According to the most recent data from the Vermont Department of Taxes (2009 tax year), the top 2 percent of taxpayers are responsible for over 30 percent of Vermont's personal income tax revenues. With such a small number of taxpayers responsible for a large chunk of Vermont's tax revenue, much of the debate about Vermont's income tax policy has revolved around the issue of tax flight.

Do state tax policies influence people's decisions (particularly the wealthy) to move into, or out of, Vermont? This a perennial question in Vermont politics, and there is no shortage of divergent opinions from "non-partisan" think-tanks, which will faithfully produce a bevy of studies to support their respective arguments: that higher taxes lead to out-migration of the wealthy, or alternatively, that taxes have no influence on migration.

So who's right?

A report issued by the Blue Ribbon Tax Reform Commission earlier this year indicates that the data on this question -- at least as it relates to Vermont's income tax -- is inconclusive. Anecdotally, I have heard stories from folks in my area that would support both arguments. I personally know several people who plan to sell their homes, specifically so that they can move to a state with lower taxes (income and property). On the other hand, when I ask seasonal home owners what policy changes might encourage them to make Vermont their primary residence, the responses vary: some would make Vermont their full-time home if we made certain tax changes (e.g. more favorable treatment of retirement income), but others cite non-financial reasons that keep them from becoming full-time residents (e.g. family, business commitments, etc.). Ultimately, the factors that influence someone's decision to move to or from Vermont are numerous; every situation is unique, so the weight of tax implications will vary accordingly.

The bottom line is that the risk of tax flight is just one of many issues that should be analyzed whenever potential tax changes are considered.

In some ways, though, the issue of tax flight is a red herring in any debate about taxing the rich in Vermont. An overlooked, but much more significant, tax policy consideration is the issue of income volatility at the top of the scale. We also need to be careful with our assumptions about who the "rich" really are. It's easy to look at a few income statistics and conclude that Vermont has a base of high-income earners who can be tapped into for more revenue. But consider a key finding of the Blue Ribbon Tax Reform Commission -- that higher reported incomes are not constant; rather, they tend to be event driven. When the commission analyzed tax returns with Adjusted Gross Income (AGI) above $500,000, they discovered that, over a period of nine years, over half of the filers only had that kind of income in a single year, and only 3.5 percent had incomes above $500,000 in each of the nine years. If you think about it, the statistics make sense. The sale of a business, real estate, equities, or other assets are examples of single events where a taxpayer could end up reporting a large income in one year -- but not the next. These are all common events as people approach retirement age.

The frequency and size of these high-income events track the contours of the economy, and are extremely volatile -- they rise quickly when the economy is accelerating, but fall fast -- and hard -- when the economy stalls. In contrast, even though they also track the economy, lower incomes tend to be more stable. To illustrate, here in Vermont, the AGI for taxpayers with incomes above $200,000 averaged $519,588 in 2007, but fell 14 percent to an average of $445,435 in 2009. Taxpayers with less than $200,000 AGI saw their average AGI fall from $41,521 in 2007 to $41,327 in 2009 -- a reduction of one half of one percent.

From a tax policy standpoint, volatility at the upper-income range introduces greater risk to the stability of tax revenues when there is over-dependence on high incomes for tax revenues. California is a case study of what we want to avoid. Before the start of the great recession, over 50 percent of California's tax revenues came from the top 1 percent of earners. The effect of this imbalance was realized when those high incomes cratered -- California's tax revenues plummeted, leaving the state with a massive budget deficit.

A precipitous drop in higher incomes hit Vermont hard as well -- the top 2 percent of taxpayers accounted for a $54.7 million decline in state income tax revenues from 2007 to 2009, compared with a $17.3 million decline in revenues over the same period from incomes below $200,000 AGI. Expressed another way, 76 percent of the $72 million decline in personal income tax collections between 2007 and 2009 was attributable to the falling incomes of the top 2 percent of Vermont taxpayers. But, as challenging as our budget situation has been over the past few years, things would have been much worse if our tax structure had been more reliant on those high-income events.

This is not to suggest that we cannot, or should not, rely on high incomes (and specifically, high income events) for our tax base. But the data do highlight the need for a balanced tax portfolio that ensures relative stability of state revenues as the economy cycles up and down. In the end, we must continue to pair our state budget with a stable revenue base.

Oliver Olsen represents the towns of Jamaica, Londonderry, Stratton, Weston, and Windhall in the Vermont House of Representatives, and serves on the House Ways & Means Committee.


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