This study was authorized by Section 314 of Act 178 of 1996 (the "Appropriations Act"). It was designed to provide a base of information to aid policy deliberations. Volume I of the report looks at historical trends in Vermont revenues and compares Vermonts tax rates and revenues to the 50 states, and more specifically, to 11 of the 15 comparison states chosen by the 1993 Vermont Business Roundtable study, Working Paper - A Critical Look at Vermonts Economy: Past, Present and Future. Volume II focuses on the actual taxes paid by 20 individuals and 10 businesses in each of the comparison states.
Below are key findings of Volume I:
- Vermonts state government financing sources have changed over the past twenty years (FY75 to FY95). As a portion of total state revenues, Vermonts General Fund declined from 71.2% in FY75 to 68.8% in FY95. The Transportation Fund declined from 21.1% to 16.3% in the same period. Special Funds experienced the most growth, from 6.6% of all revenues in FY75 to 14.2% in FY95. Total state revenues, not adjusted for inflation, grew from $208.6 million in FY75 to $958.4 million in FY95. This represents an inflation adjusted average annual growth rate of 2.4% for combined state funds.
- In FY95, Vermont ranked 32nd nationally in state tax collections per capita, 30th in state tax collections per $1,000 of personal income, and 29th in personal income per capita. Nationally, since FY75, Vermonts tax collections per capita have fallen relative to other states, while personal income per capita increased. Among the 12 comparison states, Vermont ranks seventh in per capita state and local taxes and sixth in state and local tax collections per $1,000 of personal income.
- The share of revenues from local taxes in Vermont is above the 12-state average share. Among the 12 states, the state and local share of tax revenues was 61% and 39% respectively in FY95. Vermonts ratio was 56% to 44%. Only New Hampshire and New York exceed Vermont in the size of the local share. Local property taxes as a percentage of all local taxes are higher in Vermont than in the 12 comparison states.
- General Fund revenue sources also changed over the 20-year study period. The greatest percentage growth as a portion of the General Fund has been in sales tax revenue (17.9% to 26.3%) and rooms & meals tax revenue (5.1% to 8.9%). In both cases, rate increases were a major part of revenue growth. Excise tax revenue (13.9% to 4.1%) declined the most.
- Income Tax: Vermonts FY95 income tax revenue per capita ranked 31st of the 41 states with a general income tax. Vermont is one of three states nationally that tie their income taxes to a percent of federal tax liability, giving Vermont a progressive income tax system with an effective tax burden that is relatively low for most taxpayers. The top 3.3% of Vermont taxpayers account for 35% of revenues. Among the comparison states, Vermont ranked ninth in personal income tax revenue as a percentage of total state and local revenue. Comparison states ranking lower than Vermont are New Hampshire (which taxes dividend and interest income only) and Florida and Washington (without income tax).
- Sales (Sales, Rooms & Meals and Purchase & Use) Taxes: Vermonts current 5% sales tax rate is equal to the national median rate of states with sales taxes. In FY95, Vermont ranked 32nd in state sales tax revenues per capita. [ National data includes rooms & meals and purchase & use revenue in this total.] When local sales taxes are included, FY93 data indicate that Vermont ranked 36th. Among the 12 comparison states, Vermont ranked ninth in FY95 for state and local sales taxes per capita.
- Corporate Income Taxes: In FY95, Vermonts corporate income tax revenues per capita ranked 28th nationally. Among the 12 comparison states, Vermont ranked ninth in corporate income tax per capita. While corporate income tax represents the same share of the General Fund as it did twenty years ago, it is not a stable revenue source. This is due in part to the corporate tax being an economically sensitive tax; it is also due in part to Vermonts reliance on a few top corporate taxpayers for a large percentage of corporate income tax revenues. The top 1% of the taxpayers account for 37% of all corporate income tax revenue.
- Excise Taxes: Vermonts excise taxes on cigarettes and alcohol declined dramatically as a portion of General Fund revenues during the study period.
- Other Taxes and Revenues: Two key areas of growth in the General Fund have been in "other revenues" and "other taxes." This growth has primarily come from state lottery revenues (FY75, $0 and FY95, $21 million); and insurance taxes (FY75, $3.6 million and FY95, $26.7 million). Of this insurance revenue growth, $8 million came from captive insurance premium taxes alone. Since FY95, lottery revenues leveled off. Growth in revenues from insurance taxes has also leveled off since FY95.
- Transportation Fund Revenues: Transportation Fund revenues have declined as a percent of total state revenues. Of the three largest components of the Transportation Fund, the purchase & use tax is the most directly sensitive to inflation. Total fees depend on licenses and registrations, and gasoline tax revenues depend on gallons purchased. Nationally, in 1996, Vermont ranked 40th for fuel excise rates and 46th for total state and local fuel tax rates. Among the 12 comparison states, Vermont ranked 12th when all fuel tax rates were counted.
- Special Fund Revenues: Special Fund revenues have been the fastest growing of Vermonts state revenues. They have gone from $13.9 million in FY75 to $135.7 million in FY95.
- Property Tax: While this report does not cover local revenues, it includes some of the key comparative findings on the property tax because of its importance in Vermont. Of the $643 million in state and local property taxes collected in FY95, roughly two-thirds are from school taxes and the remaining one-third represent municipal taxes. [ The division of school and municipal taxes and rates of growth vary greatly from town to town.] Overall, local property taxes grew at an 8% annual rate, before adjusting for inflation, since FY75. This equals an inflation-adjusted rate of 2.5% which compares to the General Fund growth rate of 2.3%. Vermont ranks highest of the 12 comparison states in property tax revenue per $1,000 of personal income. Its per capita ranking is seventh nationally. The difference is due to the higher per capita incomes in other states.
During research for the report, a number of questions arose that exceeded the scope of this study. Questions about Vermonts revenue sources continually arise throughout the Legislative and Executive branches. Vermont is one of few states without a permanent tax research component in its Tax Department. We recommend that one be established. We also suggest that if the Legislature goes forward with additional research, it should establish clear direction as to tax system goals and objectives or provide for an oversight committee to set policy directions during the course of the study.