Vermont lawmakers are currently considering DR 26-0804, a proposal that would significantly increase taxes on high-income households and investment activity. The proposal would raise the state’s top marginal income tax rate to 13.3% on income above $586,000 for joint filers or $480,000 for single filers and small businesses, and impose an additional 4% surtax on investment income. If enacted, these changes would make Vermont the highest-tax state in the country (tied only with California) for top earners, far exceeding regional tax rates in New England.
Research from the National Taxpayers Union Foundation has consistently shown that taxpayers migrate from high-tax states to more competitive ones. This helps explain why no-income-tax states such as Florida, Texas, and Tennessee continue to experience strong population inflows, while higher-tax states like New York, California, and New Jersey see sustained outmigration. Importantly, mobility is not evenly distributed. Higher-income households are more responsive to differences in state tax policy, and they are also disproportionately important to state tax bases.
This dynamic is significant in a small state like Vermont, where even modest outmigration among high-income households can have an outsized fiscal impact. The top 1% of taxpayers in Vermont currently contribute about one-third of the state’s total income tax revenue, meaning relatively small shifts in this group can have a meaningful effect the state’s fiscal position.
If the legislature proceeds with this proposal, it would place additional pressure on Vermont’s already constrained economic environment, particularly given the structure of the state’s business community. Approximately 92% of Vermont businesses are organized as pass-through entities, meaning their income is taxed through the individual income tax system. As a result, many small businesses would face higher tax burdens under the proposal than C corporations, which would remain subject to the top corporate income tax rate of 8.5%. The Vermont chapter of the National Federation of Independent Business has cautioned that such policies will increase costs for small businesses and reduce the state’s competitiveness as a place to start, expand, or relocate operations, particularly relative to neighboring states.
According to the U.S. Census Bureau, Vermont’s population already declined by approximately 0.3% between 2024 and 2025 – the largest percentage decline in the country. While population change is driven by multiple factors, tax policy is widely recognized as one of the key influences on interstate migration, especially among higher-income households.
Regionally, Vermont remains marginally competitive with neighboring high-tax states such as Massachusetts (9% top marginal rate) and New York (10.9% top rate) and has historically benefited from the income migration out of those states. However, as you can see in the graph above, Vermont’s proposed increase to 13.3% (especially when combined with an additional surtax on investment income) would move it well beyond those regional benchmarks, reducing its ability to attract and retain mobile taxpayers and investment.
When will Vermont stop looking for ways to collect more taxpayer money and start spending existing revenue more responsibly?
Vermont is not a low-tax state struggling to fund basic services. It already ranks 42nd on the Tax Foundation’s 2026 State Tax Competitiveness Index, among the least competitive tax environments in the country. At the same time, despite total state spending pressures exceeding $9 billion annually, there are recurring budget gaps and continued demands for new funding. By contrast, New Hampshire operates with a slightly lower total budget while serving more than twice Vermont’s population and has continued to experience population growth driven largely by in-migration, suggesting that good fiscal policy and economic competitiveness play a meaningful role in attracting residents and businesses.
Despite sustained increases in spending on systems like education and healthcare, costs have continued to rise faster than inflation, and access challenges persist. The pattern has become familiar to Vermonters: lawmakers increase spending to “address affordability,” taxes are raised to fund that spending, and yet taxpayers see costs continue to climb.
So, how can Vermont reduce fiscal pressure on its citizens to avoid driving away the individuals and businesses that sustain its economy?
A more sustainable approach is one grounded in fiscal discipline, economic competitiveness, and market-driven solutions rather than continued expansion of government programs. That includes reducing regulatory and tax burdens, simplifying the tax code, and lowering marginal rates to encourage investment and attract new residents. It also requires reversing the state’s tendency to centralize systems in areas like healthcare and education, where increased regulation and state spending have not, and will not, translate into improved affordability. States that pursue competitive, growth-oriented policies, particularly those with lower marginal tax rates, experience stronger population and economic growth, and Vermont would be wise to follow suit.
