Vermont Legislature SmartTranscripts:

[Emilie Kornheiser (Chair)]: Hello. This is the first joint hearing of the House Ways and Means and Senate Finance Committee of the 2026 session. I think we're gonna start off with a real fun one, talking about the impacts of the federal action this summer on both our revenues and the tax code. This is going to be a huge portion of what the House Ways and Means Committee is doing before crossover, and knowing that Senate Finance often doesn't have very much time after crossover to dig deep into something. I wanted to make sure that we could all start off the conversation together. I know a number of years ago when the Tax Cuts and Jobs Act passed, the legislature spent a great deal of time really separating our personal income tax code from the federal code. And I think one question we're going be asking ourselves is, do we need to do the same thing with our corporate code this year? But that's just sort of one of the many questions that get opened up by this question about reduced revenues and complex corporate taxes. So I think we can start off with our first witness.

[Carol Ode (Member)]: And Leslie, would you like to say anything, Senator Fein?

[Unidentified Senator (Senate Finance Committee)]: No. I think you've said it all. Of course. This is the first weeks, and we are doing basic information to find out what the federal changes since we left, the impact that they're gonna have on us and start developing solutions if necessary.

[Emilie Kornheiser (Chair)]: Would everybody like to join us? Happy New Year.

[Kirby Higley (Legislative Counsel)]: New Year. Happy New Central.

[Emilie Kornheiser (Chair)]: And for anyone watching on YouTube, we know that cameras are a little funny right now. I think everyone knows what Kirby looks like who's ever watched us before, and we'll be mostly sharing screen the whole time anyway. So apologies for the IT problems.

[Kirby Higley (Legislative Counsel)]: So Kirby Higley, Legislative Council, will share a presentation with you.

[Carol Ode (Member)]: I'm sorry, can I say one more thing?

[Emilie Kornheiser (Chair)]: Mhmm. This stuff is so deep in the weeds so quick. I don't I don't think there's any expectation that anyone around this table is gonna understand it the first time or the second time around. So we'll go through deeper on different versions of it as we go over it. I'm going to try not to panic.

[Kirby Higley (Legislative Counsel)]: I'm going teach you so well, you're going to get it. Pat's gonna come up and say the same stuff in a different way, but you'll already get it before Pat.

[Emilie Kornheiser (Chair)]: I love that. We'll just quiz Pat. Representative Ode, have a question right out of the gate. This

[Carol Ode (Member)]: is one big beautiful bill.

[Kirby Higley (Legislative Counsel)]: Yes, we will not be calling it that. In a lot of my written materials over the summer, we were calling the Reconciliation Act. I think it's probably the most accurate to call it HR one. So I'll probably call it HR. Sometimes called P3. You should say the federal changes and we'll go. Right? Okay. So this is what I'm going go over with you. First we're going to go through some of the changes from HR1 that do not flow through different lines, but the things you've probably heard about in the news, I thought it would be worth touching on them just to show why they're not things that we have to deal with directly because they're not monthly bonds. And then we're gonna talk about, there's one personal income tax change that does come through and we'll talk about that. Then we'll talk about the corporate and business tax changes that flow through. There are about nine or 10 of those. And then I'll talk at the end just briefly about decoupling and some of the nuances that come with if you do want to make any changes from the stuff that flows through, and what that might mean for our planning. So first off, first day of session, first day of school, should we do a pop quiz where someone tells me what the difference between above the line and below the line deduction is? Or that could just be rhetorical.

[Carol Ode (Member)]: I think maybe you could just tell us.

[James Masland (Member)]: Yeah, I thought you could say

[Carol Ode (Member)]: that. So

[Kirby Higley (Legislative Counsel)]: the reason I'm asking that question is when it comes to HR1 that had over 100 tax and finance sections to it, a question that comes up when it comes to Vermont and what flows through is if it's an above the line deduction, then that means it gets baked into adjusted gross income, which is our starting place. So we care about all of it of course, but we care about above the line deductions because those things flow through when it comes to personal income tax. But if they're below the line, that is if they get taken out of AGI after AGI is computed, then those things are not going to flow through. So right now on the screen here we have the federal definition for taxable income and you'll see in the highlighted part are some of the things you may have seen in the news, which are below the line deductions that being taken out of AGI. So these are things that are not flowing through to Vermont. So you'll see qualified tips is something that's new, qualified overtime compensation is something that's new, and qualified passenger vehicle loan interest. These are all new federal deductions that do not flow through to Vermont because they are taken out of AGI and we start with AGI. Got that? This is just a reminder of where Vermont does start, we define taxable income starting with federal AGI and then we go from there. So I'm going to touch briefly on some of these things that do not flow through. First there, I'm not going to read this list, but we'll just touch briefly on them. First is the personal exemption for individuals aged 65 and older. This is a new personal exemption at the federal level. It's a deduction of up to $6,000 for individuals aged 65 and older. And then it phases out at AGI of 75,000 for individuals and 150,000 for 20 filers. This is a temporary thing for tax years '25 through '28. If you've heard the president refer to or say something to the effect of we're not taxing social security, this is what that's referencing. It's not directly having to do with social security but it's for a demographic that's pretty similar to people who are living on social security income. And it's a deduction roughly equal to what they would owe on that. This is not a Vermont thing though. As a side note here, this same section of HR one makes permanent the elimination of the personal exemption tax deduction federal level. So that's something that hasn't existed the last few years and it will continue to not exist because of this.

[Emilie Kornheiser (Chair)]: I clarify, Kirby? When you say something doesn't flow through, it doesn't affect someone's Vermont taxes, Vermont's tax responsibility, but it still has a big impact on Vermonters, right?

[Kirby Higley (Legislative Counsel)]: Correct. Everything that we're talking about here when I say it doesn't flow through, Vermonters are still, that's still affecting Vermonters on their federal income tax return. It's just not going to be part of their Vermont income tax return and it's not going to be a part of the revenue generation for Vermont either. But yes, of course anything on the federal income tax is going to affect Vermont terms. So the second thing you've probably heard a lot about is the taxation of tip income. So there's a new federal deduction of up to $25,000 for qualified tip income. It's available for occupations that customarily and regularly receive tips. Recently the treasury department put out a list of these occupations and they're probably what you would expect, food service, some entertainment, a lot of gambling, a lot of gambling professions I didn't know. And I learned that you're supposed to tip a locksmith I guess because that's on the list. A locksmith, that's one of the occupations that would qualify here. So this does not flow through to Vermont. There's a phase out for this federal deduction for taxpayers with modified adjusted gross income exceeding 150,000 for individuals and 300,000 for joint filers. And this is another temporary change.

[Carol Ode (Member)]: Professor, can I ask a question? Yes, I'm so sorry. So

[Unidentified Member]: just to clarify that flowing through to Vermont. So if it's affecting somebody's AGI, the distinction you're making is whether or not it

[Kirby Higley (Legislative Counsel)]: Whether it ends up on the Vermont income tax return.

[Carol Ode (Member)]: Right.

[Kirby Higley (Legislative Counsel)]: I'm talking about flowing through, I'm just talking specifically about the Vermont income tax return.

[Unidentified Member]: Okay, but if somebody's AGI is impacted and we're starting with the AGI, maybe it's technically not flowing through to Vermont, but it's impacting what the tax liability is for somebody because we start with AGI.

[Kirby Higley (Legislative Counsel)]: If it's affecting their AGI, I would say that it flows through.

[Carol Ode (Member)]: That it

[Kirby Higley (Legislative Counsel)]: is flowing through.

[Unidentified Member]: Okay, that's what I didn't understand. I thought you said NOS. Sorry.

[Kirby Higley (Legislative Counsel)]: Yeah, and then sorry if I wasn't careful. Going back to this definition, see that when qualified tips of division five there, the deduction for the qualified tips gets taken out of AGI.

[Unidentified Member]: Okay, so the things in the yellow are flowing through.

[Kirby Higley (Legislative Counsel)]: Are not.

[Unidentified Member]: Are not flowing through.

[Carol Ode (Member)]: Okay, this

[Unidentified Member]: is where I'm confused. Because if it's taken out, it's impacting their AGI.

[Kirby Higley (Legislative Counsel)]: So AGI is calculated and then these things are

[Unidentified Member]: Oh, I see. Okay, I'm sorry. Okay, got it.

[Kirby Higley (Legislative Counsel)]: It's okay.

[Unidentified Member]: Order of operation.

[Kirby Higley (Legislative Counsel)]: It's okay.

[Emilie Kornheiser (Chair)]: That's why we're here. It's great.

[Kirby Higley (Legislative Counsel)]: Yeah. And also you're teaching me to be more clear. Thank you. Were we? Qualified overtime compensation. Similar to tips, there's a new federal deduction up to 12,500 for individuals on qualified overtime compensation. This deduction applies to the overtime premium when a person paid overtime. So they get paid time and a half. This deduction goes towards the half, not usual rate of pay, but the extra half that can be deducted up to $12,500 per individual. And it's temporary as well. There's a new deduction for interest on passenger vehicle loans. It's a deduction of up to $10,000 for interest paid on qualified passenger vehicle loans. There's requirements that the vehicle has to be made in The US. So similar stuff, you may have heard of that one. And there's also a new charitable contribution deduction for non itemized at the federal level. So this would be being able to take up to a deduction of $1,000 for a single filer without having to itemize. And so that's it for the things that don't go through. From here on, we don't have to make that distinction anymore. We want to talk about things that are going to affect the law. For personal

[Carol Ode (Member)]: getting back to at least a charitable deduction, we give a thousand dollars to the Alzheimer's Association, let's say, that's a charity, So that, but now in Vermont, we are not able to deduct that on our tax return. Does this allow us to deduct it or does not allow Alphameral?

[Kirby Higley (Legislative Counsel)]: This is a new option at the federal level for you to get a deduction for charitable up to $1,000 for individuals, 2,000 for married filers without having to itemize. Usually to take a charitable deduction federal loan, you would have to itemize, but this allows you to take at least some charitable deduction without itemizing at the federal level. Does not affect anything to do with Vermont tax return. Just your federal one.

[Carol Ode (Member)]: On the federal return, but not the state return. Okay. And the maximum is 2,000?

[Kirby Higley (Legislative Counsel)]: For joint filers, yes.

[James Masland (Member)]: For what?

[Kirby Higley (Legislative Counsel)]: Joint filers, married filing joint. Yes.

[Emilie Kornheiser (Chair)]: Okay. And what I wanna offer the Ways and Means Committee is that as we're sort of thinking about decision points for ourselves and as other bills come to our committee with other tax expenditures or exemptions, that to some degree, it's helpful to think about if the federal government is doing this, is it helpful for the state to sort of match up and build on that? Is it helpful to just say the feds are doing it at a scale we couldn't, we shouldn't bother? But it's another way of thinking about sort of how the things don't flow through, we're still impacting Vermonters, how we can think about that.

[Unidentified Senator (Senate Finance Committee)]: And as I remember when we rewrote the personal income tax code, this charitable deduction was the focus of most of the concern, so much so that we missed a medical deduction. And I remember being told, but the federal deduction still stays. So you can still donate a million dollars at the federal level and deduct that. You have to itemize it. This just says, well, if you're a small donor and you give $10 to 20 different charities, you don't have to itemize that. You can just say, I get it to up to a $2,000 charitable donation.

[Kirby Higley (Legislative Counsel)]: Yeah. That's that's correct. I I would add that the, you know, the Tax Cuts and Jobs Act increased the standard deduction at the federal level, so that fewer and fewer people are itemizing now. And that probably has something to do with the perceived need for allowing charitable deduction, because most people are just not itemizing anymore. Moving on, the personal income tax, things that do flow through to Vermont. Vermont has its version of the child and dependent care credit. It is equal to 72% of the federal credit, which means changes to the federal credit are going to flow through to Vermont. There's a lot of number changes. I'm gonna try to phrase this in a way, it's easy to follow. Yes?

[Carol Ode (Member)]: Questions. When you say expands the phase down, do you mean which way are you expanding? What does that mean?

[Kirby Higley (Legislative Counsel)]: Okay, sorry.

[Carol Ode (Member)]: I thought you were going to answer.

[Kirby Higley (Legislative Counsel)]: No. And I use phased out on purpose because at the federal level, this is not phased out. It just phases down to a certain point and then stops there. But at no point do you have too much money, you can always claim this. So that's why it says phased out. But here's how it works right now then I'll tell you how it's changing. For child dependent care credit, most people will take this for childcare expenses. So I'm gonna use that as an example, paying for preschool. Right now under current law, you can take between 3520% of your actual expenses for preschool as a credit for this. The percentage that you take depends on your AGI. It starts I think at 15,000 of AGI where you could take 35% of your expenses and then it phases down to 20% at 43,000 of AGI, which is a pretty low amount of AGI. So most people will be taking, most taxpayers will be taking 20% of their expenses for childcare as this credit at the federal level under current law. That's current law, pays us down to 20%, most people can get a credit for 20% of their expenses. This change changes instead of it starting at 35% of your expenses, it starts at 50 and it's still at 15,000 AGI where it's at 50% of expenses. But it's changed so that AGI is between 43,000 and 75,000 can now have a 35% credit instead of under current law, will be 20% of your expenses. It's now 35. That's why we say it's an expansion of that credit because more people will be able to take more of their expenses as a credit. And then it continues to phase down between 86 or one of, or 86 for an individual 150 per joint return and it phases down That's the 35% rate phase down through that. And then by the time you're between, well, by the time as an individual, you're at 105,000 in AGI, that's when it hits 20% for you. So when you're at that level of AGI, it's gonna be the same as current law, 20%. You're gonna face all the way down. But for an individual having less than 105 AGI, they're going to see an expanded credit. They're going to be able to claim more of their expenses as a credit.

[Carol Ode (Member)]: Could you help me understand how this interacts with the CFAP program and the child care subsidies in Vermont? How are those factored in when you're figuring income, or do you? What program? The CFAP, the federal child care subsidies.

[Kirby Higley (Legislative Counsel)]: I'm not

[Emilie Kornheiser (Chair)]: Are they they're not figured in?

[Carol Ode (Member)]: They're not factored in. So if you are covered for child care, you would only account for what you'd have to pay on top. So your vouchers may not get the benefit of this credit is what we're hearing. It's what you pay.

[Kirby Higley (Legislative Counsel)]: It's your expenses. So yeah, so if childcare being provided for free for you, then you wouldn't have expenses.

[Carol Ode (Member)]: So we are effectively Okay, that's interesting.

[Emilie Kornheiser (Chair)]: Do you have a question, representative Ode?

[Carol Ode (Member)]: Yes. That leads me to follow-up question. Will you change the not give out the CPAP the way that we have been?

[Emilie Kornheiser (Chair)]: So we're gonna this is our first touch on all of this. Let us not leapfight so far yet. But I appreciate the thinking. And we're going to go deeper into each of these pieces multiple times.

[Kirby Higley (Legislative Counsel)]: Pat has a chart for you showing the slope of those numbers I was trying to describe. Hopefully that will help. As I said before, Vermont allows 72% of the federal credits. So the fact that this credit could be more for more taxpayers, that will flow through to Vermont and cost more. That's it for personal income tax. It gets a lot more fun from here as we're gonna go to business and corporate stuff. So a couple of, we broke this out as business tax and corporate tax, because these first couple of things I'm gonna talk about are, they're oriented towards businesses, but they do have a connection with the personal income tax return because of the way things flow through. First change is there's a change at the federal level for residential construction. It's an accounting change under current law in some limited situations for small construction projects, the business doing the construction has the choice of essentially waiting until the project is done before they claim the income. This is expanding that be allowable that type of accounting to be allowable for a much larger set of projects for residential construction. So means that it's a matter of when taxes do and it means that there'll be potentially more taxpayers waiting until a project is done before they start paying tax on the income from the project. Next thing that's kind of business tax. So there's something called qualified small business stock that's allowable or that's established under federal law. A person who owns qualified small business stock can get a lot of tax benefits for purchasing and holding the stock when they go to sell it.

[Emilie Kornheiser (Chair)]: Can you explain what one of those stocks is before you?

[Kirby Higley (Legislative Counsel)]: Yes. Well, first we have start with a qualified small business, which under this change means if you have 75,000,000 in assets or less, you could be a qualified small business. And you would have the option of issuing stock called qualified small business stock. And this federal laws exist to entice investors for you because under this change, if you hold the stock for five years or selling it, you can not pay tax on that gain when you go to sell it. And the upper limits for how much you can have not taxed under this change is going all the way up to 15,000,000 per issuer, that is per company that you've invested in, up to 15,000,000 of gains that you could just exclude from your income and not pay tax on. So it's pretty enticing program and it's being expanded and this does flow through to Vermont. When this happens and this income is excluded at the federal level, it will pass through to Vermont, will be excluded in Vermont. We'll be going through a lot of individual changes like I mentioned. For some of these changes, they have a Vermont impact right away And I'll point that out. This is one where the Vermont impact, the revenue impact is going to actually be out. Because to get that full 100% exclusion, this has to be held for five years. The And way it was written is it has to be qualified small business stock that's purchased after 2025. So the impact is not going to be immediate. I'm not personally aware of how active Vermont is as far as having investors who buy qualified small business stock. So at this point, I don't know what it will look like. I'll just know that whatever impact there is will be five years from now and after that, and that this is a very big tax benefit. But as far as the universe people out there, I don't know.

[Unidentified Member]: So just gaming this out, the length of the years, it follows the stock from point of purchase, right? So you buy one tomorrow, you hold it for five years, and then I buy it from you, that clock resets.

[Kirby Higley (Legislative Counsel)]: That's a good question. I want to double check about it as far as the re I know that when it gets issued by the small business and you buy it, clock starts. I would want to double check that when it gets resold, what happens. But yeah, I think you get it though. And you see if it's only held for three years, 50% is excluded, which means some tax is being paid if it's being held for just three years. So there might be some short term with these changes happening, there might be some short term where people don't wanna hold something for five years and they do sell it right away. So there might be some revenue resulting from this change. That makes sense, just because of basically the changes in human behavior and it's hard to say what that's going to be.

[Carol Ode (Member)]: Representative Ode. Thank you. I just wonder if when you researching this, you read any articles that explained what the thinking was behind even making health have to hold it for five years?

[Kirby Higley (Legislative Counsel)]: I think this exists to encourage investors to invest in smaller businesses. Holding it for an amount of time helps the business.

[Carol Ode (Member)]: So did you read anything or see anything or talk to a state economist that would tell you that this would be beneficial for Vermont business who need investment money?

[Kirby Higley (Legislative Counsel)]: I don't know what Vermont businesses exist that issued the stock. I don't know anything about that. Thinking about it, the fact that this is being expanded and the tax benefits even greater than before, maybe this will cause there to be more Vermont businesses doing this. I don't know though.

[Emilie Kornheiser (Chair)]: We will spend time digging into that.

[Kirby Higley (Legislative Counsel)]: So as I mentioned before, one of the things that's changed is the aggregate asset ceiling to qualify as a qualified small business is being increased to $75,000,000 in assets. Do you know what it was? Not finding a median yet, won't hold you up, so I'll just give it to you later. Okay. I already guessed saved 50. Probably wrong. Okay, so that's the business tax stuff. We've got about nine more corporate income tax changes that do flow through. These are the more significant that we have identified.

[Carol Ode (Member)]: A really quick question before you move on. Is there anything in the language around that that limits it to start ups or early stage businesses? Like, who qualifies for this? Is it anyone who's

[Kirby Higley (Legislative Counsel)]: My understanding is it does tend to be start ups. I mean,

[Carol Ode (Member)]: it seems like that's would benefit, but I'm wondering how it affects the incentive versus setting up multiple related businesses.

[Kirby Higley (Legislative Counsel)]: From what I've read in the federal law, think that it's set up in a way where it can't be gained so that a larger business can't just, through some tricks, set up one of these. But I don't think there's any limitation on how long the business could have existed before though either. But I think that it is oriented towards startups. Another thing that I'll note here is it's possible to issue qualified small business stock and use it to compensate your employees, which startups do. So this is used by businesses in different ways, it's not just about investors. It can be used to, if you're short on money in the short term, pay people the stock. Do

[Carol Ode (Member)]: they have the same benefits, like tax sheltering if you're giving

[Kirby Higley (Legislative Counsel)]: If they hold on to it, yeah. Course, there's no guarantee that the stock ever becomes worth anything either, by the way.

[Carol Ode (Member)]: I'm trying to be quick, but I had two things. Think you know my hunch, somebody over here was asking a question about what this means in Vermont, my hunch is that there are a lot of businesses who would qualify and more people come into existence that want to take advantage of this. Small manufacturing firms and product producers, that's one thing. Then my other thing is really a question, is 75,000,000 in assets, what does that mean? Does that mean the value of the company or product they have sitting on the shelves or what are the assets?

[Kirby Higley (Legislative Counsel)]: Everything, the buildings, personal property, everything.

[Carol Ode (Member)]: How does the state have a way of knowing that? Because we don't do an assessment of the business anymore.

[Kirby Higley (Legislative Counsel)]: It wouldn't, it would be something that the business determines. I'm sure that there is some checking by the IRS, the federal level to make sure that businesses, qualified small businesses are indeed that. But I don't know the extent that they investigate that.

[Carol Ode (Member)]: Thank you.

[Kirby Higley (Legislative Counsel)]: Okay. So, income tax, float crews. We'll read the list but we'll be handling these one by one. There's more. I've loaded some of the expected more significant impacts upfront here. So the first one we're looking at is the domestic research and experimental procedures deduction at the federal level. The change here is, we mentioned before about the timing of things and how it was qualified small business stock could have an impact farther in the long term. This particular changes is all about the short term. So there's this federal deduction for domestic research experimental expenses. Under current law, those expenses have to be taken as a deduction, they have to be taken over five years. And this was changed from Tax and Jobs Act, believe. If there's one theme with all these changes, is that some of this stuff is rolling back some of the strictness that came out of the Tax Cuts and Jobs Act. This is an example where they're loosening it back up. They're not requiring these expenses to be capitalized and amortized over five years. They're gonna start allowing them to be deducted as they're incurred, which means that people are going to get a bigger deduction sooner using this deduction. And there's an element of this that is retroactive for what they consider small taxpayers with up to 31,000,000 in gross receipts, which lets them retroactively take these expenses going back to 2022, going back to the time in which they started having to take them over five years. So not only could you start seeing in the short term businesses fully expensing instead of spreading over five years these things, but also some of them going back and amending their returns from previous years to say, we're not taking this over five years, we're taking it now. So this is an immediate impact on corporate returns.

[Unidentified Member]: Let me just real quick. On some of the personal income taxes, you provided windows for when those expire. Should we assume that if you haven't written that down here, they are permanent? Yeah,

[Kirby Higley (Legislative Counsel)]: I think you should. I've tried to. It might not be perfect, but I've tried to mark it. Part of the reason some of those personal income tax changes, sunset by the way, is because in the reconciliation process at the federal level, For that process, if you're not paying for tax expenditures as you go, then they have to be temporary. That's why so many of these are temporary. That's rules about using the budget process to deficit spend, there's federal rules around that. Moving on to the next corporate tax change, there's the amended limitation on business interest deduction at federal level. There's a corporate income tax deduction for interest paid on loans used for business purposes. The change here is, you can take the deduction for the interest you pay on your indebtedness as a corporation. So you owe debt, you pay interest on it, you could take that interest as a deduction, but there's limits on how much you can deduct. The change here was changing how that limit is calculated. This is another example of things being loosened up after the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act changed this so that this calculation, the limit was stricter allowing less to be deducted. The change here is loosening that back up and allowing a larger limit on what can be deducted. And I think that's probably good for now. Can get into So I'm gonna move on to the next one. Exceptions from limitations on this deduction. Tax Cuts and Jobs Act once again tightened up this business entertainment expenses deduction that was allowed previously. You think about, I don't know, Mad Men and the lunches they would have and then they would just take it off their taxes. So this tightened up that kind of thing as far as expenses related to goods or services for employees. But the HR one here is going back and creating more exceptions to what was tightened up before. Some of those new exceptions are meals provided to cruise on commercial vessels and oil platforms, and meals provided on certain fishing vessels and facilities. So things that may not necessarily happen in Vermont a lot, but it does flow through. The next thing that flows through is the increased limitation on expensing of depreciable business assets. There are certain smaller corporations that can expense qualifying depreciable business assets. Expense means take the full deduction for what they pay for the thing now instead of depreciating it, which would mean that they take that deduction over years of time. So the maximum amount they can, under current law, the maximum amount that could be expensed using this would be a million dollars, that's being changed 2 and a half million. Again, these are when you bought a qualifying depreciable business asset in that tax year, you can expense it right away. I think I've already set the stuff from this slide. Similar to different thing here, federal level they allow additional first year depreciation deduction equal to 100% of the adjusted basis of qualified production property. So this is specific to certain situations like this particular deduction is limited to agricultural chemical production. So it's limited in a way, but taxpayers that buy qualified production property can expense it 100% in the year. So again, no depreciation. It's just expensed right away in these narrow situations. But it is something that flows through the mom.

[Emilie Kornheiser (Chair)]: So, I just want to make sure I'm understanding. Instead of having a depreciation schedule, you basically assume all the depreciation in the first year?

[Kirby Higley (Legislative Counsel)]: I think this

[Carol Ode (Member)]: is 100%

[Kirby Higley (Legislative Counsel)]: of the adjusted basis. So in the world of capital gains or basis is generally what you pay for for the thing, and then it's adjusted to some additions and subtractions. Bonus depreciation. Is

[Unidentified Senator (Senate Finance Committee)]: this production, is this mining or oil?

[Kirby Higley (Legislative Counsel)]: It's non residential property used in manufacturing, production, or refining of tangible personal property, but it's also limited to properties that are being used for the first time for qualified production purpose, which is there's a definition for that. And it's limited mostly to agricultural production.

[Unidentified Senator (Senate Finance Committee)]: Oil and chemical?

[Kirby Higley (Legislative Counsel)]: So to encourage companies that are in the agriculture or chemical areas to invest in manufacturing production facilities.

[Emilie Kornheiser (Chair)]: And is this the section that applies to all businesses or just to corporations?

[Kirby Higley (Legislative Counsel)]: This is corporate income tax stuff here.

[Emilie Kornheiser (Chair)]: Okay. So I wanna just sort of remind folks that corporate income tax is not isn't paid. Can you explain that part about who pays corporate income tax in Vermont? Because I think people assume it's Vermont businesses. Businesses.

[Kirby Higley (Legislative Counsel)]: I know what you mean. The business has to be a C corporation or in some cases an S corporation, which so that's gonna eliminate a lot of what you might think of as a company or a business. If it's an LLC or a partnership, they're most likely not going to be subject to this at all. Those are pass through and they pay on the personal income tax. So we're just talking about C corporations for the most part and the way the C corporations pay corporate income tax to Vermont is through allocating and apportioning all of their income from everywhere and how much they use Vermont as a market depends on how much they're paying to Vermont. So when you're talking about a national corporation, it is a very small fraction of all of their income is what gets reported and paid for modest corporate income tax because Vermont is not a large market.

[Carol Ode (Member)]: Representative Ode. So when I read agricultural and chemical production, I'm wondering if you read anywhere that that includes making more feed box and more pesticides.

[Kirby Higley (Legislative Counsel)]: No, but maybe based off of are chemicals, I don't know. Okay, so just for some context here, usually this property is appreciated for thirty nine years. This has allowed me to be appreciated. One,

[Carol Ode (Member)]: and

[Kirby Higley (Legislative Counsel)]: it sunsets in 2028. This is as representative asked me earlier about. So I flag here this one, this one sunsets in 2028. To be on the depreciation, recapture full of the property sold. Is that over a period of time or ever? I don't think it's not ever, but it's a long time. Can double check. You gotta hold on to it for a period of time. Yeah, I mean, it might be for the entire time that it was supposed to have been appreciated, so might be thirty nine years. I can double check that for you. I do recall it's a long time.

[Carol Ode (Member)]: That'd be something.

[Kirby Higley (Legislative Counsel)]: That'd be something. Because these things are meant to incentivize long term investment. Foreign derived income, I'm going to simplify this a lot because this is an area where there's a lot of jargon and we could get lost real fast. There's two major changes to how at the federal level they're taxing foreign derived income. This all comes from the Tax Cuts and Jobs Act, which created new ways to tax foreign income in the year which is earned, is not something that was done before that. So the two changes from HR one are that there was a deduction of 10% of the tax basis of qualified tangible assets held by the taxpayer in other countries. It's called QBAI. HR1 gets rid of that 10% deduction. That does flow through to Vermont. What it means is this foreign direct income is being deducted less than it was before, which means more revenue on their returns. And like I said, that does flow through to Vermont. So the part of this that's revenue up flows through to Vermont. At the same time, HR1 increased the amount of credit that can be claimed for foreign taxes imposed on what's called controlled foreign corporations. That credit though does not flow through to Vermont. That's a federal credit, not a Vermont credit does not flow through. So the part of this that would increase revenue potentially for Vermont does flow through, the part that would then reduce it does not flow through. And that's the short version of a very, there were very many changes here changing calculations and things that we can go to detail with later if you want. So moving to the next, there was a new rule created by HR1 that if a foreign corporation is a controlled foreign corporation at any time during a taxable year, Each US shareholder that owns stock in the corporation must include in gross income their pro rata share of the corporation's passive income for the CFC's tax year. Basically this just results in taxpayers who own stock and control form corporations, they're going to have to report more of that gross income from the stocks than they used to, so more taxes paid. And then we've got the renewal and expansion of opportunity zones and this one is a pretty big change and potentially significant for Vermont, I'm not sure. So the Tax Cuts and Jobs Act created these opportunity zones. It's another way to encourage kind of like the qualified small business stock thing we talked about. A way to encourage investment in places where federal policy level they wanted to encourage investment. So there's these opportunity zones that were created in every state and they were supposed to expire in 2026. So Vermont has one of these or at least one. This change makes it so that those opportunities zone designations will be on a ten year rolling basis. In other words, they'll be changing and moving around. But they're also were made permanent because it was supposed to stop in 2026. The way that this whole thing works is kind of like we talked about before, this is for investors to get a tax benefit. An investor can invest in a qualified opportunity fund to support, in this case it's about supporting real estate development in areas that are designated as opportunity zones. The policy idea is to try to designate places that are like low growth areas and to try to get investments into developing in those low growth areas. My understanding is at the national level, that's not always been the case. It's been opportunity zones that were kind of put in places that were already growing a little bit, which would make that even more enticing investment. And I bring that up because we're gonna get to it, but this does tighten up some of the definitions so that changes. A taxpayer can elect to defer any gain they get from investments as long as they hold them. So if you invest in one of these opportunity funds, you can defer tax as long as you're holding the gain.

[Carol Ode (Member)]: Can I ask a hypothetical question? So if

[Emilie Kornheiser (Chair)]: there's an opportunity zone in Oklahoma, and folks in Oklahoma who need development there, get the development as a result of the opportunity zone, and a corporation in, say, Arkansas, and investors in Arkansas are sort of putting in on that. But that corporation and say Arkansas, I really didn't have a hypothetical corporation when I started this, but it's really turning into one, sells into Vermont. Are we gonna have reduced revenue into Vermont or basically Vermonters gonna be paying for the opportunities in the opportunity zone in Arkansas. Even though our opportunity zone in Vermont might not see any benefits at all. Because of the single sales factor.

[Kirby Higley (Legislative Counsel)]: Yeah, I'm scared to try to answer.

[Carol Ode (Member)]: Okay, then Joe, we're going to talk about it another day.

[Kirby Higley (Legislative Counsel)]: Yeah, but I think you're definitely hitting on the fact that these things can get very complicated and this does flow through to Vermont as in the gains that are deferred here. In most cases this would be a Vermont investor.

[Carol Ode (Member)]: But they don't have to be

[Kirby Higley (Legislative Counsel)]: investing They in would, no. Then they could defer their gains and possibly as the slide here says at the bottom, it's possible to completely exclude the gain if the investments held for at least ten years. This would be income that becomes excluded and not taxed by Vermont. But it would be for taxpayers that would owe money potentially to Vermont. So an Arkansas investor investing in Oklahoma, maybe that'll affect us, but when they start to have, become subject to Vermont tax. That would affect you. And in your example, they're using Vermont's a market. Yeah. So they're able to, yeah.

[Emilie Kornheiser (Chair)]: Okay. Thanks. We can go deeper into some other time with diagrams.

[Kirby Higley (Legislative Counsel)]: But yeah, sounds like, I think, yeah, that there's going be an indirect Vermont.

[James Masland (Member)]: Okay. Thank you.

[Emilie Kornheiser (Chair)]: Represent Masland.

[James Masland (Member)]: Thank you. Monday ago, you said there were things where you for gauge as long as you're holding the asset. Is that similar to carry the interest?

[Carol Ode (Member)]: Is it the same principle? Is it

[James Masland (Member)]: the same thing or it just appeared to be the same? There's been discussion over the last couple of years about carried interest in whether or not it was taxed or not. Remember that? It went on and it was quite

[Kirby Higley (Legislative Counsel)]: a big deal in

[Unidentified Member]: some circles for a while.

[Kirby Higley (Legislative Counsel)]: I don't think part I of that, but I don't know if we covered it. There is the business interest deduction. I think we covered it. There is a deduction for pay, but somebody can come back.

[James Masland (Member)]: I'll try to be more articulate the next time I ask about that.

[Emilie Kornheiser (Chair)]: I'm realizing we should probably pick up our pace slightly.

[Kirby Higley (Legislative Counsel)]: Okay, so expansion of opportunity zones. There's some tightening of some of the requirements, but at the same time, some of the incentives have been increased. So this is going to be more in the bucket of things that could have impacts on more of the long term. In the short term, there's not going to be a lot of Vermont impacts, as these things become established, there could be a longer term impact.

[Carol Ode (Member)]: Do you have a question, Richard Branagan? No. Okay.

[Kirby Higley (Legislative Counsel)]: Another thing to note that the HR1 did here was they created qualified rural opportunity funds, which is a That has enhanced the tax benefits. And that could be something that ends up, Vermont could end up being one of those. The charitable deduction for corporations, I'll go through this quickly. This potentially allows less of a charitable deduction at the federal level, which would flow through to Vermont. It's creating a floor for a corporation to take a charitable deduction. Currently, corporations can make a deductible contributions up to 10% of taxable income. This change creates a floor of you can't take any deduction if you don't make contributions equal to at least 1% of your taxable income. So now smaller donations can't be deducted. It has to be equal to least 1% of the taxable income of the corporations. And then there's gonna be the ceiling of 10% of taxable income. Thinking about this, I think this is gonna be more of a changing taxpayer behavior thing than any kind of revenue thing in the long term, revenue impact in the long term. I think it might mean for corporations that don't make large contributions that maybe they'll start doing it every other year so that they can surpass the floor on the years in which they do contribute. Speculation.

[Unidentified Member]: Just to clarify around that, Kirby, is that aggregate deductions or individual donations rather for the charitable deduction? Like

[Kirby Higley (Legislative Counsel)]: Aggregate. Okay, great. Thanks. Okay, so a couple of things on decoupling. Kornheiser started this off by talking about recent changes. I have a slide here. You'll see since 2002, Vermont has moved more and more away from when it comes to personal income tax, moved away from being based purely off of the federal return. And we're at a point now where we start with federal AGI. We do not start with federal taxable income. And in recent sessions, there have been even more changes to move away from that. There has not been as much work when it comes to the Vermont corporate income tax to decouple. One thing I just wanna know for all of you, I'm not saying this to dissuade or persuade or to make you think any differently, but as far as decoupling goes, each of these changes we talked about could have administrative challenges and it's going to vary depending on what that change is. So I'm not saying it to say don't do certain changes, but just know that if there are certain ones we want to tackle, I'll work Texas, JFO, and we'll try to figure it out, but some of them are harder than others.

[Emilie Kornheiser (Chair)]: And the tax department's gonna come in to talk to us about it next week or the week after.

[Kirby Higley (Legislative Counsel)]: Great. And just some examples, the child dependent care credit, that would be easy, deduction domestic or deduction for domestic production, relatively easy. Some of these other things, opportunity zones, things like that would be harder, but that's again just making you aware, not trying to affect your thinking. And with that, can pass on to Pat.

[Emilie Kornheiser (Chair)]: Let's take a three minute stretch break.