STATE SPOTLIGHT: Vermont Ping-Pongs on Capital Gains Hike on Upper Incomes

By at 12 September, 2019, 10:46 am

 by Raymond J. Keating-

Small Business Policy Index 2019: Vermont ranked 45th – or sixth worst – among the 50 states.

SBE Council’s “Small Business Policy Index 2019” ranks the 50 states according to 62 different policy measures, including a wide array of tax, regulatory and government spending and performance measurements.

Small Business Tax Index 2019: Vermont ranked 45th – or sixth worst – among the 50 states.

SBE Council’s “Small Business Tax Index 2019” is included in the Policy Index report, ranking the states according to a wide array of tax measures, including income, capital gains, property, death, unemployment, and various consumption-based taxes like state gas and diesel levies.

Apparently, Vermont lawmakers can’t make up their minds on capital gains taxes. It would be helpful if these elected officials could get focused on moving in a positive, pro-entrepreneur, pro-growth direction on taxes given how costly it is in terms of public policy to live, work, startup and operate a business, and invest in the state.

SBE Council’s “Small Business Policy Index 2019: Ranking the States on Policy Measures and Costs Impacting Entrepreneurship and Small Business Growth” ranks the 50 states according to 62 different policy measures, including assorted tax, regulatory and government spending measures. Vermont ranked 45th – or sixth worst – among the 50 states. The state also earned the 45th spot on the “Small Business Tax Index 2019,” which is a subset of the larger Policy Index, whereby the states are ranked on tax measures alone.

Indeed, there are many negatives for Vermont, including high personal income, corporate income and corporate capital gains taxes; the second highest property tax burden; a death tax; high workers’ compensation costs; high levels of state and local government employment and spending; a high minimum wage mandate; and poor private property protections. Yikes!

There a few clear positives as well, such as a fairly low level of state and local government debt; and the second lowest state crime rate. But the negatives far outweigh any positives.

One relative positive is the fact that the state imposes an individual capital gains tax that is lower than the general personal income tax rate. And for good measure, between the publication of the 2018 and 2019 editions of the Index, Vermont actually reduced both, with the top personal income tax rate going from 8.95 percent to 8.75 percent, and the individual capital gains tax rate from 5.37 percent to 5.25 percent.

However, the state also just took a step back with a capital gains tax increase going into effect on July 1 of this year. The Tax Foundation summed up what Vermont did this way:

“Under House Bill 541, Vermont limited the amount of long-term capital gains a taxpayer can exclude from standard individual income tax rates to $350,000. Most states tax capital gains as ordinary income, but Vermont has historically allowed an exclusion for the greater of 40 percent of capital gains income or $5,000. It is this 40 percent exclusion to which the new $350,000 cap applies.”

That means that top individual capital gains has increased from 5.25 percent to 8.75 percent – a two-thirds increase.

Of course, those supporting such a tax increase will say that it “only” applies to high-income earners. That’s simply class warfare that ignores the clear economic facts that incentives and resources will be diminished for investment, including in entrepreneurial ventures. And by the way, high-income earners are the people with the accumulated financial capital available for investment.

The capital gains tax – given that it is a tax on the returns of entrepreneurship and investment – arguably is the most destructive tax. Therefore, it makes no economic sense for Vermont to hike the capital gains tax. It’s simply a case of misguided politics winning out over sound economics.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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