Vermont’s Democratic candidate for governor, Amanda Janoo, has supported a proposal from progressive advocacy coalition Fair Share for Vermont to impose surtaxes on some high-income households. Revenue generated would be used for universal primary and preventative care.
The proposal has some advantages. Its relatively low income threshold means that the surtaxes could bring in substantial revenue and be less susceptible to the kinds of tax avoidance strategies that have plagued proposals with even higher income thresholds. At the same time, state income data suggest most Vermonters would not be subject to the surtaxes.
However, the proposal also has potential disadvantages. As designed, it would disproportionately affect businesses organized as “pass-through” entities and married people filing jointly. And, because it is unclear whether the thresholds would be indexed for inflation, the surtaxes could apply to more people over time as incomes rise.
Additionally, recent research suggests taxpayers may be more mobile in response to higher taxes than was previously thought. High-income taxpayers with a lot of capital gains will have several methods to avoid the tax.
Some of these issues are unavoidable, but others might not arise under alternative tax designs.
The surtaxes would result in much higher tax rates on middle- and high-income households
Vermont has a progressive income tax with four brackets. In 2025 the top rate was 8.75 percent, starting at $304,000 for married couples filing jointly and $249,700 for single taxpayers. The brackets are indexed for inflation.
Fair Share for Vermont has proposed several tax changes aimed at offsetting some of the federal tax cuts enacted through the One Big Beautiful Bill Act in 2025. The most aggressive change would impose a 2 percent surcharge on adjusted gross incomes over $250,000, and 8 percent on income above $500,000. The 8 percent would replace, rather than be added to, the 2 percent surcharge.
The proposals would nearly double Vermont’s top marginal tax rate for taxpayers with incomes above $500,000 to 16.75 percent, which would be the highest in the country.
The surtaxes rely on a small tax base for potentially large revenues
Fair Share for Vermont estimates its proposals would raise about $344 million annually. While advocacy organization projections may differ from official state estimates or other independent analyses, even half that revenue would increase Vermont’s individual income tax collections by about 14 percent. Yet the top rate would apply to very few taxpayers. (About 1 percent of Vermont tax returns in 2023 had incomes greater than $500,000.)
The proposal’s relatively low income threshold would also reduce risk of some tax avoidance strategies. For example, analyzing a 2021 federal surtax that would apply to taxpayers earning more than $1 million, my co-author Karen Smith and I found that many could avoid the tax by spreading realized capital gains over two or more years. And assets not easily converted to cash, such as buildings, could be sold using installment sales.
Taxpayers earning much less than $1 million are less likely to have a large share of their income from realizations of capital gains, making it harder for them to avoid the surtax.
The surtaxes have potential pitfalls
The proposal would apply to pass-through firms that are not subject to corporate taxes, instead passing their net income to owners who then report and pay tax on their individual income tax returns. IRS data show that about 10 percent of Vermont taxpayers reporting income from S corporations and partnerships have incomes greater than $500,000. However, a report from the Vermont Chamber of Commerce argues that some pass-throughs are small businesses that lack the liquidity to pay higher taxes based on their adjusted gross income.
As written, the surtaxes would also impose a marriage penalty. Two unmarried taxpayers who each had $200,000 of income would not exceed the individual income threshold. If they were married and filing jointly, however, their combined $400,000 of income would exceed the $250,000 threshold for married couples, potentially subjecting their income to the new tax.
Although Vermont’s regular tax brackets are adjusted for inflation, there is no mention of an inflation adjustment for the thresholds of the surtax. If there were no adjustment, as incomes generally rise an increasing share of taxpayers would be affected.
Very high-income taxpayers could choose to avoid the tax by moving to another state. Research on the migration of millionaires among states has found that this effect is relatively small. However, more recent studies find larger responses for particular groups of taxpayers. Because Vermont is a small state and is near to low- or no-income-tax states such as New Hampshire, migration concerns may be more relevant than they are in larger states.
High-income taxpayers who don’t move could also react to the surtaxes by changing when they realize capital gains. Additional research by Karen Smith and me found that those with incomes consistently above $1 million react to tax increases by decreasing their capital gains realizations—including by holding appreciated assets longer. In that case, higher capital gains tax rates could lead taxpayers to sharply reduce the amount of gains they realize.
Vermont could impose surtaxes and avoid some pitfalls
As with many taxes aimed at high-income taxpayers, the surtaxes could induce responses, such as migration to other states or re-timing realizations of their capital gains. Both could affect revenues.
Two problems could be avoided through tax design. The marriage penalty could be eliminated by doubling the income threshold for married couples. Income thresholds could be indexed for inflation, if they are not already.
And design could also reduce the potential impact on small businesses, though would involve tradeoffs. For example, small businesses could be allowed to exclude retained earnings below a cap from the surtax base. That would ameliorate the cash flow problem, but it could be difficult to administer, and it could create opportunities for taxpayers to reduce surtaxes by retaining some earnings within the business.
Alternatively, the surtaxes could apply to taxable income instead of adjusted gross income, allowing business owners to use more deductions, but this broad approach would bring in less revenue and provide relief to taxpayers beyond those facing cash-flow problems.
Fair Share for Vermont is proposing an ambitious tax plan. Even if its revenue estimates end up being overly optimistic, the plan would raise a significant amount of revenue. The question is whether and how the design of the plan could be improved.
