When rich Vermonters die, their kids aren’t the only ones who get a windfall. The state is a beneficiary, too, taking a 16 percent cut of the value of estates over $2.75 million.
Vermont is one of just 12 states that still have an estate tax — or, as critics call it, a death tax. Most others ditched theirs after a 2001 federal tax overhaul.
Gov. Phil Scott thinks the tax chases wealthy families out of Vermont, ultimately starving the state of steadier revenue streams that would be collected before they die, such as income and sales taxes. So in his proposed budget, now being hotly debated by the legislature, he called for a big tax break for wealthy Vermont families in the hopes they’ll keep their greenbacks in the Green Mountain State.
The plan has reignited a long-simmering policy debate over whether Vermont’s tax burden is so high that it’s driving people to states with lower taxes. Though there’s no conclusive data to prove this theory, those who believe it have plenty of anecdotal evidence.
“The ones with all the money are checking out,” said Pat Robins, cofounder of the SymQuest Group, a South Burlington technology services company he sold in 2015. “I know, because a lot of them are friends of mine.”
It’s one thing to ask the wealthy to pay taxes on their own income or properties, he said, but it’s another to tax what they’re trying to pass on to their children. Many can and do leave the state to protect those assets, he argued, depriving Vermont of the taxes and economic activity they would have otherwise generated.
“I think we’re slowly strangling the golden goose,” Robins said.
Paul Cillo doesn’t buy it. The executive director of the Public Assets Institute in Montpelier said he’s heard this claim for years and has never seen any evidence to back it up.
“This convention about people leaving any state as a result of tax changes is nonsense,” Cillo said. “It’s basically an argument without substance.”
People move for jobs, to be closer to family or for better weather, but not to flee higher taxes, he said. Studies done after states have imposed taxes on millionaires have debunked the claim, he said. One 2011 study by the nonprofit Center on Budget and Policy Priorities was titled “Tax Flight Is a Myth: Higher State Taxes Bring More Revenue, Not More Migration.”
“What happens is, people pretty much stay put,” Cillo said.
The number of people coming into the state mostly makes up for those who leave, he added, creating a population churn that is not only natural but healthy.
Tax Commissioner Kaj Samsom disagrees. The state should not be satisfied to simply replace departing residents with new ones, he said, calling it a recipe for stagnation.
“Clearly, for the Scott administration, success is not equilibrium,” Samsom said.
The goal should be to increase the number of high-income residents by continuing to attract new ones and encouraging people to stay, he argued.
Vermont has a relatively progressive tax structure, meaning rates increase as people’s incomes do. The problem, according to Samsom, is that the state has few wealthy people compared to others.
It ranks 41st in the nation by one key measure of wealth: the average income of the top 1 percent of taxpayers. Connecticut tops the charts at $3.2 million. Vermont is at $1 million, according to the nonpartisan Institute on Taxation and Economic Policy.
“A progressive tax structure doesn’t do what you want it to do if the high income and high wealth is not there,” Samsom said.
A $10 million estate today would enjoy a $2.75 million exemption and be assessed at $1.16 million in taxes. Scott’s plan would bump up that exemption to $5.75 million, slashing that same estate’s tax bill to $680,000 — and saving the heirs $480,000.
All told, the Department of Taxes estimates that the state would give up about $10 million per year in revenue if the proposal became law, a change that would be phased in over several years.
Financial professionals have been telling the state for years that its tax structure in general, and the estate tax in particular, contributes to driving well-off people elsewhere, Samsom said.
Rebecca Walsh, a financial planner with Pathway Financial Advisors in South Burlington, said there is broad consensus in her industry on this point.
“Every financial planner, attorney and accountant I’ve spoken to about this issue has handfuls of anecdotes of clients who decide to establish residency in another state while keeping a foot in Vermont, to reduce their income [tax] and estate tax liabilities,” Walsh said.
People with multimillion-dollar estates usually own homes in other states, often in warmer climates, so shifting their residency is not difficult, Walsh said.
States such as Florida generally require legal residents to be physically present for six months plus a day, which is not that much longer than the de facto Vermont winter. And the cost of airfare twice a year, Walsh noted, is far from prohibitive for someone with a $10 million estate.
“That range of wealthy clients have a lot of flexibility on how to live their lives,” she said.
According to Rick Kozlowski, a Burlington attorney who specializes in estate planning, the combination of state income and estate taxes pushes Vermonters to leave — or, in legal terms, change their domicile.
“It’s the hit to their income combined with knowing that when they’re gone, their kids will be writing out a big check to the State of Vermont,” Kozlowski said. “It riles them as unfair. They’re thinking, Why should I give 16 percent of what I’ve earned and saved over my life to the State of Vermont just for the privilege of being there?”
To reduce their exposure to the estate tax, many clients instead give money to their children while they are alive, Kozlowski said. As long as the parent lives for two years after making such a gift, it is not taxable, he added. So, a person who gives an adult child $1 million can avoid paying $160,000 in estate taxes after death.
The administration faces several challenges in making its case to reform the estate tax.
One is a data problem. No information clearly shows how many people leave the state due to the tax. Samsom’s department knows how many Vermonters change their tax domicile, but it doesn’t know why.
The department recently tried to analyze the exodus. It examined tax data from 2017, looking at returns from nonresidents who used to file taxes as Vermonters but still have to make disclosures based on Vermont income. Someone who now lives in Florida for more than six months of the year, for example, might still have a rental property in Vermont on which they have to pay state income tax, Samsom explained.
The analysis found that 422 nonresidents who were over 60 years old and made more than $200,000 per year filed returns with the state. Of those, 200 had moved from Vermont to states without an income or estate tax. The top two destinations were Florida (136) and New Hampshire (45).
This suggests to Samsom that while climate is certainly a motivator for people to move elsewhere, tax benefits are also clearly part of the equation.
Cillo said that such analysis fails to consider that a similar number of people in that income range likely moved into the state. In 2016, 420 such people moved out and 401 moved in, he said, citing Internal Revenue Service data.
Samsom countered that a closer look at the data shows there are fewer high-income residents coming into the state than leaving, and those that are replacing them are earning an average of $50,000 a year less.
He also noted that it wouldn’t take that many more people staying in the state to recoup from other sources the drop in estate tax revenue. A typical resident earning more than $300,000 per year generates about $40,000 in a suite of other taxes, the department estimated.
People don’t change their retirement plans on a dime. But if over the next 15 years just 17 more retirees per year decide to keep their tax home in Vermont than would have otherwise, the state could recoup the $10 million annually. The more high-income residents who stay, the faster the state would not only recoup the lost revenue but exceed it.
Rep. Janet Ancel (D-Calais) isn’t convinced that lowering the tax would really change the retirement patterns of the wealthy.
“I don’t think the data proves or really even demonstrates that,” said Ancel, the chair of the tax-writing House Ways and Means Committee. “There are a lot of reasons people move.”
But she does think the estate tax contributes to the impression of the state as high-tax, and there might be fairer, broader ways to make up similar revenue. That’s why her committee recently supported raising the exemption, but only to $5 million, instead of the governor’s proposed $5.75 million. To compensate, the committee proposed raising $5 million by expanding the capital gains tax, which targets the sale of land and businesses.
The full House approved the change as part of a tax bill that now heads to the Senate.
There are signs that it may be in for a cool reception.
Sen. Chris Pearson (P/D-Chittenden) said he was “astounded” when Gov. Scott proposed in his budget address to reduce the tax burden on wealthy families.
“That is a segment of the population that I’m not fretting about,” said Pearson, who sits on the Senate Finance Committee. He said he was surprised to see the House “essentially advance the governor’s proposal” and said he’ll need some serious convincing to support it.
“To me, the onus is on folks to really clearly and unequivocally prove that we have a drain of wealthy families in Vermont,” Pearson said. “I just don’t see it.”
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This article appears in Apr 3-9, 2019.
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To illustrate my earlier point:
Suppose in 2015 one person with $1 million dollars in AGI migrates out of Vermont.
Suppose in 2016 one person with $2 million dollars in AGI migrates out of Vermont.
In 2017, there would be $3M more of taxable income in the state had these filers not out-migrated. This logic leads to the $5.5 million estimate in my earlier post.
Mr. Feldman
The $97.7 million was over five years so (if your figures are correct) the $5.5 million savings would not be realized in one year, but over time. If it was one fifth per year ($1.1m) it would be a rounding error since the total income tax paid in 2017 was $725 million. Again, not as good as gaining $1.1m, but the sky is not falling.
Thanks to Doug Hoffer, who obviously gets up earlier than I do, which isn’t hard!
This argument has staying power, but in the end, there are always lots of anecdotes, and NO statistical evidence supporting it. That’s pretty odd, given how often we’ve been told (and for how long) that Vermont’s high taxes are causing substantial out-migration. Where are the supporting statistics? A theory which fails every factual test should be considered false, however plausible anecdotal evidence may make it seem.
The theory is simply wrong. Study after study shows that the top reasons why people move from one state to another are family and jobs. The US Census Bureau tracks this annually and doesn’t even list taxes among the explanations people offer. Remember that Americans are VERY mobile: roughly 10-20% move every year.
As to some of the proposed “fixes” to this non-existent problem, they’re just silly. Raising the bar on the estate tax changes NOTHING when VT has a tax and alternative states don’t. It MIGHT make sense if the alternative states most people choose (FL, esp.) had a LOWER tax (or higher limit). But ANY tax vs zero is going to be “too high.” The “solution” is even less reasonable than the “problem” it purports to solve.
One last note. Kendall at Hanover is right on the other side of the river, and that there aren’t a lot of other similar opportunities in Vermont outside of Chittenden County. Just as I go to Dartmouth-Hitchcock or Boston for certain medical interventions not available in the Brattleboro area, it’s not impossible that I would end up in NH or MA if I needed to go to a retirement facility, since there are none nearby in VT.
According to the most recent year of Vermont income tax statistics (https://tax.vermont.gov/research-and-reports/statistical-data/income-tax):
The 11,711 Vermont resident filers with AGI over $200,000 had about $5.4 billion dollars in total AGI and paid about $306 million dollars in total income taxes. This translates to an average effective tax rate for that group of about 5.7%.
Had the net out-migration not happened in the five years prior, the base for this filer population would have been $97.7 million dollars bigger in 2017 (this takes some thinking about) which translates to about $5.5M more in income tax revenue to the state at the average effective rate.
Mr. DeFrancis said “my parents have recently shifted their official residence from VT to Mass as the flat income tax rate of 5.05% presents significant savings over Vermont’s outrageous progressive income tax structure.”
Interesting. You are probably unaware that Vermont’s top marginal rate is not what your parents pay. We have a progressive structure so on average the effective rate for those that earn $200,000 to $299,999 is 4.8%. Therefore, it’s likely your parents are paying more in MA than they were in VT.
Aren’t facts fun?
Mr. Feldman
I always appreciate those (like you) who seek the data so thanks for that.
However, in this case, you provided no context for that $97 million figure. Try this. During that period (2012 – 2016) Vermont’s total aggregate AGI was over 85 billion so the $97 million represents just a bit more than one tenth of one percent. Pretty sure the sky is not falling.
Moreover, you might be surprised to learn that more than half the states in the country lost AGI from domestic migration and that many lost a greater percentage than VT.
Facts matter, but context is im portant too.
Auditor Hoffer,
You keep cherry-picking the $200k bracket because it fits your narrative. We’re not talking about everyone in the $200k bracket, we’re talking about high net-worth individuals who would pass on estates large enough to be subject to the Death Tax. As noted by others, in the time period you mentioned we had net in-migration of tax filers in that income bracket but an OUTFLOW of the total value of income tax receipts in aggregate. One $10-millionaire provides more value to state income tax receipts than nine $1-millionaires.
As an anecdote, my parents make north of $200k but remain solidly middle-class and certainly won’t be leaving me with an inheritance large enough to be subject to any state or federal Death Tax but still count in your cherry-picked figure. (FWIW, my parents have recently shifted their official residence from VT to Mass as the flat income tax rate of 5.05% presents significant savings over Vermont’s outrageous progressive income tax structure….a trend only exacerbated with the Tax Cuts & Jobs Act’s $10k cap to the SALT deduction.)
Lastly, estate taxes are a tremendously unfair and immoral form of taxation. Inheritances represent earned income. Taxes have already been paid on that income (and if they haven’t that’s an audit problem; not a tax code problem). Estate taxes amount to double-taxation on the activity that generated that income.
How about caring about the people who are having their Social Security income taxed? Many of my friends plan to leave because there are states that are warm and don’t tax social security.
Meanwhile, having a schedule of gifting to children and charities sounds like a good way to distribute wealth in the community.
Thanks Jake, facts really do matter!
Thank you Jake Feldman, facts do matter!