The following is a guest editorial written by John Pelletier, Director of the Center for Financial Literacy at Champlain College and member of the Roundtable’s Pension Reform Task Force. His deep work here helps illuminate the public discussion around net migration of taxpayers. You can read more about John and the work of the Center at https://www.champlain.edu/centers-of-experience/center-for-financial-literacy.
Is Vermont Exporting Maple Syrup and Wealthy Tax Payers?
By John Pelletier, Director of the Center for Financial Literacy at Champlain College
For several years now, there has been discussion regarding the impact of the migration of Vermont’s citizens to other states on Vermont’s tax revenues. For the most part, we have been reassured that nearly as many taxpayers leave Vermont as relocate here. And we have been told that the dollars involved are about the same especially for high income individuals. So, it looks like we have nothing to worry about. Or do we?
Our tax policies are not very welcoming to the mobile wealthy retiree. According to Kiplinger 33 states have no inheritance or estate tax, 37 states do not tax social security benefits and 9 states have no income tax. Vermont is not one of these states. The Tax Foundation notes that only 5 states have higher marginal income tax rates than Vermont and Vermont is ranked 49th, nearly in last place, with regard to its property tax burden. Not surprisingly, Kiplinger ranks Vermont as the 4th least tax-friendly state for retirees.
In January, Governor Scott asked the legislature to change Vermont’s estate tax so that it would be competitive with other states (two-thirds of all states do not have this tax). This policy change is intended to keep more wealthy taxpayers in Vermont (mostly retirees) by reducing the economic incentive for high tax paying citizens to move to low tax states like Florida and New Hampshire. The goal is to have Vermont retain more tax dollars that can be spent on government provided services.
The proposed tax change assumes that Vermont’s current tax policies incentivizes older rich tax payers to leave Vermont solely for estate planning purposes. Such tax payers will likely migrate to another state long before they die. The result—Vermont never collects their inheritance tax and their income tax while they are residents of another state for the years prior to their death.
An analysis of the IRS files that contain the state tax migration data for the most recent five years available appears to confirm Governor Scott’s concerns. The time frame reviewed was from 2012 to 2016. Please note that the discussion below focuses on tax filers that have left Vermont, not individuals. Individuals who have left the state are a larger number than tax filers since many tax filings are joint (e.g. married couples) and some include dependents.
Over this five year period nearly 48,000 tax filers have left our state and nearly 44,000 tax filers have moved to Vermont[1]. Over this time frame Vermont gained tax filers from net migration from only seven states and lost tax filers to 37 states and the District of Columbia.[2] From 2012-2016 Vermont has lost 4,012 tax filers, resulting in a total aggregate net loss of about $271 million in taxable AGI (adjustable gross income). The net AGI lost is approximately $68,000 per tax filer leaving the state.
Net Migration out of Vermont. When you net the migration on a per state basis (e.g., tax filers moving from Vermont to Maine netted against tax filers moving to Vermont from Maine), only thirteen states had net migration from Vermont of more than 200 tax filers in the aggregate from 2012 to 2016 (an average of 40 tax filers or more per year leaving Vermont)[3]. Vermont “exported” 6,489 tax filers to these thirteen states and lost a total of $588.4 million in net taxable AGI over this five year period. On average, the net tax filer lost to these states had an AGI of approximately $91,000.
| State | Net Migration of Tax Filers from Vermont 2012-2016 |
Net AGI that has left Vermont 2012-2016 | Average AGI per net Tax Filer leaving Vermont |
| Florida | 1,769 | $332.7 million | $188,053 |
| California | 838 | $5.6 million* | Not Applicable* |
| North Carolina | 796 | $44.6 million | $56,019 |
| Colorado | 503 | $12.8 million | $25,414 |
| South Carolina | 445 | $40.2 million | $90,270 |
| Maine | 436 | $26.8 million | $61,408 |
| Washington | 302 | $14.0 million | $13,964 |
| New Hampshire | 264 | $68.9 million | $260,936 |
| Oregon | 253 | $10.1 million | $39,787 |
| Texas | 253 | $9.0 million | $35,727 |
| Georgia | 217 | $9.5 million | $43,820 |
| Tennessee | 209 | $11.3 million | $54,124 |
| Arizona | 204 | $14.1 million | $69,083 |
| Total | 6,489 | $588.4 million | $90,676 |
| Total of 4 states (FL, SC, NH & AZ) with AIG higher than $68,000 | 2,682(41% of Total Net Migration Tax Filers) | $455.9 million(78% of total AGI that has left Vermont 2012-16) | $169,985 |
| Total of 9 states (CA, NC, CO, ME, WA, OR, TX, GA & TN) with AIG lower than $68,000 | 3,807(59% of Total Net Migration Tax Filers) | $132.5 million(22% of total AGI that has left Vermont 2012-16) | $34,804 |
*California’s net migration results in positive net AGI of about $6 million to Vermont despite losing 838 tax filers. Migration from Vermont to California was 2,735 tax filers (AGI lost was $122 million or $44,615 per tax filer) and migration from California to Vermont was 1,897 (AGI gained was $128 million or $67,285 per tax filer).
As you can see in the chart above, there are four states (Florida, South Carolina, New Hampshire and Arizona) where the AGI per net tax filer leaving Vermont is greater than $68,000, the approximate average of all tax filer net migration from the state from 2012-16. These four states appear to be where Vermont is “exporting” rich tax payers with an average AGI of about $170,000 per tax filer lost. The total AGI lost to these four states is $455.9 million or 78% of the total AGI lost to these thirteen states.
Vermont is “exporting” 42% more tax filers in the remaining nine states, but they are not rich tax filers. The average AGI of the tax filers lost to these nine states is approximately $35,000. The rich and the not so rich are leaving Vermont in a manner that suggests that tax policies are playing a large role in these migratory patterns.
As indicated in the tax policy chart below, all four states where the rich are migrating to have no estate or inheritance tax, do not tax social security income and have no income tax or have marginal income tax rates that are lower than Vermont’s. Interestingly, all thirteen states, where net migration of more than 200 tax filers over five years is occurring, are much more generous than Vermont to social security recipients. Twelve of these states do not tax social security payments and the thirteenth state, Colorado, exempts $24,000 in social security income per recipient from taxable income.
All thirteen states are considered by Kiplinger to be friendlier to retirees with regard to taxes than Vermont. Although 10 states (including Vermont) are ranked by Kiplinger as being Least Tax Friendly to Retirees, none of these states are where material net migration from Vermont occurs (a total net migration of 167 tax filers to these nine other least tax friendly to retirees states or 4% of all net migration from 2012-16).
| State | Estate or Inheritance Tax? | Tax on Social Security Income? | Highest Marginal Income Tax Rate (flat or progressive tax) | Retiree Tax Friendly Rating by Kiplinger** | Worker Tax Friendly Rating by Kiplinger*** |
| Florida | No | No | No income tax | Most Tax Friendly | Most Tax Friendly |
| California* | No | No | Yes (Progressive 13.3%) | Mixed
|
Least Tax Friendly |
| North Carolina | No | No | Yes (Flat 5.49%) | Not Tax Friendly
|
Tax Friendly |
| Colorado | No | Partial ($24K exclusion per recipient) | Yes (Flat 4.63%) | Mixed
|
Tax Friendly |
| South Carolina | No | No | Yes (Progressive 7%) | Tax Friendly | Mixed |
| Maine | Yes (Progressive 8% to 12%, Exemption $5.6 million) | No | Yes (Progressive 7.5%) | Mixed | Least Tax Friendly |
| Washington | Yes (Progressive 10% to 20%, Exemption $2.19 million) | No | No | Tax Friendly | Tax Friendly |
| New Hampshire | No | No | No | Most Tax Friendly | Tax Friendly |
| Oregon | Yes (Progressive 10% to 16%, Exemption $1 million) | No | Yes (Progressive 9.9%) | Not Tax Friendly | Not Tax Friendly |
| Texas | No | No | No | Tax Friendly | Mixed |
| Georgia | No | No | Yes (Progressive 6%) | Most Tax Friendly | Mixed |
| Tennessee | No | No | No (taxation on dividend interest of 3%) | Tax Friendly | Tax Friendly |
| Arizona | No | No | Yes (Progressive 4.54%) | Mixed | Most Tax Friendly |
| Vermont | Yes (Flat 16%, Exemption $2.75 million) | Yes+ | Yes (Progressive 8.75%) | Least Tax Friendly | Least Tax Friendly |
*California is the only state on this list where the negative net migration from Vermont results in positive AGI income to the state (see previous chart). California’s top marginal income tax rate is 13.3% compared to Vermont’s top marginal income tax rate of 8.75%. California is one of 10 states identified by Kiplinger as being Least Tax Friendly for individuals who are not retired, see: https://www.kiplinger.com/tool/taxes/T055-S001-kiplinger-tax-map/index.php
**Kiplinger’s November 2018 State-by-State Guide to Taxes on Retirees at following website link: https://www.kiplinger.com/tool/retirement/T055-S001-state-by-state-guide-to-taxes-on-retirees/index.php
***Kiplinger’s October 2018 State-by-State Guide to Taxes at following website link: https://www.kiplinger.com/tool/taxes/T055-S001-kiplinger-tax-map/index.php
+ In 2019 in Vermont, for single filers Social Security benefits will be exempt if AGI is less than $45,000 and partially exempt if AGI is between $45,000-$55,000. For married joint filers, Social Security benefits will be exempt AGI is less than $60,000 and partially exempt if AGI is between $60,000-$70,000.
Only three of the thirteen outflow migration states have an estate or inheritance tax (Maine, Washington and Oregon). All three have progressive rather than flat estate tax rates like Vermont has. Maine has a much higher tax exemption than Vermont’s. None of these three states appear to be “importing” wealthy Vermonters.
Net Migration into Vermont. When you net the migration on a per state basis, only five states had net migration into Vermont of more than 200 tax filers in total over the last five years[4]. As you can see in the chart below, there are five states (New York, Connecticut, New Jersey, Massachusetts and Pennsylvania) that are “exporting” relatively wealthy taxpayers to Vermont, but just not enough of them.
The net migration into Vermont from these five states was 2,950 tax filers over the past five years resulted in a total gain to Vermont of $358.7 million in taxable AGI or an AGI of approximately $122,000 per net tax filer gained.
| State | Net Migration of Tax Filers into Vermont 2012-2016 | Net AGI that has migrated to Vermont 2012-2016 | Average AGI per net Tax Filer migrating to Vermont |
| New York | 1,155 | $129.1 million | $111,762 |
| Connecticut | 700 | $77.6 million | $110,879 |
| New Jersey | 534 | $63.4 million | $118,695 |
| Massachusetts | 333 | $68.4 million | $205,477 |
| Pennsylvania | 228 | $20.2 million | $88,522 |
| Total | 2,950 | $358.7 million | $121,593 |
Interestingly, as the tax policy chart below indicates all five states, over the time period measured, had an estate or inheritance tax (New Jersey repealed their estate tax as of 2018). All of these states also had more generous tax policies to social security recipients during the period measured. Based on these facts, it is possible that Vermont may be “importing” mostly working age tax filers from these states rather than retirees. For individuals who are not retired yet, Kiplinger ranks New York, Connecticut and New Jersey as Least Tax Friendly and ranks Massachusetts and Pennsylvania as being Mixed Tax Friendly.
| State | Estate or Inheritance Tax? | Tax on Social Security Income? | Highest Marginal Income Tax Rate (flat or progressive tax) | Retiree Tax Friendly Rating by Kiplinger** | Worker Tax Friendly Rating by Kiplinger*** |
| New York | Yes (Flat 16%; Exemption $5.49 million; is a cliff tax—if estate is more than 105% of the exemption then entire estate is subject to the tax) | No | Yes (Progressive 8.882% plus an additional 3.879% in New York City) | Not Tax Friendly | Least Tax Friendly |
| Connecticut | Yes (Progressive 7.2% to 12%, Exemption $2.6 million rising to $3.6 million in 2019) | Yes (exemption for single taxpayers $50k and for joint $60k) | Yes (Progressive 6.99%) | Least Tax Friendly | Least Tax Friendly |
| New Jersey | Yes during 2012-2016 but None currently (repealed for tax year 2018; prior rate was Progressive 11% to 16% with $2 million exemption in 2017 and $680,000 exemption in 2012-2016) | No | Yes (Progressive 8.97%) | Mixed | Least Tax Friendly |
| Massachusetts | Yes (Progressive 0.8% to 16%, unlimited marital deduction, Exemption $1 million) | No | Yes (Flat 5.1%) | Not Tax Friendly | Mixed |
| Pennsylvania | Yes (No tax on spousal property; 4.5% for transfers to direct descendants (lineal heirs), 12% for transfers to siblings and 15% for transfers to other heirs) | No | Yes (Flat 3.07%) | Most Tax Friendly | Mixed |
| Vermont | Yes (Flat 16%, Exemption $2.75 million) | Yes* | Yes (Progressive 8.75%) | Least Tax Friendly | Least Tax Friendly |
* In 2019 in Vermont, for single filers Social Security benefits will be exempt if AGI is less than $45,000 and partially exempt if AGI is between $45,000-$55,000. For married joint filers, Social Security benefits will be exempt AGI is less than $60,000 and partially exempt if AGI is between $60,000-$70,000.
**Kiplinger’s November 2018 State-by-State Guide to Taxes on Retirees at following website link: https://www.kiplinger.com/tool/retirement/T055-S001-state-by-state-guide-to-taxes-on-retirees/index.php
***See Kiplinger’s October 2018 State-by-State Guide to Taxes at following website link: https://www.kiplinger.com/tool/taxes/T055-S001-kiplinger-tax-map/index.php
The charts below show the percent of total net AGI leaving or entering into Vermont based on the migration patterns of the 18 states with material net migration patterns (more than 200 tax filers) over the period measured. The charts use the Kiplinger worker and retiree tax friendly ratings of the states to see if any noticeable patterns emerge.
| Kiplinger Retiree Tax Friendly Rankings | Most Tax Friendly State | Tax Friendly State | Mixed Tax Friendly State | Not Tax Friendly State | Least Tax Friendly State |
| OUTFLOW: Percentage of Vermont AGI Lost to Net Migration | 70% | 13% | 8% | 8% | 0% |
| INFLOW: Percentage of Vermont AGI Gained from Net Migration | 8% | 0% | 18% | 55% | 22% |
| Kiplinger Worker Tax Friendly Rankings | Most Tax Friendly State | Tax Friendly State | Mixed Tax Friendly State | Not Tax Friendly State | Least Tax Friendly State |
| OUTFLOW: Percentage of Vermont AGI Lost to Net Migration | 59% | 26% | 10% | 2% | 4% |
| INFLOW: Percentage of Vermont AGI Gained from Net Migration | 0% | 0% | 25% | 0% | 75% |
Charts above are of states with net migration to or from Vermont more than 200 tax filers from 2012 to 2016
Vermont’s net migration of tax filers appears to be correlated to our state’s tax policies. The following appears to be occurring in response to the tax policies of Vermont and other states:
- Rich retirees and workers are leaving Vermont for more tax friendly states. These retirees and workers are looking to avoid Vermont’s estate tax and income tax on social security benefits and other income. Eighty-three percent of taxable AGI that left Vermont went to states recognized by Kiplinger as Most Tax Friendly or Tax Friendly to retirees. Eighty-five percent of taxable AGI that left Vermont went to states categorized by Kiplinger as being Most Tax Friendly or Tax Friendly to workers.
- Vermont only appears to be able to generate material net migration (retirees or workers) from states whose tax policies very similar to Vermont’s. Seventy-five percent of taxable AGI was gained by Vermont from states categorized by Kiplinger as Least Tax Friendly to workers. Seventy-seven percent of taxable AGI “imported” into Vermont came from states recognized by Kiplinger as Least Tax Friendly or Not Tax Friendly to retirees.
The percent of Vermont’s population over age 65 is nearly 20% and continues to grow. Vermont is one of the oldest states, by median age, in the nation and continues to get older. Vermont is not growing its population. Vermont needs tax policies that reduce the number of rich tax filers leaving the state and policies that will attract more rich tax filers to move here. Modest changes in these net migration numbers could generate enough taxable income to pay the tax changes and generate additional tax revenue for the legislature to spend on needed public services. That is the theory behind the proposed estate tax modifications that the Scott administration is pursuing. Tax policies designed to retain and “import” more rich retirees and rich working tax filers is certainly worthy of more study and consideration by Vermont’s legislature.
[1] Measures only migration between Vermont and the 49 other states and District of Columbia and does not include migration to or from foreign countries.
[2] In five states (Arkansas, Nebraska, North Dakota, South Dakota and West Virginia) the migration numbers were so low that the IRS suppressed the data in certain years to prevent individual disclosure of income.
[3] There is a large drop off in outflow net migration per state below 200 over the five year period measured. Virginia was ranked number fourteen with 194 net migrants out of Vermont followed by Montana at fifteen with 98 net migrants.
[4] There is a large drop off in inflow net migration per state below 200 over the five year period measured. Maryland was ranked number six with 28 net migrants into Vermont followed by Iowa at seventh place with 13 net migrants.