Vermont Legislature SmartTranscripts:

[Rep. Emilie Kornheiser (Chair)]: Part two. Here, joint hearing, ways and means, senate finance, day one, legislative session, beginning with a bang. Part two. Thank you, Patrick for joining us.

[Patrick Turton (Joint Fiscal Office)]: So Patrick Turton, joint fiscal office, I do commend all of you for really jumping in like this.

[Rep. Emilie Kornheiser (Chair)]: I don't know if anyone had a choice.

[Patrick Turton (Joint Fiscal Office)]: So you're going hear me say a lot of the same things that you just heard Kirby said. I'm going to try and say them differently. So if you understood something that Kirby said and don't understand me and vice versa, hopefully we can triangulate it. Yeah, I, likewise, I'm going to talk about a couple of things in personal income tax that were sort of very much in the news, but don't necessarily affect Vermont. We're going to talk about looking at tax forms, how we actually figure out whether something's above the line or below the line. And then for the business tax side of things, there's so many things in there that I'm also going to focus on the things that are actually flowing through. We can, of course, talk about all that at a later date. But I guess jumping into it for personal income taxes, reconciliation acts included a lot of different provisions. Again, I'm focusing on ones that were sort of more popular. I might reference a couple of more esoteric parts of it that are not in the presentation, but some ones that you've just heard about is the deduction for tax income, the deduction for overtime pay, the automobile loan interest payments, the enhanced deduction for BILE 65 plus, and then that child and care credit phase down or expansion. And again, not all of these flow through, some are above, some are below the line. But just to quickly summarize again, because it was over an hour ago at this point, for the tipped, the deduction for qualified tipped income, filers can deduct up to $25,000 of that if they have an AGI of 150 or lower, that's for single filers, or $300,000 or lower if they're married to joint filers. And then again, this is sort of phased out beyond that point. Perry mentioned this is temporary for tax use twenty five to twenty eight. The second thing was that overtime income deduction. So again, they can deduct 12,500 of that if they are below an AGI of 150,000 if they're an individual filer. If they're a joint filer, they can deduct up to 25,500 if their AGI is below 300,000. And again, temporary through 2028. The deduction for automobile interest, it's for interest paid on qualified passenger vehicles and it's limited to vehicles with final assembly states. So it's not just any vehicle, it's specifically those sort of final assembly in The US. Yeah, so you can deduct up to $10,000 of that if you are an individual with $100,000 or less of API, your joint filer less than $200,000 And the deduction is for the interest paid that is accrued within that year. It's not prospective looking. It's just for what's been paid in that year.

[Rep. Emilie Kornheiser (Chair)]: That's for a loan, right?

[Patrick Turton (Joint Fiscal Office)]: Yep. It's the interest paid on your auto loan. Got it. And then, yeah, there's an enhanced deduction for senior citizens. And that is face out filers with AGI above 75,000 if they're single filer and 150,000 if they're joint filers, again, temporary. So you heard all that. And one thing that I found through this whole process that actually was really helpful in understanding all of this, and it's probably really boring sounding, is going and looking at the actual tax forms and sort of using that to use sort of like develop a flow chart for determining this kind of thing. So what we have here is the federal form ten forty, which includes the calculation of your income that ultimately adds up to adjusted gross income. Now, we always say that adjusted gross income is the starting point for Vermont based personal income taxes. And so when you look at this form in this red box towards the bottom here that I have, that line 11A is our starting point when we're just talking about Vermont income taxes. Lines one through 10, those are purely sort of the feds have full control over what the definitions are within that, what is and what is not included, whether you're including all of that type of income. I mean, the biggest thing on here you'll see is that W-two box. That's going to include your salary, wages, tips. I think it includes social security income as well. So that's sort of the primary box that a lot of Vermonters Americans are gonna be filling out for the most part. There are certainly other things that go into income. You see further down, there's IRA distributions, there's pensions and annuities, capital gains. So as long as the feds aren't touching any of what defines those types of income and their inclusion in this part of the form, it doesn't matter to us. I just mentioned, well, you report your tip income up here in line 1A, right? The deduction doesn't actually show up until we get below that line 11A and it's in this other part of the form line 13B. So that line 13B that is the schedule 1A, That's where you see, it's a new part of the form. That's where you see the tips income, overtime pay, car loan interest, and the enhanced deduction for seniors. That form only includes those four things, and that's below the line, so none of those are flowing through. So for the concept of flow through and above the line, below the line, does that help illustrate that a little bit for folks?

[Rep. Emilie Kornheiser (Chair)]: Yes, that's very helpful. It's literally a line.

[Patrick Turton (Joint Fiscal Office)]: Yeah, it didn't take a lot of imagination to come out. A lot of you have seen this before. We take that line 11, 11a, which was the federal adjusted gross income. You see here that that is our starting point for Vermont's personal income taxes. Now we do add back some things like bonus appreciation and interest paid or interest earned from non Vermont state and local bonds. But we have our own standard deductions, our own personal exemptions, and some other subtractions we make

[Rep. Edward "Teddy" Waszazak (Member)]: from to

[Patrick Turton (Joint Fiscal Office)]: get to Vermont taxable income. And I'm showing you all this again, you'll see where I'm going here. The next slide, that Vermont taxable income is then what flows through our brackets of those marginal brackets, which I'm sure you're all familiar with. And then we get to credits. Now, credits are something that Back up. On the federal return, credits show up further down on the form that I even showed you. So that any changes that the feds are making to their credits, that's all stuff that's below the line. However, there are a few different credits that Vermont has where we are coupled to the federal calculations of them. So one example is the child dependent care credit. And I call that out because Vermont has a state level child dependent care credit that is equal to 72% of what you can receive from the Fed. So while we have our own separate credit and their credit is below the line, as we have a statute calling out their calculation of this credit. It shows up here and that's why in that particular instance, that can flow through even though it's below the line, right? Another example for this is the earned income tax credit. That's another one where we just take an applicable percentage of your federal credit amount. You can receive it on your Vermont tax return as its own state specific credit against your state tax liability. So I don't have as many words about how the phased out changed because I do have a chart right after this, but the upshot is for the child and then a care credit, the maximum credit amounts didn't change from pre HR1 to now, but the percentage of dependent care expenses that you have did increase. It went from 35% to 50% and they even have an extra plateau, which you'll see in a second. And again, just said maybe a slightly different way. All this means is that if you pay $1,000 for childcare, you get $500 back to the refundable credit in the state of Vermont based on that. Again, it's refundable. We talked about the federal credits being calculated below the line, but we're linked in that way. I guess the other thing I have in this presentation that Kirby doesn't, is I have some numbers. We are estimating that this change starting in fiscal year twenty twenty seven is going to add an additional about a million dollars to this tax expenditure in the state. So now this is on top of what we already have for tax expenditure in the last tax expenditure report, so shorthand for that, we were projecting that in 2020 for fiscal twenty six, that would come in around 4,800,000.0. So a million on top of that going forward. And so, yeah, we're expecting this revenue to start kind of decreasing starting in fiscal year twenty twenty seven. So not immediately for fiscal year twenty six. This is the chart.

[Rep. Emilie Kornheiser (Chair)]: Thanks. So

[Patrick Turton (Joint Fiscal Office)]: this green line here shows you what the reimbursement rate was under Tax Cuts and Jobs Act. You can see it starts over here on the left at 35 percent. There is a phase down period up to $43,000 And then it just stays constant at 20% as far up the income spectrum as you go. And it was the same for both individual filers and joint filers. So the change that the feds made is they did two things. They split it so there's two schedules, one for individual, one for joint filers. And they sort of implemented two, actually two totally different phase downs. So both jump up to 50% reimbursement rate up to $15,000 of income. They both bays down to 35% reimbursement rate at that $43,000 AGI point. Then you can see in the orange there, which is the unmarried filers, there's a plateau up until I think it's about $75,000 where then again, it starts to phase down to that 20%, which just stays at 20% no matter how much you're making for the joint filers at that same point where single plateaus, it just slowly comes down to the 20%. Any questions on the chart or does that sort of help illustrate that? Of the chart.

[Rep. Edward "Teddy" Waszazak (Member)]: There's a maximum credit amount,

[Patrick Turton (Joint Fiscal Office)]: correct? Yes. I think it's around $3,000 per dependent. And then if you have two tenants, that amount depend. But expenses have to specifically be for each dependent. Again, there's a whole dependent is defined a little bit differently for this particular credit than it is traditionally. They call them qualifying individuals. Okay, so that is personal income taxes. Next, we have the area of my portfolio that a colleague of mine has claimed is Byzantine and Esoteric, and that is corporate business income taxes.

[Rep. Emilie Kornheiser (Chair)]: Did Chris say that?

[Patrick Turton (Joint Fiscal Office)]: I'm not naming names. So again, I just want to reiterate that we're really going to be focusing on things that are flowing through. And I pulled another form that we can look at that's specific to corporate and past identities And where all of these changes that Kirby just walked through with you and I'm about to walk through with you live on the form. And so, yeah, we'll do a similar type of exercise. So this is IRS Form eleven twenty. There is one for C Corps and there is one for insurance companies, S Corps, all different kinds of past remedies or different incorporation types. This particular one is for C corps, but generally speaking, they're all structured almost identically with maybe some variations here and there. So this is the first half of the form. And what you're seeing here is how we get up to how we total all of the money coming into your corporation to get to what your total income is. And just to note, total income does not equal taxable income, which we'll see in why a lot of these changes are flowing through because this is just the money coming in, doesn't factor in the deductions, which ultimately get us to taxable income. So like with personal income, we're line 11A, it's the starting point for Vermont personal income taxes. Line 28 on this form eleven twenty is our starting point for corporate income taxes. This slide is sort of, I've referred to it before when talking about corporate income taxes as total net income or something like that. And to the clarification point earlier that Kirby spoke to, this is pretty apportionment with that single sales factor.

[Rep. Emilie Kornheiser (Chair)]: So who pays corporate taxes in Vermont?

[Patrick Turton (Joint Fiscal Office)]: C corps. Every C corp that sells to the Vermont market will be filing a return and have to apportion some of their net income towards Vermont corporate income taxes.

[Rep. Emilie Kornheiser (Chair)]: So if I have a corporation here and we like have our headquarters here and all of our employees here, we don't sell anything here, do I put corporate income taxes?

[Patrick Turton (Joint Fiscal Office)]: Well, you, interestingly enough, there are quite a lot of corporate income tax filers who file zero basically income returns in Vermont. And what I mean by that is they just file in all 50 states, but if they don't have sales into Vermont, they aren't paying anything. So if you are a Vermont based headquartered, have a bunch of employees here, all that kind of stuff, but you only sell into New Hampshire and nowhere else, you're not gonna pay anything in Vermont corporate income taxes. Of course, there's things like payroll tax, property tax, stuff like that, but no. Thanks. It's a short answer.

[Rep. Emilie Kornheiser (Chair)]: I like the long answer too.

[Rep. Edward "Teddy" Waszazak (Member)]: But in my opposite, a company that's not headquartered here but has sales here, such as Comcast or something else.

[Rep. Emilie Kornheiser (Chair)]: This was the change we made, like, four, five years ago, whenever that was. Yeah. That one? Sure.

[Patrick Turton (Joint Fiscal Office)]: That was in response to the Taxpayments Act, I believe, earlier.

[Rep. Emilie Kornheiser (Chair)]: After. Recently. Yeah. Because it started out as a tampon tap still. Oh, that was so funny. Forgot about that. Some of us are still going to get even because some of us are still happy about it. Back to you, Pat.

[Patrick Turton (Joint Fiscal Office)]: So in other words, this line 28 is our line. All of the things I'm going to talk to you about next are occurring in line 27. So that's above our line 28 line. So I'm not going to read every single one of these because it's a long list, but these are all the things that Kirby just spoke with you about. And going I'm to try and give a slightly briefer summary of what they are and also sort of describe what we're thinking the fiscal impact to the state specifically to the state's revenue picture, not what their federal picture is going to look like and how that's changing at all. Just the state revenue picture. So the deduction for domestic research and development expenses. So to put it again, this changed how these expenses are deducted and calculated on a year to year basis for corporations. It's actually reverting back to a pre Tax Cut and Jobs Act change where previously you could fully deduct those expenses in the year that they're incurred. Tax Cut and Jobs said you have to amortize that over a five day period. We're just going back to the previous treatment where you can deduct it all right up front in the year that it's incurred. I guess I should caveat that by saying if the deduction is more than your tax liability, you can carry it forward. And so one thing also in this is that HR1 paid the R and D expenses that you can deduct retroactive to 2022. So presumably there's some expenses that companies have been amortizing over their five year period. They still have some left on that amortization period. So they will be able to sort of look back anything that's not been deducted already, they can deduct now. So with that look backward. And what that does in two ways with the look back and with the fact that any expenses that occurred now going forward can be deducted right away, is that it's really going to sort of front load a lot of those costs. So this change in how the timing of when you can deduct these expenses is expected to reduce state revenues by approximately 2,300,000.0 in fiscal year twenty six and twenty seven, and then sort of gradually weighing going forward. Because in some ways, if you think about it, this is kind of more of a cost shift rather than an increase in cost. So over the super long run, it's kind of a net neutral change in some ways, but for the immediate future, it's certainly going to be a net negative, we see in terms of the same revenue picture. So that was R and D. The amended limitation on business interest deduction. So HR expanded that limit to which corporations can deduct interest paid on loans for business purposes. The limit is limited by the sum of their business interest income, So the amount that they're actually earning on interest or their floor plan financing, which I had to look up what this was. It seems very specific to auto dealers where they'll receive a lot of vehicles from a manufacturer, sort of a credit. They're paying interest on that vehicle while it sits on the lot. Once they sell it, they pay off the principal and the interest and keep the rest. And then the third limit that can come into play is 30% of their adjusted taxable income. So there's three limits. What HR1 expanded was the percent of business interest paid that can be deducted. That just went from 30 to 50%. And again, because the Vermont is coupled, it's happening above that line 28 that we just saw. This change is estimated to produce revenue, and we're estimating approximately 1,000,000 annually starting in fiscal year twenty twenty six moving forward. I have

[Unidentified committee member]: a question. So these revenue projection downgrades are based on the current businesses that are paying those taxes? It doesn't have anything to do with the projection on increased businesses or depreciated businesses throughout Vermont?

[Patrick Turton (Joint Fiscal Office)]: Sure. Guess so. I can take a step back and talk about what we're looking at with all of these. So over the course of the summer, Kirby, myself, whole slew of people at the tax department have been working through things like what has flown through? Well, how do we come about estimating this? So we've been working together on a lot of these questions and for the estimates in this specifically, we're sort of utilizing both some in house data that the tax department actually has, but for other areas, and this is particularly true in corporate finance in general, there's a real dearth of information available. So sort of the basis of what we were working with is, so there's the joint committee on taxes, it's JCT. They kind of are, they're sort of like how the CBO does a lot of economic and policy projections, but they do a similar role for scoring tax policy. So they did that for this bill. And so they did have presumably some estimates in there, which I don't know the exact methodology they're using, but it was clear to us, particularly looking at, I think it was the R and D estimate. It was very clear to us that they were assuming some degree of growth. What that particularly was, we're not sure. But we did look around at a lot of methodologies that other states are using And it seems like everyone's kind of in the same place with what they have available to look at to come to some of these estimates. And so again, I have some numbers here. It's corporate income tax. It's incredibly volatile. So it's really difficult to look at. And also, I think us and the tax department is gonna wanna go back and sort of revisit all of this when the new forecast comes, the consensus forecast comes out for the state. Which is next Friday. Right. But I guess all that is to say there's a lot of uncertainty, particularly because we're talking corporate income taxes here.

[Rep. Emilie Kornheiser (Chair)]: I just want to take a minute to thank you and Kirby and the team at TACS. You all started working on this when the federal law just passed and there wasn't even guidance attached to it yet. And I know you've been just, like, digging in really deep on a lot of incredibly confusing work. So thank you both. Been trying. Yeah. And there's a really great comprehensive memo that this sort of covers everything in the PowerPoints, but in a slightly different way, and that's posted on our page for today. Sam,

[Patrick Turton (Joint Fiscal Office)]: million dollars sort of anticipated reduced revenue annually for corporate income from this particular one. Exceptions from limitation of business meals deductions. And to be honest, I had to read over this section 100 times before I really understood what it was saying. But Kirby, I think, explained it pretty well earlier. Before, there's sort of a general deduction for business entertainment expenses. Here's the lunch example. TCJA limited a lot of that broad ability to deduct those expenses and made them much more stringent. HR1 maintains these restrictions, but they created a couple of new exceptions to things that can be deducted certain expenses. That included when employed. So an employer offers food or beverage and the employee pays the same rate that the general public is able to pay for that product or food or beverage. And then meals provided to crews on commercial vessels, on oil platforms, provided on certain fishing vessels and facilities. So again, you probably might think, well, we don't really have those industries. But again, remember this is going to be corporations that are selling into the Vermont market. That said, through the analysis, think we were looking at thousands of dollars, not tens of thousands, thousands of dollars of potential revenue impact. So I always get asked, so how do you define de minimis? It's not really a strict I think it's appropriate in this case that we're talking about a fairly limited scope sort of revenue exposure for the state. So the limitation on expensing for depreciable business assets. HR1 increased the maximum amount that a taxpayer could expense for the cost of a qualifying depreciable business asset. And we were covering the cost through depreciation. Did we describe this? Well, it's really geared towards small businesses. It's saying that instead of amortizing it over the lifetime of the product, these are durable goods or buildings, you can instead take that depreciable value upfront. It's pretty limited. It went from a million dollars to $2,500,000 And again, it's really sort of going to be geared towards some of the smaller businesses. Again, we're coupled, so it's going to flow through. And we're estimating approximately $250,000 revenue or foregone revenue in fiscal year twenty twenty six, and then rising to approximately 600,000 in years going forward. The special depreciation allowance for qualified business assets. This is the one that has to do with the qualified production property. So you're with this change, you're able to now deduct 100% of its adjusted cost base. It's a 100% bonus depreciation that specifically can be used for non residential property, which as Kirby mentioned, it's for manufacturing, production, refining of tangible personal products. And again, it's largely limited to agricultural and chemical production. Just to sort of illustrate the change, typically this would be like a thirty nine year amortization schedule. They're saying you can take that upfront. And importantly, if you're a corporation that has taken the full depreciable amount and you sell that property, that sort of gets clawed back. So in instances where a new corporation buys that building and then does the same thing, it sort of vets out. So that's why you might be kind of confused as to why and it only applies to properties bought after 01/19/2025 until 01/01/2029. So with the prospect of it netting out, but then being clawed back, if you sell the property or if it's a new construction, a new construction takes a little while, there's sort of going to be a little bit of a phase in for when the revenue hit kind of comes about. So we can see in fiscal year twenty six, somewhat limited, it may be 250,000, but by fiscal year twenty seven, we're thinking about 3,500,000.0 by fiscal year twenty eight, about 5,200,000.0. And then we don't usually project much further than that because of the uncertainty. But just wanted to give you sort of a little illustration of this is something that could certainly ramp up But over it is temporary. It's only between 2025 and 2029. Yeah. So foreign derived intangible income and global intangible low tax income. All right, this is the foreign income that Kirby absolutely described as, we have like two, two and a half hours right now. We could do two, two and a half hours just on this. So this is five bullets and about as simple as I can attempt to put it. It showed an increase the base used to calculate foreign derived intangible income. So there's kind of two examples I remember from a year or two ago that I used to try and illustrate what the heck that means. So foreign derived intangible income, it's an instance, and this is sort of the narrative, it's not true in every single case. It's an instance where you've got intellectual property held domestically. They get a copyright on, I don't know, SpongeBob. You license a foreign entity to sell t shirts with his image on it, and they pay you royalties or licensing fees. So it's kind of maybe helps you sort of understand a little bit of what that means. That's a really blunt explanation. So it increased the base used to calculate that while at the same time increasing the percentage of this income that could be deducted. So it's effectively lowering the effective tax rate on it, but at the same time, increasing the amount of money that that lower effective tax rate is subject to. The net effect of that is a positive revenue swing for the state. So the other piece of the foreign income was the elimination of the 10% QBAI that Kirby mentioned earlier. And for GILTI, again, is the narrative sort of explanation of it. You a US company and you've got a foreign subsidiary and you park your intellectual property in that foreign subsidiary and then you pay that foreign subsidiary royalties and licensing. I will tell you now that is not how the formula for this particular tax tip actually works. It's much more complicated than that and does not just apply to intellectual property, but that is sort of what you read about it, lot of the narrative explanation for how people think about it. Yeah, by removing this 10% deduction from that tax base, again, you're increasing the amount of income that you have to report as income for your tax return. They did rename them. They're on the screen. It's a mouthful. It is coupled to the federal treatment of these types of income. So again, it's something that's going to flow right through the state. But this time we're talking about an increase in revenue. We spent a long time on this estimate, a lot of back and forth. It's something we're probably going to want to revisit, but estimating about $2,500,000 in increased revenue in fiscal year twenty six, raising to potentially about 3.2 in future years.

[Rep. Emilie Kornheiser (Chair)]: Pat, does the revenue estimate at the federal level go up, or is it just a weird quirk of Vermont's tax law that it's going up in Vermont?

[Patrick Turton (Joint Fiscal Office)]: So I don't know exactly if it's going up or down, but what I can say is that one thing Vermont does not offer corporations reporting this type of income is a credit on taxes paid to a foreign country. So that is something that is available to corporations. And if I remember correctly, credit amount was increased. Kirby's nodding. So on one hand, you see the increase in revenue that we're getting because we don't allow the credits on the federal side, they alleviated some of that increase in revenue. And really, I think part of the basis for doing some of that was this actually, It's still complicated, but this actually does simplify some of the calculation of these income types. So it could be little more efficient moving forward. But yeah, we don't offer those credits for the foreign taxes. All right, so the changes to pro rata share rules. This changes the treatment of controlled foreign corporations or CFCs. What that is, a CFC is a foreign corporation, it's CFC. If at least 50% of the voting power or value of the stock are held by US shareholders, each US shareholder must include in their gross income that they report their prorated share of the CFC's passive income in that tax year. So tax payers who hold CFCs will have to report more gross income than they would have previously, and this does flow through to the state. So we're not expecting a change in this for fiscal year twenty six, but it is estimated to increase revenue by a modest amount, maybe 100,000 in fiscal year twenty seven, 240,000 in fiscal year 'twenty eight, and growing gradually thereafter. I got the stage wrong. 100,000 in 'twenty six, 240,000 in 'twenty seven. Sorry about that.

[Rep. Emilie Kornheiser (Chair)]: It's okay.

[Patrick Turton (Joint Fiscal Office)]: Okay, the opportunity zones. So this makes permanent creation of these zones done in tax cut and giant sacks. It also This encourages investment entities in qualified opportunity funds, which support real estate development in those opportunity zones. Again, if you elect to defer the gains from these investment, long as you can defer these gains for as long as you hold them. So the longer you hold them, the more they appreciate the greater the tax benefit on that. Currently, Vermont has 25 opportunity zones that they span over a census tract typically. So somewhat limited in terms of physical footprint. You're not talking entire towns usually unless it's a very small town. So that's sort of what was maintained or made permanent. And usually from a sort of accounting standpoint, making something permanent that was temporary up until that point, usually doesn't We don't usually consider that a change in revenue, as you're just maintaining current log even though it had a sunset on it. But with the creation of the rural opportunity funds, those could start to flow through to the state and decrease revenue over time. I think, I forget who has to, well, yeah, I'll save that comment. Yeah, the implementation date is of out a couple of years, so no immediate impact with these, but forward looking is certainly something that'll flow through. And the hypothetical earlier about Oklahoma and Arkansas, I believe because of the single sales factor, those corporations would be able to defer those gains and that would affect Vermont. So that is something that would flow through and kinda comes back to that discussion about the single sales factor.

[Rep. Edward "Teddy" Waszazak (Member)]: Just a couple of questions. Did did you look at the number of investments made in the opportunity zones since the Tax Cut and Job Act was actually in Vermont. The 22, I think you said, zones that we have in Vermont. Anybody take a look at that?

[Patrick Turton (Joint Fiscal Office)]: I haven't looked at those particular funds. We would only 25.

[Rep. Edward "Teddy" Waszazak (Member)]: The deferral of any revenue would be deferred is only upon the sale of that property and the gain that would result from it. So am I getting that right?

[Patrick Turton (Joint Fiscal Office)]: Believe that's my understanding as well.

[Rep. Edward "Teddy" Waszazak (Member)]: Okay. So there's no other tax incentive beyond just the deferral of a gain from a property sale?

[Patrick Turton (Joint Fiscal Office)]: That's my understanding.

[Rep. Edward "Teddy" Waszazak (Member)]: Okay. Alright. Thank you.

[Patrick Turton (Joint Fiscal Office)]: There's, of course, so much nuance to all this.

[Rep. Emilie Kornheiser (Chair)]: Kirby was nodding.

[Patrick Turton (Joint Fiscal Office)]: No. Okay. Thanks, Kirby. Thanks.

[Unidentified committee member]: Yeah. I understand we're gonna be going through this all again. And when you do, can you help us understand the growth assumptions under the categories that you've just gone through where there the assumptions of revenue changes are based on assumptions about growth? And I'm I'm also just curious about opportunity zones because in other states, the gains in opportunity zones are often offset by loss of economic activity surrounding zones, and I just wonder if that's true in Vermont.

[Patrick Turton (Joint Fiscal Office)]: Yeah, I could try. So part of the problem with the JCT estimates that we're sort of using is we could tell that they had some kind of assumption that they were using through inference, but there wasn't a sort of catalog that we found of the specific methodology used. So unfortunately, it's kind of difficult to parse out, but it's certainly something we, in particular, struggled with the research and development expense deduction. We can look at it again and see if maybe there's something to do. Okay, so the charitable deductions for corporations. Previously, this is maybe the simplest one, honestly. Previously, could deduct their charitable contributions up to 10% of their taxable income. HR one just says, well, actually you can only deduct the amount of charitable contributions between 110%. So that bottom 1%, they're really just subtracting 1% and creating a floor that you need to hit. And above that floor, up to 10%, that amount can be deducted for charitable contributions. Not expected to change state revenues in 2026, but it is estimated to increase revenue, right? Because you're reducing deduction amount by creating that floor and not raising the ceiling by approximately $140,000 if you're in '27 and sort of increased gradually over time. Yeah. So we're getting close. And then I have a summary table that shows you everything put together. So these are the business taxes and this is the accounting changes for certain residential construction. This is previously income from certain home construction contracts was reported at the end of the contract rather than based on the sort of completion percentage of the project. It was limited to construction projects with four fewer units or contracts within two years by taxpayers with $31,000,000 or less in gross receipts. And so HR1 expands this treatment of the income reporting. So being able when you actually claim it, expands that treatment to all construction contracts completed within two years. So it's taking out a $31,000,000 or less in gross receipts caveat to that. Yeah, and so what this does, it amends the timing when this income needs to be reported, not exactly changing the income that needs to be reported, but more so the timing. And it's not expected to change state revenue in 'twenty six. Looking forward, we're not expecting it to exceed about $100,000 in future years.

[Rep. Edward "Teddy" Waszazak (Member)]: I'm not sure I'm asking a question. I guess I'm a little confused. So does this apply only to those contractors that are contracted with the owner of the property? So if they are not the owner of the property, because in terms of an owner might not recognize anything until the property is completed and sold in terms of revenue.

[Patrick Turton (Joint Fiscal Office)]: So I believe that this is actually on the flip side. This would be when the building company has to report that income. Okay, so it's not the owner of the property who has this development. It's the builder who gets paid. When you build a house, have to pay installments for work that's been done thus far. This is saying you could just wait till the end to claim all that income.

[Rep. Edward "Teddy" Waszazak (Member)]: Yeah. Okay. So right now, if I'm ABC home building company and I'm working for you, I don't have to right now, I don't have to declare my income until the project is done and this changes it to percentage completion.

[Patrick Turton (Joint Fiscal Office)]: What happens?

[Rep. Emilie Kornheiser (Chair)]: What if the project's never done? No income. We don't have to answer that. The

[Patrick Turton (Joint Fiscal Office)]: clarification, though, is that the change is percentage of

[Rep. Emilie Kornheiser (Chair)]: completion I'm sorry. It's okay.

[Patrick Turton (Joint Fiscal Office)]: Thank you. Permitent legislative council. Currently for a lot of these contracts, the accounting works of it, the builder, as Pat was saying, is reporting the income as they complete the project and have to pay. This change changes it so that they just report the income at the end of the project. I heard something a little slightly different than that, so it's one of

[Rep. Emilie Kornheiser (Chair)]: That's what I heard. Representative Rutland. Go back to slide before. It's the, within two years, by tax pressure,

[Unidentified committee member (possibly from Rutland County)]: dollars 31,000,000 or less gross receipts.

[Patrick Turton (Joint Fiscal Office)]: Those are

[Rep. Emilie Kornheiser (Chair)]: Please call it the 31,000,000

[Patrick Turton (Joint Fiscal Office)]: That's the builder. So these are all eligibility requirements on the first, on the construction of the project. So the person who's completing the work for the project.

[Rep. Emilie Kornheiser (Chair)]: Did gross proceeds come from?

[Patrick Turton (Joint Fiscal Office)]: They could have multiple projects. If they could be building a development over here, it could be all over the place. What this is doing is lifting revenue restrictions on whether you can qualify for this and also some of the scope of the projects.

[Rep. Emilie Kornheiser (Chair)]: So there's two limits to come. Okay. Thanks. Representative Waszazak?

[Rep. Edward "Teddy" Waszazak (Member)]: I'm good, thank you.

[Rep. Emilie Kornheiser (Chair)]: I just wanna make sure I'm reading your slide right. Under previous law, it's for fewer units and that 31,000,000 under the new law. They don't have those restrictions?

[Patrick Turton (Joint Fiscal Office)]: The new law is expanding so that those so it's really just if you're completed within two years.

[Rep. Emilie Kornheiser (Chair)]: No matter what size your project is?

[Patrick Turton (Joint Fiscal Office)]: Right. Great.

[Rep. Emilie Kornheiser (Chair)]: Okay. Thanks a lot. Residential.

[Patrick Turton (Joint Fiscal Office)]: Residential. So

[Rep. Emilie Kornheiser (Chair)]: when it says four units, is that four buildings or four apartments? That's tax That's tax law. Okay. Pass law. Yes.

[Patrick Turton (Joint Fiscal Office)]: I would still understand that to be dwelling units.

[Rep. Emilie Kornheiser (Chair)]: Okay.

[Patrick Turton (Joint Fiscal Office)]: So for like a quadplex Okay, so the expanded exclusion on gains from qualified small business stock. So again, this is only for this type of stock issued after 07/05/2025 with aggregate gross assets. And I don't think this is something that Vermont State would need to be tracking whether those assets are valued at that point. With any stock issuance, there's typically going to be some form of federal oversight with actually sort of the valuation because you can't just issue a stock and say, trust us, in most cases.

[Rep. Emilie Kornheiser (Chair)]: Federal oversight, is that still?

[Patrick Turton (Joint Fiscal Office)]: I need to look into like which particular federal agency would be regulating something like that, but

[Rep. Emilie Kornheiser (Chair)]: You're saying the insurance based on return.

[Patrick Turton (Joint Fiscal Office)]: No, no, no. It's just the ensuring that the court, the company issuing the stock is, I guess, honestly valuing their assets.

[Rep. Emilie Kornheiser (Chair)]: So let's go to the next.

[Patrick Turton (Joint Fiscal Office)]: Okay, we're on this one. Yeah, so summary. Yeah, we're there. So this is kind of everything we've just talked about, put into one table, it's easier to conceptualize all the numbers that was thrown around. In particular, with the international tax provisions and the upward effect they have in that first year, it's appearing to be somewhat limited in scope in terms of revenue downgraded. However, Colorado had a really good quote in their forecast. You know, there's a lot of, I think the term was bidirectional actions happening in this film. And because this is such a volatile tax type, it's not hard to overestimate any individual one of these pieces. So again, I think we're going to want I think I speak to the tax firm as well. We're going want to look at these again once the new revenue forecast is out, see again how we feel about it. But this is where we're at right now.

[Rep. Edward "Teddy" Waszazak (Member)]: This is just corporate income taxes. We're not making any conjecture about here about what might happen to payroll tax or personal income taxes or property taxes that might result from the economic development that this is supposed to create.

[Patrick Turton (Joint Fiscal Office)]: The only small caveat to everything you said, which is all correct, I do have a line up here for the child independent care for an extension. Thank you.

[Rep. Emilie Kornheiser (Chair)]: Any other questions? Thank you so much. Thank you everyone for a lot of information in an afternoon. And I thank you for coming back again tomorrow after today.