Waddaya know! Sometimes there’s at least a little truth to the myth.

Turns out all those folks who proclaimed, explained, or complained that Vermont had a progressive tax structure were right all along.

Sort of.

For those who don’t keep up with the jargon, a progressive tax system is not one that keeps making progress. It’s one in which the more a taxpayer earns, the more he or she pays.

Not just in dollars, but as a percentage of his or her income.

So here’s how we know that Vermont’s taxes are, by that definition, progressive:

In 2007, (sort of, explanation below) the richest Vermonters, households earning $412,000 a year or more (and averaging $1,250,000 per annum), paid 8.4 percent of their income in state and local taxes, according to a new study by the Institute on Taxation and Economic Policy.

Except that they didn’t really pay that much. Because like all taxpayers, but more so, they can deduct most state and local tax payments from their federal taxable income. Factor in that “offset,” and they paid only 7.5 percent of their income in state and local taxes.

And yes, (here’s that promised explanation) the study did take into account this year’s small increase in the taxes paid by the richest Vermonters, retroactively tweaking it back into the 2007 figures.

And the poorest Vermonters? Those who earned less than $18,000 in 2007, with an average of $11,200?

They paid 8.2 percent of their income in state and local taxes.

No federal offset, either, These guys don’t itemize.

Neither do many taxpayers in the next higher bracket, those earning between $18,000 and $34,000. They pay 8.1 percent of their incomes in state and local taxes. The middle fifth ($34,000 to $54,000) pay 9.4percent. Taxpayers in the fourth quintile ($54,000 to $85,000) pay 9.2 percent (after the offset).

The ITEP study divides the top 20 percent into three brackets, including that top one percent who earn $412,000 or more. The 15 percent earning between $85,000 and $168,000 pay 8.2 percent and the next higher four percent ($168,000 to $412,000) pay 7.5 percent, after the offset in both cases.

Whereupon one hears a voice calling from the trees, saying….

This by you is progressive?

Well, everything is relative.

Compared with Florida, for instance, Vermont is a progressive’s paradise. Down there, the poorest 20 percent of taxpayers fork over 13.5 percent of their incomes in state and local taxes; the richest one percent a mere 2.6 percent.

Not that having a more progressive tax system than Florida’s is much of an accomplishment. According to ITEP’s analysis, Florida’s is one of the ten least progressive structure’s in the county.

Vermont’s, on the other hand, is one of the four most progressive, along with Delaware, New York, and the District of Columbia, because, says ITEP, “it has a highly progressive income tax and low sales and excise taxes.”

In addition, Vermont has a refundable Earned Income Tax Credit (EITC), meaning low income residents don’t pay income taxes; they get money from the state as a partial offset to their sales and property tax payments. Twenty-three states and the District of Columbia “allow an earned-income tax credit patterned after the federal credit.,” the study reported.

Still, as is evident in those figures above, more progressive isn’t very progressive. If a typical household earning a quarter of a million bucks pays 7.5 percent of it in state and local taxes while the family earning 60 grand pays 9.2 percent, not many economists would call that a progressive system.

The explanation, according to ITEP, is that all state tax systems are regressive. It’s just that most of them are more regressive than Vermont’s.

“Nearly every state and local tax system takes a much greater share of income from middle- and low-income families than from the wealthy,” according to ITEP.

The main reason for Vermont’s regressivity appears to be the property tax. The lowest earners pay 3.8 percent of their incomes in property taxes. The next two quintiles pay 3.9 percent, and the fourth pays 4.2 percent. The wealthiest bracket pays only 2.3 percent of its income in property taxes.

The sales tax is also regressive, with the poorest paying 5.3 percent of their incomes, the richest only 0.6 percent. But according to the report, Vermont relies less on sales taxes than do most other states.

A few caveats. ITEP is clearly on the left side of the political spectrum. It begins its analysis with the assumption that the wealthiest families “should pay at a tax rate at least equal to what low-and-middle-income families pay,” a “basic test of tax fairness” that “virtually every state fails.”

It’s possible that everyone does not share that assumption.

Besides, statistical analyses always include some “noise,” which renders their conclusions at least potentially debatable. This one, for instance, “is limited to non-elderly families…because state tax systems often treat elderly families very differently from other families.” Because Vermont has a high percentage of elderly families, including them could alter the results, although probably not by much.

Then there is the question of whether to count “in-kind” payments to the poor, such as Medicaid and food stamps. In an account of the study as it pertains to Vermont, the Denpubs publication company in nearby upstate New York contacted Martin Harris, identifying him as a “long-time Vermont tax policy critic” (but not as a long-time ultra-conservative activist, not to mention someone who now seems to live in Tennessee), who said “a Vermont family of four (with income) below $27,000, gets $668 per month in food stamps,” raising “real disposable (income) to over $34,000.”

Actually, it’s impossible to know how much a family would get in food stamps. There are too many variables, including how much it would pay for rent and heating, that go into that calculation. At the Department of Children and Families, a very helpful benefits programs assistant administrator named Meg Houston said that a family of three with $15,000 in income (after several deductions) would get $151 a month in food stamps.

Before the deductions, that family probably earns just about $17,000 in gross income, of which it pays, on average,  $1,394 in state and local taxes. If the food stamps raise its “real” income to 18,812, its state and local taxes would add up to about 7.4 percent of its income. just a touch lower than the percentage paid by the wealthiest taxpayers.

Besides, as Jeff McLynch of ITEP noted, the organization’s statistical method is consistent with the Census Bureau’s and other federal agencies, which distinguish between cash and in-kind income.

That Denpubs account was on line. It does not appear to have been in any Vermont newspaper. Neither did anything else on the report except an editorial in the Barre-Montpelier Times Argus. As far as ITEP’s public affairs official Ed Meyers could find, no other Vermont news organization mentioned the report, which was released November 18 (though there was an item in the Progressive Party’s Prog Blog).

This in a state where news organizations rarely fail to give big play to less responsible studies that proclaim, inaccurately, that Vermont taxes are the highest in the nation.

Editorial judgment by ideology?

Just asking.

Tags: ITEP

This entry was posted on Friday, December 4th, 2009 at 12:15 am and is filed under Taxes. 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.