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Vermont income taxes: in the middle of the pack

A new 50-state analysis of state income taxes by Public Assets Institute shows that Vermont ranks in the middle of states in the rest of the country. While much has been made of Vermont's high tax rates, the amount taxpayers actually pay in Vermont is lower than in many other states because of deductions and other adjustments and the state's progressive rate structure. This analysis looked at the total income taxes paid in each state in 2008 and divided it by the total adjusted gross income (AGI)-that is, income before deductions and other adjustments.

Using this "effective tax rate" measure, Vermont was no. 23 among states when they were ranked highest to lowest. Forty-three states levy a personal income tax; seven do not.

"We hear a lot about Vermont's top income tax rate, which is relatively high because Vermont has a long traditional of progressive income taxes. Those who get the greatest financial benefit from society's public structures are expected to contribute the most to maintaining them," said Paul Cillo, president of the Public Assets Institute. "But few people pay that top rate because it applies only to taxable income above about $372,000, after deductions and exemptions have been subtracted.

"If we want to see how Vermont's income tax stacks up against the other states, the most straightforward way is to look at the amount Vermonters actually pay and divide it by their adjusted gross income, which is based on federal tax laws and is, therefore, the same for every state."

The Public Assets report shows that Vermont's effect tax rate was 3.9 percent in 2008. Among the states with an income tax, the effective rates ranged from 0.2 percent in Tennessee to 7.0 percent in Oregon.

"Because we have progressive income tax rates, people in the higher income brackets have an effective tax rate that is higher than 3.9 percent; the rate is lower for those in the lower brackets," Cillo said. "How taxes are distributed is an important consideration. But it's also useful to look at how much of Vermonters' income goes to pay state income taxes, and how that stacks up against other states."

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