And the other thing (picking up here from the previous post) that “everybody knows” about the Vermont economy is that Vermonters are heavily taxed.

As with the first thing that “everybody knows” about Vermont’s economy – that the state has a bad business climate (scroll down to the previous post) — “everybody knows” this other thing because it is incessantly repeated.

Unlike the gripe about the business climate, though, the statement about the taxes is almost accurate. Some Vermonters pay either a little or a lot more in state and local taxes than they would if they lived in most other states.

Most do not. Or if they do, the difference is so small that it is both imperceptible and not really measureable.

(In general, of course. No doubt there is somebody whose special circumstances would enable him or her to pay far less elsewhere. But then some whose special circumstances would involve them paying more).

Take a typical $60,000-a-year-household. Assuming it consisted of a couple with one or more children who own their home and itemize deductions, its taxable income would be about $50,000, costing them roughly $1,360 in state income taxes, or about 2.2 percent of their income. They’d pay as much or more in several other states.

Same with the sales tax. It’s six percent in Vermont, but nothing on food from the store, non-prescription drugs, or most clothing. Eighteen other states charge six percent or more, 11 levy a sales tax on groceries, and in Illinois, shoppers pay a one percent sales tax on non-prescription medicines.

Even the hated property tax is higher in many other states, and an income sensitivity cap holds down that levy for most Vermont property owners, including that $60,000-a-year couple.

But there are Vermonters who pay substantially more than their counterparts in most other states. These are the richest Vermonters, those who earn hundreds of thousands of dollars a year.

It isn’t that Vermont’s top rates are the highest. Four states have higher marginal income tax rates than Vermont’s 9.4 percent. Besides, that top rate doesn’t go into effect in Vermont until a household  has $372, 950 in taxable income (which probably means total household income of close to $500,000). In several states with lower top rates, that top rates kicks in at a lower income, meaning higher taxes for some upper-middle-income folks.

But that doesn’t hold down taxes for the truly wealthy, for households earning $500,000 a year or more. In Vermont, those taxpayers pay more than they would if they lived in almost (though not quite all) other states.

Just look at the numbers.  In 2008, the last year for which figures are available, the 1,195 Vermont households whose taxable income was more than $500,000 (400 of them more than a million) paid $95,417,651 in “net Vermont taxes.” That’s an average of almost $80,000 each, and was almost 20 percent of all the income taxes the state collected (they earned about ten percent of the income).

That’s a heap o’ taxes

It is these wealthy people that business advocates, conservative politicians, and others, have in mind when they assert that Vermont has a poor business climate. If taxes on these folks weren’t so high, the argument goes, more of them would move to (or remain in) Vermont. They wouldn’t just spend their money here. They’d invest. They’d start businesses. So there would be more jobs, meaning more income for middle-income and working people.

Maybe even (though not all the tax-cut advocates take their argument this far) so much more earnings for middle-income people that the state treasury would take in more tax revenues from those incomes  than it would lose by cutting taxes for the wealthy.

And the evidence, the  statistical data to support these contentions are…are…well, it seems that they aren’t.

At least the Lake Champlain Regional Chamber of Commerce and the Greater Regional  Burlington Industrial Corporation, the state’s two biggest lobbies often urging lower taxes, couldn’t come up with any. Neither could the American Legislative Exchange Council, the very conservative organization of state legislators from around the country. Neither could a few hours of trolling the Internet.

Oh, there are anecdotes and examples. This businessman or that is moving himself and/or his company to a lower-tax state. Sometimes a state or a country will see economic growth after cutting taxes. Sometimes low-tax states grow faster than their higher-tax neighbors.

But sometimes they don’t. Wealthy people seem to move into high-tax states as quickly as they move out of them. Vermont had almost 30 percent more over-$500,000 households in 2008 than it had in 2000, though it has had relatively high top rates for decades (fewer such households than in 2007; but the economic slowdown began in 2008).

As to taxes and economic growth just to take one example out of the blue, the United States of America raised income taxes in the early 1990s and embarked on perhaps its strongest period of sustained, non-inflationary, growth. Then it cut income taxes twice in the following decade and hit the economic skids.

In the 1980s, South Dakota Gov. William Janklow bragged about how his low-tax state was gaining population faster than neighboring, higher-taxed, Minnesota. It was. But in the ten years ending in 2007, Minnesota’s population grew faster, though its taxes were still higher. South Dakota’s economy grew faster, but it started from a lower base, from which faster percentage growth is often easier, and it remains a much less prosperous state than either Minnesota or Vermont.

And as illustrated in the report released last month by Burlington policy analyst Doug Hoffer (and discussed in Wednesday’s News Guy post), Vermont has been adding jobs at a faster rate than famously low-tax New Hampshire in recent years.

Proof that the state should raise taxes, especially on the wealthy, to spur economic growth?

Of course not. In fact, the data do not even conclusively disprove the “lower taxes means faster growth” argument. They just don’t come anywhere close to confirming it.

Do not expect this near-total lack of evidence to deter politicians from arguing that Vermont ought to cut taxes on the wealthy to invigorate its economy.  Gov. Jim Douglas has already used it urging the Legislature to roll back last year’s increases in the capital gains and estate taxes. Early indications are that it will be a theme in Lt.Gov. Brian Dubie’s campaign for governor.

It isn’t that there is no case to be made for cutting taxes on the wealthy. There is. There is a case to be made for almost anything. But when it comes to reducing taxes on the wealthy, only two outcomes should be expected: the wealthy will pay less in taxes, and the state government will have less money to do the things it does, and will therefore have to do less.

Either or both of these may be desirable ends. Tax cut advocates should make the case that they are desirable ends. Claiming that economic growth will also follow is intellectually irresponsible.

This entry was posted on Friday, February 5th, 2010 at 12:15 am and is filed under Business & Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.