#1Overview of ITEP's Report, "Who Pays?" 7th Edition House Committee on Ways and Means Joyce Manchester January 18, 2024 DM #373781 JFO 1 Baldwin Street • Montpelier, VT 05633-5701 ⚫ (802) 828-2295 • https://ljfo.vermont.gov#2Outline What is ITEP? What does the "Who Pays?" report look at? Where does Vermont rank? How do "sister states" or neighboring states rank? What is included/not included in the analysis? DIJFO 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 2#3What is ITEP, and what does the "Who Pays" report look at? • . ITEP is the Institute on Taxation and Economic Policy, a tax and budget. policy advocacy group and 501(c)3 that focuses on state and federal tax policy issues Who Pays? examines how, and from whom, state and local governments collect tax revenue The report shows the impact of permanent tax laws on non-senior taxpayers, including the impact of all tax changes enacted through January 1, 2024, at 2023 income levels. . Includes income taxes, consumption taxes, and property/education taxes at the state and local level Caveat: non-tax revenue is largely excluded from the analysis DJFO 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 3#4. Ideally, how would states collect tax revenue? One of the "principles of a high-quality tax system" is fairness • Do taxpayers with higher income pay larger shares of income as taxes? • Vertical equity: households with greater income pay a greater share of income in taxes; known as a "progressive tax" Progressive Tax Regressive Tax DJFO Lowest Second Middle Fourth Next Next Top 20% 20% 20% 20% 15% 4% 1% Lowest Second Middle Fourth Next Next Тор 20% 20% 20% 20% 15% 4% 1% 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 4#5Findings of the "Who Pays?" report • Most state tax systems are regressive, meaning lower-income people are taxed at higher rates than higher-income taxpayers. FIGURE 1 Average Effective State and Local Tax Rates in the U.S. State and local taxes paid by residents to their home states, as a share of income, for non-senior residents DJFO 11.3% 10.4% 10.5% 10.3% 9.5% 8.3% 7.2% Lowest 20% Second Middle Fourth 20% 20% 20% Next 15% Next 4% Top 1% Top 20% Source: Institute on Taxation and Economic Policy (ITEP) 1 Baldwin Street • Montpelier, VT 05633-5701 (802) 828-2295 TEP WhoPays? https://ljfo.vermont.gov 5#6DJFO Vermont ITEP Tax Inequality Index Ranking Vermont's state and local tax system does not worsen income inequality and ranks 49th on ITEP's Tax Inequality Index. RANK 49 State and Local Taxes as Share of Family Income Lowest 20 percent Second 20 percent Middle 20 percent Fourth 20 percent Next 15 percent Next 4 percent Top 1 percent 6.3% Vermont 8.2% 9.6% Total Taxes Share of family income 10.5% 10.6% 10.5% 10.6% 10.3% 10.3% 9.6% 10.1% 8.2% 10.1% 6.3% Less than $27,500 Lowest Second Third 20% 20% 20% $27,500 to $55,400 to 555400 $83,300 Fourth 20% $83.300 to $135,900 Next 15% $135,900 to $240,200 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov Next 4% Top 1% $2.40,200 to $588.500 Over $589,500 Top 20% T 6#7The "more equitable" jurisdictions Vermont is among the ten jurisdictions with more equitable state and local tax systems • Seven of the ten do not worsen income inequality overall and lessen inequality across some groups • · California, DC, Maine, Minnesota, New Jersey, New York, and Vermont The other three have tax codes that tilt slightly regressive overall Massachusetts, New Mexico, and Oregon None of the tax systems in the ten states are robustly progressive in a traditional sense • DC is least regressive overall, but the top 5 percent of DC families pay a lower rate (11.2 percent) than the bottom 95 percent (11.6 percent) DJFO 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 7#8• Factors in states with more equitable tax systems Highly progressive income tax brackets and rates • Use of targeted, refundable low-income credits · Broad-based income taxes Higher reliance on income taxes and lower reliance on regressive consumption taxes DJFO 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 8#9States with rankings close to Vermont; neighboring states Least regressive states • Minnesota: Rank 50 . • Vermont: Rank 49 • New York: Rank 48 California: Rank 47 Neighboring states Connecticut: Rank 21 • Maine: Rank 45 • Massachusetts: Rank 44 . New Hampshire: Rank 18 Rhode Island: Rank 31 DJFO 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 6#10DJFO Minnesota ITEP Tax Inequality Index Ranking Minnesota's state and local tax system does not worsen income inequality and ranks 50th on ITEP's Tax Inequality Index. State and Local Taxes as Share of Family Income Lowest 20 percent Second 20 percent Middle 20 percent Fourth 20 percent Next 15 percent Next 4 percent Top 1 percent RANK 50 6.2% Minnesota 8.0% Total Taxes 10.0% Share of family income 10.9% 9.9% 10.9% 10.5% 9.9% 10.0% 9.9% 9.9% 8.0% 10.5% 6.2% Lowest Second Third Fourth Next 20% Less than $34,400 20% $34,400 to $60,800 Next 20% $60,000 to $100,900 20% $100,900 to $149,400 15% $149,400 to $325,700 4% Top 1% $325,700 to $730,600 Over $730,600 Top 20% 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov TEP WhoPays? 10#11DJFO Vermont 1 ITEP Tax Inequality Index Ranking Vermont's state and local tax system does not worsen income inequality and ranks 49th on ITEP's Tax Inequality Index. State and Local Taxes as Share of Family Income Lowest 20 percent Second 20 percent Middle 20 percent Fourth 20 percent Next 15 percent Next 4 percent Top 1 percent RANK 49 6.3% Vermont 8.2% 9.6% Total Taxes Share of family income 10.5% 10.6% 10.5% 10.6% 10.3% 10.3% 9.6% 10.1% 8.2% 10.1% 6.3% Less than $27,500 20% $27,500 to 555400 Lowest Second Third Fourth Next 20% 20% $55,400 to 583,300 20% $83.300 to $135,900 15% $135,900 to $240,200 Next 4% Тор 1% $240,200 to $588.500 Over $589,500 Top 20% 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 11#12DJFO New York ITEP Tax Inequality Index Ranking New York's state and local tax system does not worsen income inequality and ranks 48th on ITEP's Tax Inequality Index. State and Local Taxes as Share of Family Income Lowest 20 percent Second 20 percent Middle 20 percent Fourth 20 percent Next 15 percent Next 4 percent Top 1 percent RANK 48 11.19 New York 11.8% Total Taxes 13.3% Share of family income 13.8% 13.8% 13.8% 13.3% 13.5% 12.8% 13.8% 11.8% 11.1% 12.8% 13.5% Lowest 20% Less than $24.200 $24200 to $48100 Second Third Fourth Next 20% 20% 20% $4,000 $86,400 to $86-400 $144,000 15% $144,000 to $334,600 Next 4% Top 1% 5334.400 Over $80,900 $900 Top 20% ITEP WhoPays? 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 12#13DJFO California ITEP Tax Inequality Index Ranking California's state and local tax system does not worsen income inequality and ranks 47th on ITEP's Tax Inequality Index. State and Local Taxes as Share of Family Income Lowest 20 percent Second 20 percent Middle 20 percent Fourth 20 percent Next 15 percent Next 4 percent Top 1 percent RANK 47 11.7% California 10.3% 10.4% Total Taxes Share of family income 11.0% 10.8% 11.7% 12.0% 11.0% 10.3% 10.4% 10.8% 10.4% 10.4% 12.0% Lowest Second 20% Less than $25.300 20% $25,200 to $48,800 $400 to SO L100 Third Fourth Next 20% 20% $86,100 to $145,900 15% $145,900 $352,300 Next 4% $352,300 $862,100 Top 1% Over $162100 Top 20% 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov ་ ITEP WhoPays? 13#14Caveat regarding non-tax revenues • ITEP does not include non-tax revenues • • Many forms of non-tax revenue are collected in a manner that is disconnected from ability to pay and may be regressive • For example, road tolls and public parking are based on the use of a service and are charged at the same rate regardless of one's income • Court fees and fines can be particularly onerous for low-income and historically marginalized communities Some excluded revenues may be progressive • Estate and inheritance taxes, real estate transfer taxes Excluded portion of corporate income taxes paid by out-of-state payers According to ITEP Appendix C, in fiscal year 2021, Vermont got 21.6% of its own-source revenue from non-tax revenue • Alaska got 62.7% from non-tax revenue (due to their severance taxes on oil extraction) New Hampshire got 24.5% from non-tax revenue DJFO 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 14#15Resources Institute on Taxation and Economic Policy (ITEP). "Who Pays?" 7th Edition, January 2024 https://itep.org/whopays-7th-edition/ State-by-State Data • https://itep.org/whopays-map-7th-edition/ DJFO 1 Baldwin Street Montpelier, VT 05633-5701 (802) 828-2295 https://ljfo.vermont.gov 15