EXECUTIVE SUMMARY

 

This volume compares actual tax liability in Vermont with 11 comparison states for 20 representative individual taxpayers and 10 representative business taxpayers.

The scope of this study is limited to Vermont and 11 comparison states. We would like to expand our comparison to all states, however, even this small study involved the preparation of more than 250 detailed income tax returns. We examined not only the income tax, but also general sales and use taxes, selective sales taxes, gasoline taxes, and motor vehicle fees, licenses, and taxes.

In summary, Vermont ranks below average among the comparison states in overall tax liability for both individuals and businesses. An individual’s tax liability may be as high as 7th out of the 12 states, or as low as 12th. A businesses’ tax liability may be as high as 5th out of the 12 states, or as low as 11th.

The key findings of Volume II are summarized below:

Individuals

Corporations

 

INTRODUCTION

Volume II takes the taxes discussed in Volume I and applies them to simulated cases to determine the burden placed on Vermont taxpayers (individual and corporate) and compares that burden to identical taxpayers in 11 comparison states.

We selected the 11 comparison states and determined that we needed 20 individual cases and 10 corporate cases to cover the spectrum. We developed those cases with regard to income level, income type, family type, and age brackets and prepared the appropriate tax returns. We also included, as a part of the taxpayer burden, sales taxes, excise taxes, gasoline taxes, and motor vehicle license fees, and taxes.

For the purposes of the income tax portion of the study, we evaluated five different tax preparation software packages before selecting ATX Saber95. This software package includes a 1995 federal tax preparation package for personal and corporate tax returns and 1995 state tax preparation packages for most of the 42 states that have personal and/or corporate taxes. For the "other taxes" portion of the study, we used the Consumer Expenditure Survey, 1994, data for expenditures on such things as food, apparel, household goods, gasoline etc., which became the basis for the sales tax, excise tax, selective sales tax, and gasoline tax computations.

While this study focuses on "state" tax burden, it must be noted that, nationally, state taxes comprise approximately 60% of the total tax burden on individuals and corporations. [ See Volume I, Section 2] The remaining 40% is made up of property taxes, inventory and equipment taxes and, in some states, local income and/or sales taxes (plus other non-tax fees and revenues). While these "local" taxes make up a significant portion of a "total tax burden," they are beyond th e scope of this study and should be considered for inclusion in a more comprehensive future study.

For Volume II of this study we used the following approaches:

First: We used a sample of 11 comparison states as discussed in Volume I. [ See Volume I, Section 1]

Connecticut Florida Massachusetts
Maine Minnesota North Carolina
New HampshireNew York Oregon
Wisconsin Washington

It should be noted that these states were selected through a consensus process and that each state on the list is also a state that was selected for study by the Vermont Business Roundtable using the factor analysis method. [ Vermont Business Roundtable, A Critical Look at Vermont’s Economy: Past, Present, and Future , November, 1993]

Second: For the 20 individual cases, we analyzed the summary data [ Vermont Tax Statistics, Summary of 1994, Vermont Department of Taxes] on individual income tax returns filed by Vermonters to ensure that we cover a wide range of income types, sizes, and income compositions that actually occur in Vermont. Also, the analysis of Vermont returns helped us to decide how many sample cases we needed to cover the spectrum. For the 10 corporate cases, we analyzed information from the Vermont Departmen t of Taxes, the Vermont Business Roundtable, and the Vermont Department of Employment and Training to determine the types of businesses that exist in Vermont.

Third: We created sample case profiles for each of the 20 individual cases. In choosing income levels we tied the lowest income levels to the federal poverty level. For the other income levels we used Vermont 1994 averages for those income groups. For the corporations, we analyzed IRS corporate filing information [ Statistics of Income Bulletin, Spring, 1996] and developed the 10 corporate cases.

Fourth: We sent the individual and corporate case profiles to a group of experts and interested parties for review and comment. The final case profile selections reflect the incorporation of their advice.

Fifth: We prepared the individual and corporate tax returns to determine the federal and state tax liabilities. We then added the tax liabilities for sales taxes, excise taxes, selective sales taxes, gasoline taxes and motor vehicle taxes/licenses to complete our "total burden" computations. Analysis and comparative rankings appear in the sections that follow.

OVERVIEW OF STUDY ORGANIZATION

Section One of this volume examines the tax liability on representative individual taxpayers resulting from all taxes included in the case studies. These taxes are: personal income taxes, general sales & use taxes, selective sales taxes, e.g., rooms & meals taxes, gasoline taxes, motor vehicle fees, and taxes.

Section Two explores the tax liability on the individual taxpayers resulting from just the personal income tax. Included in this analysis is the impact on federal tax liability and the interaction between federal and state income taxes.

Section Three evaluates the tax liability resulting from only the general sales & use tax, and includes the impact resulting from differing state tax bases.

Section Four combines the tax liability resulting from selective sales taxes, gasoline excise taxes, motor vehicle license, fees, and property taxes.

Section Five examines the tax liability on 10 representative corporate taxpayers resulting from the principal state business tax, usually the corporate income tax.

SELECTION OF REPRESENTATIVE INDIVIDUAL TAXPAYERS

We analyzed Vermont Tax Department and Internal Revenue Service data on individual income tax returns filed by Vermonters to ensure that we included the wide range of income sizes and compositions that actually occur in Vermont. This analysis of Vermont returns helped us to decide how many sample cases we needed.

Table One lists the actual case number that applies to a particular income group and filing status. For example, if you are interested in seeing an example of a single filer, under age 65, with income between $0 and $15,000, you would look at Case #1.

Table One: Index of Case Numbers


Under 65

Over 65

Income

S

M/J

M/S

HoH

S

M/J

M/S

HoH










Under $15,000

#1

-

-

#13,#24

#16

#19

-

-

$15,000-$30,000

#2

#7

-

#25

#17

-

-

-

$30,000-$50,000

#3

#8

#11

-

-

#21

-

-

$50,000-$100,000

#4

#9

-

-

-

#22

-

-

$100,000-$150,000

#5


-

-

-

#23

-

-

$150,000 & over


#26,#27
















S=Single; M/J=Married Filing Joint; M/S=Married Filing Separate; HoH=Head of Household

Small numbers refer to case numbers. Actual case profiles appear in the Appendix.

The summary above allocates a sample case to each status and category in rough proportion to the data in Table Two. We used 20 cases to demonstrate tax liability. This required the preparation of 260 income tax returns (20 federal returns plus 240 state returns).

You will notice that, while this report includes the results from 20 cases, the case numbers in the chart above extend to #27. That is because our initial casework included 25 cases and two more were added as a result of advice from our group of experts and interested parties. After the tax returns were prepared, we noticed that, while 27 cases was still a manageable number, the resultant information appeared to be redundant. Therefore, we decided to eliminate cases #6,10,12,14,15,18, and 20 from consideration. Although we did not include these cases in the report, the actual casework was prepared and is still included in the background files for this report.

Table Two, below, is based on 1995 data (the most recent data available). This chart illustrates how Vermonters filed their 1995 tax returns.

Table Two


Total

Returns

Aged 65

& Over

Filing Status

Number

Percent of Total

Number

Percent of Total

Individual Tax Returns

261,750

100.00%

24,203

100.00%






Married filing Jointly

117,115

44.74%

12,770

52.76%

Married filing Separately

4,335

1.66%

124

0.51%

Single

119,632

45.70%

10,949

45.24%

Head of Household

20,668

7.90%

360

1.49%






Under $ 15,000

94,021

35.92%

11,203

46.29%

$ 15,000 - $ 30,000

68,374

26.12%

6,740

27.85%

$ 30 000 - $ 50,000

51,753

19.77%

3,000

12.39%

$ 50,000 - $ 100,000

38,983

14.89%

2,408

9.95%

$ 100,000 - 150,000

5,138

1.96%

476

1.97%

$ 150,000 - Over

3,481

1.33%

376

1.55%

In choosing income levels, we tied the lowest income levels to the federal poverty level. The other income groups are Vermont "averages" for those income groups. We use "average" amounts for many types of income, according to the Vermont Department of Taxes, but we do not use the phrase "average taxpayer" in this discussion. The reason is because there is no such "taxpayer." For example, in the $30,000 to $50,000 income category, we could not say that a taxpayer who earned $40,000 was "average" for that category. The tax laws are written to allow for different filing status types, exemption allowances, income adjustments, and standard or itemized deductions. These variances preclude the creation of "average taxpayers" even within a particular filing status. Therefore, a creation of a "representative taxpayer" sample is the best we can hope for in our sample.

After the cases were created, the first step was to prepare a federal tax return for each of them. Several assumptions had to be made so that we would need to prepare only one federal return for each case in our study. For example, in those cases that include itemized deductions, we assigned one amount for property tax and one amount for state tax payments. In reality, even if you assumed, for example, that Case #9 had exactly the same house in each of the comparison states, there would still be a different property tax expense on each state return, as would be the case for different Vermont towns. The same is true for state tax payments because for each case that included a "wage earner," the filer would have had a different level of withholding for each state. These state-to-state variances would have required us to make further assumptions about where, in each state, our sample filer lives. What would the house be appraised for in that area? What is the tax rate? Also, does our sample case-filer claim all of his or her exemptions for withholding or does he or she claim less in hopes of a refund? Therefore, in order to avoid making more and more assumptions and preparing at least 12 federal returns for each case, we assigned one amount for each deductible expense, prepared one federal return for each case, and used that federal return as the basis for the state returns.