Vermont received an unexpected windfall in the last year from a tax that targets the state’s wealthiest residents.
It took in $55.2 million in estate tax revenue during the fiscal year that ended June 30, more than double the previous annual record. Most of that money came from a single estate changing hands, according to government officials.
But state officials and economists say it also signals the beginning of a longer-term trend that could help boost government funding and close the state’s wealth gap.
“This is going to be, without a doubt, without any changes on our part, without any policy decisions, an increasing part of both Vermont’s budget and Vermonters’ experiences,” said state Rep. Emilie Kornheiser, referring to the estate tax. As chair of the House Committee on Ways and Means, the Brattleboro Democrat plays a key role in steering state tax policy.
Economists estimate that as much $124 trillion in assets will change hands nationwide over the next two decades as aging baby boomers bequeath their holdings to their heirs. The so-called “great wealth transfer” could be especially consequential for the minority of states — Vermont among them — that impose state-level taxes on estates.
Everything from a demographic perspective and an economics perspective are pointing in the direction of: Yes, those revenues will continue to increase.John Sabelhaus, visiting fellow at the Brookings Institution
John Sabelhaus, a former Federal Reserve Board staffer who now serves as a visiting fellow at the Brookings Institution, said Vermont’s estate tax, combined with its demographic profile, position the state to see significant revenue increases. The proportion of residents older than 65 in Vermont is among the largest in the nation.
“Everything from a demographic perspective and an economics perspective are pointing in the direction of: Yes, those revenues will continue to increase,” Sabelhaus said.
Kornheiser sees the estate tax as one tool Vermont could use to alleviate economic inequality during the “great wealth transfer.”
Only the very richest Vermonters are subject to the tax, which assesses a flat 16% charge on the transfer of estates worth more than $5 million. Twelve other states — New York, Massachusetts, Connecticut and Maine among them — have estate taxes that kick in at anywhere between $1 million and about $7 million in assets.
“Do we want to make sure that our tax policy is benefiting the folks who need it, and a government that works well and protects its citizens? Or are we going to allow our tax policy to be more and more giveaways to the wealthy?” Kornheiser said. “Estate taxes are a really big part of that. Inherited wealth is how large-scale wealth is generally built.”
The net worth of U.S. households nearly tripled between 1997 and 2021, and according to an analysis by Brookings, people aged 55 and older accounted for 97% of that growth.
The bump in estate taxes is exciting for our revenues. It also shows this huge bank of wealth that we do have in Vermont, particularly among folks at the top.Anika Heilweil, Public Assets Institute
Anika Heilweil, with the Public Assets Institute, said the tax and budget bill approved by Congress earlier this summer exemplifies a decades-long trend in federal policy that has allowed the wealthiest Americans to shield their income and assets from taxes.
“The bump in estate taxes is exciting for our revenues. It also shows this huge bank of wealth that we do have in Vermont, particularly among folks at the top,” Heilweil said.
Heilweil said the Public Assets Institute has championed a 3% surcharge on incomes over $500,000 in Vermont as a “proxy” for a wealth tax. She said changes to the estate tax could also advance the organization’s goal of capturing more public revenue from the state’s richest residents.
“We’re coming at this from the angle of, how can we be collecting the revenue that we need in Vermont in order to meet Vermonters’ needs and address the federal funding changes?” Heilweil said. “I think the estate tax is definitely part of the story on taxing wealth in Vermont.”
But the estate tax has some drawbacks, according to Lucy Dadayan, principal research associate at the Urban Institute. Because revenue totals generally hinge on a small number of large estates, it’s among the most volatile revenue sources in government.
“The long-run wealth transfer could boost revenue collections,” she said. “But the reality for state budgeting is continued volatility and heavy sensitivity to federal rules and market cycles.”
Rep. Kornheiser said high-wealth households are also able to manage their estates in ways that reduce tax liability, through the creation of trusts, for example, or the exporting of assets to jurisdictions that do not impose estate taxes.
There are other considerations for Vermont’s elected officials as well. Under current law, all estate tax revenues above 125% of consensus forecasts are deposited directly into the Higher Education Trust Fund, which subsidizes tuition for Vermonters seeking degrees at state colleges and the University of Vermont. That resulted in a windfall of more than $27 million for the trust fund this year, nearly doubling the previous balance.
Kornheiser said the Legislature will need to decide if that’s the best place to send future windfalls. She said her committee is planning a wholesale assessment of the state’s tax code during the next legislative session, to determine the impact of federal legislation on tax receipts in Vermont.
“And I think while we’re in there,” Kornheiser said, “we would have an opportunity to look at the estate tax, and how well it’s working.”
