax Administrators from various sources, 1996 tax rates as of 7/1/96; see Appendix 5, Table 4. ] All but 13 states have flat corporate income tax rates. Of the states using the progressive rates, six apply the top marginal rate at $200,000 or more. [ All of these six states but Louisiana ($200,000) and New Mexico ($1 million) apply their top marginal rate to incomes at $250,000. ]

The rate analysis fails to take into account differing definitions of income and varying deductions, exclusions and credits. Furthermore, rate and burden analyses both failed to take into account fees and taxes paid by businesses. Corporate income tax isestimated to represent only one-tenth of state and local taxes paid by businesses. [ "State Business Tax Climate: How Should it be Measured and How Important is it? ", by Robert Tannenwald. New England Economic Review , Federal Reserve Bank of Boston, Jan./Feb. 1996. p. 25.] Among the taxes and fees not included are taxes on net worth, property and payroll.

Vermont’s FY95 per capita corporate income tax revenue ranking was 28th nationally at $83. The national average per capita was $112. [ State corporate income tax as reported by the U.S. Bureau of Census. Vermont data includes corporate income tax and bank franchise taxes, FY95. See Appendix 4, Table 3.]

A full comparison of relative corporate taxation would require further research. We do, however, examine a larger selection of taxes in the business tax analysis in Volume II of this study.

12-STATE COMPARISON

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Major Source: US Census Bureau. Local information from State Dept.’s of Revenue. See Appendix 6, Tables 1-3 for additional source information. Data does not include WA’s business and occupational tax.

Vermont ranks ninth in corporate income taxes as a percent of total state and local tax revenues, exceeding Washington, Maine and Florida. New Hampshire relies most heavily on corporate revenues followed by Massachusetts. [ See Appendix 6, Table 3. ]

Among the 12 comparison states, Vermont ranks ninth for corporate income tax per capita and per $1,000 of personal income. Washington, Maine and Florida are belowVermont in the rankings. [ Includes state taxes, local property, local sales and local income taxes. See Appendix 6, Tables 4, 8, 10 and 14.]

Washington’s ranking does not reflect $1.6 billion in business and occupation tax revenue, which is generated from a corporate gross income and assets tax. This tax is Washington’s second largest source of state revenue [ Washington state reported FY95 sales tax revenue of $6 billion, of which $1.6 billion is the business and occupations tax. Even if these corporate tax dollars were subtracted from Washington state ’s sales tax, it would still be first among the comparison states in sales tax per capita. ] and is reported as sales tax revenue to the U.S. Census Bureau.

Of the 12 states, Vermont and Maine are the only ones to have a graduated corporate income tax.

ISSUES OF STABILITY, PREDICTABILITY, AND PERFORMANCE

As stated above, a small portion of the corporate taxpayers produce the bulk of the corporate tax revenue. This makes the tax subject to swings in conditions of the economy, tax planning, and the particular actions of major Vermont corporate taxpayers.

Corporate tax policy and taxation is an evolving area. Its applicability to different taxpayers changes continually. Last year the Legislature created a new corporate entity/category called Limited Liability Corporations, whose income is passed through to members. As part of this change, both LLC’s and partnerships will pay the $150 minimum tax. The financial balance of this change is still unknown. [ The Joint Fiscal Office will provide a separate report on Limited Liability Corporations in December, 1996.]

In the 1997-1998 legislative biennium, several issues may emerge:

This study does not cover the use, effectiveness, and cost of corporate tax credits and tax incentives. It also does not explore the state’s relationship to the Multi-State TaxCommission, a growing force in state tax policy. These are areas that should be reviewed in the event of further study.

 

3.5. EXCISE TAXES (ALCOHOLIC BEVERAGE & TOBACCO TAXES)

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HISTORY

Excise taxes declined as a portion of the General Fund, shrinking from 13.9% of total state revenues in FY75 to 4.1% in FY95. [ See Appendix 3, Table 12.] Excise tax revenues have been essentially flat with 1.4% overall growth, before adjusting for inflation, from FY75 to FY95. After adjusting for inflation, excise tax revenues declined at an average annual rate of -3.7% over this same 20-year period. [ See Appendix 3, Tables 5 & 6.] While cigarette tax rates increased in July 1995, this increase did not affect the General Fund. The additional revenues, for health care funding, are placed in the Health Care Access Fund, a Special Fund.

There is little anticipation that we will see additional growth in excise tax revenues in the future because sales trends show no likely upsurge.

NATIONAL AND 12-STATE COMPARISONS

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Major Source: US Census Bureau. Local information from State Dept.’s of Revenue. See Appendix 6, Tables 1-3 for additional source information (includes alcohol, cigarette and tobacco taxes.)

Among the comparison states, excise tax revenues represent 1.84% of total state and local revenue. [ Including local property, income and sales taxes.] In Vermont they represent 1.96%. [ See Appendix 6, Table 3. This does not include the cigarette tax which is being used to finance health care services in Vermont. With this added revenue, Vermont ’s reliance on excise taxes would rise to about 3.5%. ] Vermont is roughly average for the 12 states.

Vermont’s relative burden among all 50 states is as follows:

Alcoholic Beverage Tax Collections Per Capita (FY95): [ See Appendix 4, Table 3.]

50 State Avg = $14VT= $23VT Rank = 8

Cigarette & Tobacco Collections Per Capita (FY95): [ See Appendix 4, Table 3.]

50 State Avg. = $27VT= $25VT Rank = 28

As of July 1996, Vermont’s excise tax rates are close to or above national averages.

Comparative Excise Tax Rates, July 1996 Data [ See Appendix 5, Table 8.]

50 State Median RateVermont RateRank
Wine Excise $0.73/gallon $0.55/gallon 27
Beer Excise $0.19/gallon $0.27/gallon 15
Cigarette Excise$0.315/pack $0.44/pack 11
 

3.6. OTHER TAXES AND REVENUES

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HISTORY

Other taxes and "other revenue" (including property transfer taxes) declined as a percent of the General Fund during the 20-year period. In FY75, combined, they represented 19.3% of the General Fund. By FY95, they represented 15.8% of the General Fund. [ See Appendix 3, Table 12.]

Virtually all the growth that did occur in "other revenue" is due to the advent of Vermont’s lottery. The lottery was not a contributing factor in FY75. In FY95, the Vermont General Fund received $21.2 million in lottery proceeds. [ Final reporting for FY95 indicated $20.6 million in lottery proceeds. An additional $500,000 was credited the first day of the next fiscal year, accounting for the difference in amounts reported. ] Lottery proceeds have leveled off since FY95. FY97 projections for lottery revenues are $22.1 million, representing a much lower rate of growth than in previous years.

Insurance tax revenue is the major component of "other taxes," and grew from $3.59 million in FY75 to $26.7 million in FY95. Much of this revenue growth was due to the increasing impact of the captive insurance industry in Vermont.

Captive insurance companies are companies that primarily insure the risks of a single "owner" or risk retention group. They are licensed in only one state and operate under the captive insurance laws of that domicile. Off-shore jurisdictions, such as Bermuda and Grand Cayman, B.W.I, have long been the domiciles of choice for captive companies seeking to escape regulations in the US.

In 1981, Vermont’s regulations and taxation changed to attract more captive insurance companies on-shore. Since then, the captive industry has boomed in Vermont. Premium taxes collected grew from $231,000 in FY85 to $8.2 million in FY95. With more than 270 active captives now registered, Vermont has more captive insurers than all other US domiciles combined. [ Vermont ’s Captive Insurance Association ’s Internet Site http://www.captive.com/assoc/ vcia/vcia_vitals.html. As of 11/5/96. ]

As in the case with the lottery, the continuation of this growth trend in insurance is not assured. Vermont must now compete with other states, such as Hawaii and Colorado, which have changed their laws to attract more captive insurance companies. Total insurance revenue projections for FY97 are $26.5 million, essentially flat from FY95.

Property transfer taxes are taxes paid to the state when property is sold, based on the sale price and imposed on the seller. The property transfer tax totaled $13.32 million in FY95. [ This amount represents net deposits in the General Fund after statutory Special Fund expenditures.] As a portion of the General Fund, it grew from 1% in FY75 to 2% in FY95. [ See Appendix 3, Table 12.] property transfer taxes are tiered and tied to the increasing prices of property. They are also sensitive to and fluctuate with interest rates and economic conditions.

Estate tax revenues have been and will continue to be relatively unpredictable. In three of the past four fiscal years (including FY95), single large estate tax payments have added to expected revenues, boosting estate tax collections. The 20-year period of this study shows estate tax revenues growing at a rate consistent with that of the General Fund, from $2.9 million in FY75 to $9.7 million in FY95. The expected revenues from this source should remain volatile and grow in the years ahead.

 

3.7. THE TRANSPORTATION FUND

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HISTORY

Vermont’s primary sources for transportation revenues are gasoline and diesel taxes, purchase & use taxes and motor vehicle fees. As the chart above indicates, these three major components have varied as proportions of the Transportation Fund over time, but steadily make up more than 95% of total fund revenues.

The Transportation Fund, as a whole, declined as a percentage of total state revenue from a high of 21.1% in FY75 to 16.3% in FY95. [ See Appendix 3, Table 10.] Part of this decline may be due to several of its revenue sources not being directly inflation-sensitive. Because Vermont’s gasoline tax is set at $0.16 per gallon, revenue growth is dependent on increased usage rather than inflation. [ This rate includes the $.01 for the Petroleum Cleanup Fund.] Gasoline tax revenues are also affected by increased fuel efficiency which reduces gallons bought. The underlying trend toward fuel efficiency may be accelerated by a higher percentage of newer, more fuel-efficient leased cars on the road.

Two-thirds of the Transportation Fund’s "total fees" component is made up of automobile registrations. Because registrations and fees are flat dollar amounts, they rise with the number of vehicles registered in the state.

Of the Transportation Fund’s three largest components, the purchase & use tax is mostdirectly inflation-sensitive, applying to the taxable cost of vehicles. [ The taxable cost is the purchase price minus trade-in credit.] All motor vehicles in the state are subject to a 5% tax at the time of registration. [ Applies to all pleasure vehicles (including motor homes) registered for $43. Large trucks and school buses are taxed by weight and capped at $750. Source: Title 32, Section 8903.] Because of this direct link to increasing motor vehicle prices, and therefore the impact of inflation, the purchase & use tax shows the most overall growth as a portion of the Transportation Fund. Between FY75 and FY95, purchase and use revenues grew from 13.9% to 28.6%, while percentages of gasoline and diesel taxes and total fees declined.

MAJOR TAXES

Motor Fuel Taxes

Gasoline and diesel taxes, as a percent of the total Transportation Fund, declined from 49.3% in FY75 to 36.8% in FY95. This represents an annual, inflation-adjusted growth rate of -0.3%, which is below that of the Transportation Fund. Due to continued improvements in fuel efficiency and to revenues being tied to gallons purchased rather than price, these taxes are likely to continue to decline as a portion of the Transportation Fund.


Gas & Diesel Taxes

Transportation Fund

Annual Growth Rate

Inflation Adjusted Annual Growth Rate

Inflation Adjusted Annual Growth Rate

FY75-FY95

5.0%

-0.3%

1.1%

FY75-FY85

5.6%

-1.5%

0.5%

FY85-FY95

4.4%

0.8%

1.7%

Source: State of Vermont Comprehensive Annual Financial Reports. Inflation adjustment uses U.S. CPI. [ See Appendix 3, Tables 7 and 8.]

Nationally, Vermont’s gasoline tax ranks lower than those in most states. According to FY94 data, Vermont ranked 32nd in motor fuel tax revenue per capita. [ Morgan Quitno, State Rankings 1996 , Lawrence Kansas. Vermont reported $102.9 in motor fuel excise taxes per capita. While the national per capita average of motor fuel excise taxes was $94.18, this figure does not include other state and local motor fuel tax collections. These influence the total motor fuel tax burden. For example, New York ’s $27.01 in motor fuel tax per capita includes only the revenues from its $0.08 per gallon excise tax rate. When other state and local taxes are included, however, New York ’s effective tax rate rises to more than $0.29 per gallon (as reported by the American Petroleum Institute).] A more recentanalysis by the American Petroleum Institute (API) of state-by-state motor fuel tax rates ranked Vermont 40th in state-only excise tax rates and 46th in total state and local fuel tax rates. [ Source: American Petroleum Institute, "A Summary of Nationwide & State-by-State Motor Fuel Taxes as of May 1996, " p.3. See Appendix 5, Table 1.]

Comparative analysis of fuel taxes is difficult. Like corporate taxes, there is no uniformity in reporting between states. According to the API study, New York, which reports a fuel excise tax of $0.08 per gallon, has an effective tax burden of more than $0.29 per gallon when all taxes are included. Vermont’s gasoline tax is reported by national published rankings as $0.15 or $0.16 depending on whether the extra penny for the Petroleum Clean-up Fund is included.

Among the comparison states, Vermont’s gasoline excise tax rate of $0.16 per gallon ranks 10th, exceeding only Florida and New York. When other state and local gasoline taxes are counted, Vermont’s rate of $0.16 per gallon ranks 12th of the 12 states. New York and Florida move to second and third respectively. In both comparisons, Connecticut ranks highest. [ See Appendix 6, Table 20.]

Motor Vehicle Fees

While motor vehicle fees declined as a percentage of the Transportation Fund (36.6% in FY75 to 29.8% in FY95), the number of fees increased dramatically. In FY75, nearly all of the motor vehicle fees paid in Vermont consisted of motor vehicle licenses and registrations (98.3%). By FY95, this decreased to 65.4%. Some of the growing fees that contributed to the other 34.6% include: registration plates, foreign cab car fees, title certificates, emissions fees, and motor boat registrations. These transportation fees may be an area for concentration in future studies. [ See Appendix 3, Table 16.]

Compared to other states, Vermont’s motor vehicle operator’s license costs are relatively high. Based on FY94 data, Vermont ranked sixth nationally for motor vehicle and operator’s license revenue per capita. Vermont’s total of $77.26 was above the national average of $49.93. [ Morgan Quitno, State Rankings 1996 , Lawrence Kansas .] Among the 12 comparison states in FY95, Vermont ranked third highest with a cost of $72.31 per capita, as compared to a 12-state average of $61.77. [ See Appendix 6, Table 4.]

Purchase & Use Tax

The purchase & use tax experienced the greatest overall growth of Transportation Fund revenue sources between FY75 and FY95. Surpassing the 1.1% growth rate of the Transportation Fund, the purchase and use tax averaged an annual, inflation-adjusted growth rate of 4.9%.


Purchase & Use Tax

Transportation Fund

Annual Growth Rate

Inflation Adjusted Annual Growth Rate

Inflation Adjusted Annual Growth Rate

FY75-FY95

10.5%

4.9%

1.1%

FY75-FY85

14.1%

6.5%

0.5%

FY85-FY95

7.0%

3.3%

1.7%

Source: State of Vermont Comprehensive Annual Financial Reports. Inflation adjustment uses U.S. CPI. [ See Appendix 3, Tables 7 and 8.]

As discussed earlier, this revenue increase is due to the inflation-sensitive nature of the tax as well as economic growth. In the future, the purchase & use tax should continue to increase and represent a growing percentage of the Transportation Fund.

Nationally, the U.S. Census Bureau reports Vermont’s purchase & use taxes as a portion of overall sales taxes. For this reason, we have no separate data with which to compare other states.

 

3.8. SPECIAL FUND REVENUES

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Special Fund revenues are received for particular purposes and do not flow directly into the General or Transportation Funds. [ Sometimes revenues do flow from Special Funds to the General or Transportation Funds, leading to some double counting in revenues.] Special Fund revenues include, among other sources, sales of services, fees, and interest and premiums on investments. Special Funds have been the fastest growing component of state revenues, with $13.9 million in revenues in FY75 growing to $135.7 million in FY95. As a percent of total state revenues, the Special Fund grew from 6.6% in FY75 to 14.2% in FY95. [ See Appendix 3, Table 10.]

The use of Special Funds and the growth of related Special Fund revenues is an area that this report does not fully explore. Similarly, time constraints, the lack of comparative information, and large differences in the use of such funds across states prevented us from doing comparative analyses with other states.

Some of the major growth areas in the Special Funds are:

 

3.9. PROPERTY TAX

Property tax is addressed briefly in this report. In accordance with Section 314 of Act 178 of 1996 (the "Appropriations Act"), our research and discussion focuses primarily on state tax revenues. However, because of its relevance to total tax burdens, we have included some of the key, comparative findings on property tax.

HISTORY

There are both state and local property taxes in Vermont. Combined, these taxes totaled $643.9 million in FY95. State property taxes include taxes on public utilities, such as railroads, and taxes from unorganized towns and gores. [ Revenues from state property taxes do not include the Vermont Yankee assessment. Source: Vermont Department of Finance and Management.] These state taxes, however, make up a small portion of total property taxes. The FY95 revenues from state property taxes ($9,635,000) represented 1.4% of both state and local property taxes combined. [ See Appendix 6, Table 2.]

The majority of property taxes are levied locally and their burden varies greatly from town to town. The Property Valuation and Review Division of the Vermont Tax Department reports $634.3 million in revenues from local taxes in FY95. Approximately two-thirds of this is collected for school taxes; the remaining one-third represents municipal taxes.

Between FY75 and FY95, local property tax collections increased at an average rate of 8.0% annually. Adjusted for inflation, the annual growth rate of 2.5% slightly exceeds that of the General Fund (2.3%). [ Inflation adjustment uses US CPI indexed to 1995. See Appendix 3, Tables 7 and 8.]

NATIONAL AND 12-STATE COMPARISON

As discussed earlier, Vermont relies more heavily on local taxes than most of the 12 comparison states. Forty-four percent of Vermont’s total tax revenues are collected at the local level. This exceeds the 12-state average of 39%. Only New Hampshire and New York rely more heavily on local taxes as a portion of their total tax collections. [ See Appendix 6, Table 21.]

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Major Source: US Census Bureau. Local information from State Dept.’s of Revenue. See Appendix 6, Tables 1-3 for additional source information.

Unlike some of the 12 comparison states, however, Vermont’s local taxes come primarily from property taxes. Other states, such as New York, use combinations of local taxes, including local sales, income and property taxes. Vermont is second only to New Hampshire in its reliance on state and local property tax revenue as a percentage of total state and local taxes. [ Includes state taxes, local property, local sales, and local income taxes. See Appendix 6, Table 3 .]

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Major Source: US Census Bureau and Bureau of Economic Analysis. See Appendix 6, Table 10 for additional information.

Among the 12 comparison states for FY95, Vermont has the highest ranking for state and local property tax revenue per $1,000 of personal income. When measured on a per capita basis, though, Vermont’s ranking drops to fourth. Connecticut, New York, and New Hampshire rank one through three respectively. This difference in Vermont’s rankings is due to the higher per capita incomes of the aforementioned states. It may also be due to the number of vacation-home properties owned in Vermont by residents of other states. [ See Appendix 4, Table 1 and Appendix 6, Tables 4 and 10.]

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Major Source: US Census Bureau. Local information from State Dept.’s of Revenue. See Appendix 6, Tables 1, 2, & 4 for additional information.

The most recent published national data for state and local property taxes per capita ranked Vermont seventh highest overall in FY92. New Hampshire ranked first, followedby New Jersey, Connecticut, New York, Alaska, and Wyoming. [ Morgan Quitno, State Rankings 1996 , Lawrence, Kansas .] Three of these states, Connecticut, New York and New Hampshire, are the same states which are ranked higher than Vermont in the 12-state comparison mentioned above.