Vermont Officials Seek to Separate from Federal Tax Changes to Prevent Budget Deficits

Vermont officials want to break with some new federal tax changes to avoid revenue shortfall.

As discussions about the federal tax code progressed, Vermont's House Ways and Means Committee became increasingly apprehensive about potential implications for state revenues. Initial assessments from last year's Republican-led One Big Beautiful Bill Act indicated a slight impact, but subsequent analyses revealed a more serious situation.

According to forecast data from the Legislative Joint Fiscal Office, the newly implemented federal tax changes are anticipated to create a $33 million deficit in the 2027 budget currently being drafted. Additionally, the state may encounter a revenue shortfall exceeding $20 million in the present budget year, which is already more than halfway through its expenditure.

In response to these alarming projections, officials from the House and Governor Phil Scott's administration are advocating for a divergence from certain federal practices related to corporate and business taxation. This initiative aims to stabilize state revenue streams and is expected to yield marginally higher revenue forecasts.

House Ways and Means ranking member and lead advocate for the proposal, Rep. Charlie Kimbell from Woodstock, expressed concerns about the state’s inability to absorb the projected loss in tax revenue, emphasizing the necessity for legislative adjustments.

While federal tax modifications do not directly alter Vermont’s fiscal framework, the state customarily revises its tax code annually, incorporating relevant federal changes. This practice, known as linking up, is intended to maintain conformity between state and federal tax regulations, thereby simplifying compliance for taxpayers and local officials.

However, Deputy Tax Commissioner Rebecca Sameroff noted that the administration appreciates the House's attempts to align revenue generation with favorable business policies. She highlighted that numerous other states are also selectively adopting similar linking strategies.

Vermont has a history of opting out of specific federal tax provisions. The state legislature occasionally decides to discard certain elements while allowing the remaining changes to integrate into the local tax system. A notable instance of this was in 2018 when Vermont detached from several impactful personal income tax policies.

Kimbell's committee put forth H.933, a comprehensive tax bill that proposes separating from key components of the new federal tax code, particularly those affecting corporations. The bill successfully passed through the House and is now proceeding to the Senate.

One of the primary measures involves dissociating Vermont’s tax regime from federal tax deductions available for income generated overseas, targeting primarily large multinational enterprises. Additionally, businesses would be required to deduct production costs over multiple years rather than in a single year, as suggested by the federal code.

Changes have also been proposed regarding deductions for companies' research and experimentation expenses. Initially, an immediate deduction option was available for all firms, but the House opted to restrict this to businesses with total revenue below $31 million. The legislation also aims to broaden existing state tax credits related to such expenses, a move welcomed by industry representatives.

State Chamber of Commerce President Amy Spear remarked on the diverse applications of research and experimentation, from advanced engineering to testing new beer recipes. She and Sameroff express strong endorsement for the bill's research expense provisions, viewing them as crucial for emerging businesses that require immediate cash flow to thrive.

On a more contentious note, the proposal will not permit investors to completely exclude capital gains generated from shares in certain smaller businesses, a benefit they would retain under federal law. Sameroff flagged concerns regarding this specific provision, stating that taxing these gains, while not essential for revenue, could deter investment in startups—an important factor for Vermont's economic landscape.

Another adjustment to H.933 allows for some, but not all, exemptions on capital gains through Vermont’s established exclusions. House leaders are unified in their stance that decisive measures are essential to maintaining state financial stability.

In earlier discussions, House Appropriations Committee Chair Rep. Robin Scheu highlighted the possible drastic revenue losses if changes were not enacted, reiterating that the governor had not anticipated such deficits in his budget plans. The new revenue predictions are seen as advantageous for the committee as it strives to manage its budget amid fiscal constraints.

While many aspects of last July’s federal budget legislation—like the child and dependent tax credit system—will be adopted into Vermont law unchanged, Kimbell expressed caution about the possibilities of overlooking any further implications.