Vermont Legislature SmartTranscripts:

[Speaker 0]: I'm with Israel. Giving up.

[Speaker 1]: Hi, folks. So it is 10:30. It's still January 15. We're still the Ways and Means Committee, and we are continuing our work on understanding the impacts of the federal budget bill, especially the tax implications of that. And I am really incredibly grateful that we have two national experts with us today. And so we're going to start our testimony with Carl Davis from the Institute on Taxation and Economic Policy. I think we've all read many reports that you have written, Carl. And I'm really glad to have you here in person. Thanks.

[Speaker 2]: Thank you. I'm going to share my screen to start. But I definitely wanted to thank the chair, thank the entire committee for making time for me to do this today. It's very exciting to talk about taxes, especially in Vermont. I'm happy to be back in Vermont. I am a former Vermont resident. I lived here for two and a half tax years. I only saw two falls, but I saw three mud seasons. I feel like I get around up to three.

[Speaker 3]: For those of you

[Speaker 4]: Your wife works at the Joint Fiscal Office.

[Speaker 2]: Briefly, yes. She was at the Joint Fiscal Office for a little while. Ended up moving for family reasons. There's no public policy fix that could have kept us here. So briefly about IPEP. We are a non profit research organization. We have separate policy teams that work on federal tax issues, state issues, and local level tax issues. Our state team is our largest. That's historically been our organizational focus. That's where I spend most of my time. It's on state level tax policy. And we're very much a research focused organization. The vast majority of our staff are analysts of some kind. We don't have significant legal expertise, for example. We're more focused on data and analysis. So we're going to be talking about HR1. What does this mean for Vermont? I don't know if we have a preferred terminology.

[Speaker 1]: It's had to go with HR1.

[Speaker 2]: HR1, okay. I've been to some conferences where they call it OB3.

[Speaker 1]: Usually people are doing that.

[Speaker 2]: Okay, you can roll your eyes at

[Speaker 1]: Our staff are mostly doing HR1.

[Speaker 2]: Okay, HR1, fair enough. That is the correct name. Know that both Kirby and Pat have given overviews of what was in the bill, so I don't want to rehash provision by provision. There's a lot in the bill. It's absolutely a big bill. There's no debate about that. So this is just a part here refresher on some of the largest items in it. There was an array of tax cuts in this bill. There were tax rate reductions, tax bracket changes, a deduction for pass through business income, estate tax cuts. The standard deduction was increased. The child tax credit was increased. And we have these blockbuster new deductions around tips over time, car loans for senior citizens and so on. And a significant number of new business tax breaks. So we can we can talk about any of these. I'm I'm saving time for questions at the end. Obviously, we could talk about any of those. But there's there's too much to to cover, and I don't wanna rehash the the good work that Kirby and Pat have already done. Long list of tax cuts and somewhat shorter list of tax increases, the big ones in the bill, were permanent repeal of the personal exemption at the federal level. The SALT cap is extended on a permanent basis. That was formerly a $10,000 cap on the amount of state and local tax you could write off on your federal forms. It's temporarily increased to 40,000. Many taxpayers then roll back to 10,000 after that, but that's made permanent. And a lot of repeal and limitations on the green energy provisions that were enacted as part of the inflation reduction act in 2022. So, again, I'm sorry I can't we can't dwell on this too long. We need more than an hour just to talk about these things. I wanted to put this as a refresher. So what did those do as far as distributional impact? This chart shows how families across the income scale are impacted by the federal bill. This is not our analysis. This is the official research of the Joint Committee on Taxation. It's basically Congress's JFO in a sense. These particular tables were published about three weeks after the bill was signed into law. But there were many versions of this done all along the way. So I think as the process went on, it was clear to the lawmakers who voted for this that it was going to look somewhere along these lines. And so what you see on the left is the tax cuts in the bill presented relative to income. This is a standard way to measure tax cutting because it shows how is it actually impacting a family's budget. And what this graph shows us is that the tax package is a regressive tax cut. That's a technical tax term. All that means is the slope of this line points in a certain direction where tax cuts grow relative to income. So this was a regressive tax cut, and then you can see what the average tax cuts were in the panel on the right here. At the bottom of the income scale, it's around $100 or so a year in tax cuts from the federal tax package. Roughly $2 a week or so, those families could expect. In the middle of the scale, you're looking more like $1,000 or $2,000 a year in tax cuts. And then it increases from there to tens of thousands or even hundreds of thousands of dollars a year for the extremely high income earners. And why is that? Again, it's a big bill, lot of provisions. There's a lot of things interacting. The largest three provisions in terms of highlighting why the tax cuts were so large at the top of the income scale, in particular, are those that I've highlighted in green here. The rate reductions, the extension and making permanent of the qualified business income deduction for pass through businesses, partnerships, and so on. And then other types of business tax breaks around the depreciation expensing and so on. So those are the big three in terms of dollar impact. Obviously, the estate tax cuts were also regressive. The AMT cuts were regressive too. But those were somewhat smaller. So if you're just trying to wrap your mind around the big picture of what's driving those results in that JCT table, think about those as the top three things going on.

[Speaker 1]: You're able to talk slightly slower.

[Speaker 2]: Oh, okay.

[Speaker 1]: I'm often not able to talk slower.

[Speaker 5]: I can

[Speaker 2]: do that.

[Speaker 1]: That's okay.

[Speaker 2]: The other thing I wanted to say, anything I'm saying, if anyone has a clarifying question, I'm happy to take that along the way. If it's a longer one, maybe say that before the end. But if I say something that's just flat out not clear, I would rather explain this clearly than just drone on and let anyone know what I'm talking about.

[Speaker 4]: Representative Ode. Thank you. For tax increases in the SALT cap extended indefinitely, Do you know how many states have protected their citizens against the SALT?

[Speaker 2]: Through the pass through entity workarounds? I don't know the number, the vast majority have. This is basically allowing pass through business owners to pay tax at the entity level because business entities like C corporations, for example, their assault is not limited. A C corporation can write off the entirety of its state local tax bill as a business expense. The idea in the past through entity taxes was to make it more like how C corporations are treated, move the tax to the entity level. And then that can be fully written off at the federal level as a business expense. So the vast majority of states are doing that. I don't have that account available. I could get that to you without too much trouble. Okay. So the I showed you the graphs just a minute ago with the the JCT table. This is we maintain a microsimulation tax model that's similar in its basic structure to what JCT runs. We have to run it on the publicly available public use file as opposed to the confidential data like JCT has. It's a But somewhat different data source, but the principles are all the same. And this is our analysis of the bill in Vermont specifically. So we have Vermont specific weights in our model where we can estimate what does it mean in Vermont in particular. And you can see the same basic patterns. The bill is largely regressive relative to income. That's shown in the left panel. And then on the right panel, again, you're looking at tax cuts of $2 a week or so at the bottom, rising with income up to $57,000 tax cut per year for the highest income 1%.

[Speaker 1]: Present loss, Iszazak?

[Speaker 0]: Do you, on the average tax click chart, the top 5% there, the 17,000 and the 57,000 tax tax, do you or maybe Pat know what is the income level of the top 1% or the top 5%?

[Speaker 6]: I think

[Speaker 2]: it's yeah. We should have this on our website. I would guess somewhere in 300,000 range in Vermont, but that can yeah. We can follow-up with that information. That's a good question.

[Speaker 3]: Just the top four or the top

[Speaker 2]: The top five. It should be about 300,000 and up.

[Speaker 1]: That's what I remember from

[Speaker 4]: past years.

[Speaker 0]: Yeah.

[Speaker 1]: I'm sorry, President Ode, do you still have a question?

[Speaker 4]: No, I'm trying to think about what I remember and what's the difference between the top 1% and the next 4%?

[Speaker 1]: That might be

[Speaker 4]: a huge jump. It looks like it might be a huge jump.

[Speaker 2]: So, how should we feel about this? That's really not a question I can answer. I can shed some light on how we expect the American public to feel about this. I think it's an interesting political science question here. To what extent is the distribution of this bill aligned with what the public is hoping for out of tax policy? And so, I'm going to show some results from a poll that Gallup, one of the largest pollsters in the country, released in March. So this is about four months prior to the bill being signed into law. They asked, at various income levels, people paying too little, too much, or about the right amount in state tax? And what the public answered for the middle class, middle income people, specifically how it was phrased. You see a somewhat narrow majority nationally, it's not a Vermont representative, but nationally saying that middle income people were paying too much.

[Speaker 4]: Can you define how people understood middle income?

[Speaker 2]: Yeah, that's a great question. Think you would get They didn't ask that question specifically, as far as I know. We have to think of this in general terms. And there is some polling on that too from other pollsters, but that's a good rabbit hole to go down in terms of people's self perception of where they fall.

[Speaker 4]: Everyone should submit their own copy.

[Speaker 2]: Many people do. I've seen around 30 or 40% of people identify as working class, I think around a similar share identify as middle income. There is some interesting polling work around that, or how folks self identify.

[Speaker 0]: Thank you.

[Speaker 3]: Just from a sample set standpoint, these are randomly selected people across The United States, it's not within any kind of income bracket. Yes, absolutely.

[Speaker 2]: This is the American public in general saying how they feel about what the middle class are paying. So, obviously, from the slides I just showed, there are unquestionably tax cuts for the middle class in the federal bill. So I think one could make a plausible case that that basic dynamic at the federal level was speaking potentially to something that the American public were articulating in this poll. I want to caution exactly there are alternative interpretations of this number. The phrase paying too much in tax, I think too much also implies too much for I think a lot of people think about it as too much for what you get. So, if middle income people were to get government provided health care, then maybe they wouldn't feel like they were paying too much anymore. Relative to what they're getting, they feel that it's too much. Or relative to what they feel other people are paying, they feel it's too much. There's a range of interpretations of this number. But I would just say that generally, the idea of cutting middle class taxes federally was potentially politically popular. We see that you know, this is being campaigned on right now in in national elections for the in the midterm election. The middle class part of the tax cuts is being campaigned on. So there is an assumption that this is reflective of what the American people were looking for very broadly. Then we have at the lower end a similar or actually slightly larger share of people nationally feel that low income people are paying too much. And I've shaded this one yellow to indicate that this is an area where the bill seems to be straying a little more from what the public are saying on this question because recall we're looking at maybe $100 average tax cut a year for low income earners. They just really weren't the priority in this bill. Now if you were seeking to do a large tax cut for low income earners, there would have been a, for example, a much larger EITC or maybe a refundable CTC or maybe a payroll tax cut. There are any number of things that could have been done because they weren't the focus of federal bill. I think as our analysis shows and as the JCT analysis shows.

[Speaker 6]: Your polling was done in March. Obviously, have changed since then, particularly healthcare insurance. And I wonder how this polling would be some of those factors, that particular factor. Yeah. It might be quite a bit different.

[Speaker 2]: Usually Gallup, this is a poll they've done for a long time, and I expect they're going to do another one in March, they usually to release it around tax day because that's when regular folks outside of rooms like this are thinking about taxes. So if you can wait till tax day, it'll be interesting to see if the needle moves at all on that question.

[Speaker 4]: I would love to try to

[Speaker 1]: have folks remember for us to look

[Speaker 6]: at that

[Speaker 1]: poll right before we adjourn. I think that would be a fun way to wrap up the

[Speaker 0]: session. Back

[Speaker 1]: to you, Carl.

[Speaker 2]: And then we have, at the high end of the scale, 12% of the American public, they said upper income people are paying too much. I've seen the poll question also asked for billionaires specifically, and I think that number shrinks even more for that group. But just for upper income in general, it's around 12% of the public think they pay too much, and then 7% of the public felt, as of March, that corporations were paying too much. And so, you have these This is what the American public was I think this could be potentially a useful guidepost for lawmakers in deciding where to direct tax cuts if you're trying to pursue a large tax cut package. But I do think there was very clearly a disconnect here, where you have 12% of the public saying the rich paid too much, and then the bill very clearly included large tax cuts for upper income people. By our estimate Oh, here's some of these income bands we were talking about. I did put them in there. So 300 Oh, these are national. These are national. So take that. Yeah. Vermont will look a little different, perhaps a little lower. Nationally, about half the tax cuts in the bill are going to families earning over $360,000 a year. And then at the very low end of the scale, the bottom 40% of folks you might think of as the working class in general, they got about 4% of the tax cuts here. So the bill was very top loaded in terms of where the tax cut dollars were directed. So what does this mean for Vermont? Let me go back a slide actually. I Thinking about So where do the states come into play here? One potential role for the states is taking a look at this and saying, Okay, where is federal policy moving in a direction that we think is responsive to what our constituents want? And where is it moving in a direction that's not in line with what our constituents want to see. So the federal government has has done tax tax cuts for middle income people already. It hasn't really done much in the way of tax cutting for low income people lately. And then it's done this tax cutting for upper income people and corporations that most of the public, as of March, was indicating they probably didn't want to see happen. So if a state was trying to steer tax policy back in a direction that is more closely aligned with what folks are saying in polls like this, it might think about, well, is there something more we could do for lower income, working class families who aren't getting a whole lot of benefit out of the federal bill? Or is there something we could do to claw back some of these very large tax cuts at the high end of the income scale that most of the public wasn't saying they wanted, but they ended up getting anyway? So those are potential roles that a state could play on the tax front there. And as far as the question of could the state recapture or claw back some of the federal tax cuts directed to high income earners, I do think it's I've testified on this report before, but this is the who pays chart for Vermont. Vermont does have a progressive system through about the bottom 80% or so of the income scale. Above the bottom 80%, the system turns pretty flat or actually regressive. So if taxes on If Vermont was interested in having a truly progressive tax system throughout the full income sale, raising taxes on upper income earners would be a way to achieve that. Whereas right now, you have a hybrid system that's partly progressive and partly flat or moderately regressive. That's how that could fit into the federal government.

[Speaker 0]: So looking at the previous chart that you had about which income tax brackets got how much of a tax cut in Vermont, marrying that with this chart, those who made over 5 and $88,000 received a $57,000 annual tax cut. Ish, on that slide, clear?

[Speaker 6]: Yes. Does

[Speaker 1]: this analysis include the expansions that we did to this CTC and EITC last year?

[Speaker 2]: No, this does not. This this is this code as of January 2024. Okay. Cool. Thanks. That's a good question. Alright. So now, we're talk about conformity or how you're linked up to the federal code. This is a big topic. We were talking yesterday. I mean, the conformity debates are kind of like cicadas. They come around every eight or ten years or so. When you get a big federal tax bill, you have to deal with it. In The States, you have to decide what you're going to do. Before I talk about conformity, I'd like to offer a brief comment on the topic of gratitude though. My wife recently suggested to me that a good New Year's resolution for me would be to be a little better at feeling and experiencing gratitude.

[Speaker 1]: Do you feel grateful for that suggestion? I think

[Speaker 2]: it was a good suggestion. Wasn't specifically I need to be more grateful to her. It was just a more general statement about being grateful for what you have. I think that's a nice lesson. So I'm going to share that sentiment with the committee, if I can. Because I think we you and the folks in this room, I do think you have something to be grateful for. And I think that that is in 2018 or so. Vermont lawmakers, including some of the folks in this room, were involved in moving Vermont from a system coupled to federal taxable income to a system coupled to federal AGI instead. Basically, you are still linked up to the federal code, but you're linked up a little less closely than you used to be. You're not inheriting all the federal provisions that are coming from DC. And the reason I think it's worth point of evidence for why you might want to be grateful for that. This is what the debate is in South Carolina right now, which is still linked up to taxable income. So this is like a pre-twenty '18 Vermont style system. And these are quotes from various Republicans in leadership positions in South Carolina. They're talking very seriously about this. If you look at how experiencing their linkage to federal taxable income, you see these quotes here. South Carolina doesn't need to depend on Congress. We shouldn't be dependent on the whims of the federal government. We don't want to be at the mercy of whatever D. C. Does. This is them being concerned about how much their tax code is going to change because of these changes in federal law. And the quote I probably like most on this list is the one in the middle, where you see Senator Bennett talking about, We want to pursue a South Carolina focused, a South Carolina centric tax policy. So just because the federal government does something, we're not going to automatically sign up and go along with that. We're going give it a close look. We might go along with it, but we're going think it through and see if it makes sense for our state. I think that's the right way to approach this. And so that's kind of the theme of my next several slides on tax conformity questions. So, this is one humble recommendation for one potential path on how a state might consider approaching conformity. The fact that you are no longer coupled to federal taxable income means that you do not automatically pick up the things that I have displayed on the screen right now. You do not automatically offer a deduction for tips income, overtime income, car loan interest and so on. I think most tax policy experts would advise you to forego these things. These were popular on the campaign trail. They are not so popular among the folks who look most carefully at tax policy. My opinion on the tips deduction is as soon as I hear a good explanation for why bartenders and servers should pay lower tax than childcare workers, then sign me up. Until then, I'm not interested in this carving up of the working class based on their occupation. Some of them will get tax breaks and some of them won't. I think that's a pretty uncontroversial view among tax policy scholars and people who study these issues. What we largely have federally, I would argue, a cluttering up of the tax code. You have a lot of new exemptions, deductions being put in place. I think right now, are hot topics. All the states are talking about these. I think with time, we're going to see the debate, the pendulum eventually swing back toward a, Okay, we need a sort of tax reform mindset. We need to broaden the base, that kind of thing. We've actually seen this specifically, the car loan interest, I think, an instructive example. The federal government used to have a car loan interest deduction. Had it up until 1986 when a bipartisan bill signed by President Ronald Reagan repealed the car loan interest deduction in this for the sake of base broadening. So these are things that we've had and rolled back. I expect that cycle will eventually repeat. I don't know how long it will repeat, but I think you could bring a range of experts into this room that would generally caution you against going along with any, many, or all of those things in this section that impact federal taxable income. On the other hand, I think there are things in the bill that are worthwhile and that Vermont could get some benefit out of conforming to. The dependent care credit was expanded in the bill. Not in a super dramatic way, but it was expanded in a sensible way. If you're going to pick that up in your own dependent care credit, that would have to be addressed in legislation. I think it's not a secret that childcare is extraordinarily expensive in this country. And so that was part of the rationale for expanding that credit. Also for expanding dependent care FSAs, which are these accounts that you can get through work to save tax free for dependent care expenses. Those were expanded as well. I think that's a reasonable enough thing to go along with. Those rules had not been updated in a very, very long time. There are some business tax changes in the bill that I think were worthwhile. There are also Trump accounts that are going to have a modest effect on Vermont revenues, potentially. And I think that's born out of the idea of baby bonds, which is a bipartisan idea. I don't think decoupling from the Trump account shouldn't necessarily be a high priority. The point of this is, the list could be longer than this, but I think if you look through a full list of things you might conform to, I think you will find some things you like and say, we should adopt these things.

[Speaker 4]: Jen Holcombe, you Are you expecting me to say something or do

[Speaker 5]: you have

[Speaker 4]: something? I just didn't want to interrupt.

[Speaker 1]: Oh, great. I have question. Okay. Yeah. Thank

[Speaker 4]: you for this list. It was really helpful. And Vermont has also done some work around dependent care and child care credits and early care and learning subsidies. Are there states that you think are doing an exemplary job of trying to figure out how to maximize the juice for young families that we can look at as a reference point in terms of this? I mean, how to marry what's going on at the federal level with our own

[Speaker 2]: context? That's a tough question for me to answer because government involvement in the childcare space happens through both the tax channel with things like dependent care credits and FSAs, but also through the spending channel with direct subsidies and so on. And so that side of the equation is more outside of our lane. We're a purely tax policy focused organization. So I don't know that I have the full field of vision necessary to really give you a great recommendation there. I would say the folks who specialize more in the childcare space can see the full field can offer you more thoughtful advice.

[Speaker 1]: Get some national experts on that. I think the Women's Law Center has done some work on it, and there some other folks.

[Speaker 4]: Yeah, that would be great. Because I think there's a real opportunity there.

[Speaker 2]: Those are things in the bill. On the other hand, I do think there are some items that are worth thinking seriously about decoupling from. And I'm going to focus most of the remainder of my presentation on these items here in this red shaded box, so we don't need to belabor them on this slide. I'll go through those in just a moment. And then, I would also encourage I think when a federal bill of this size is enacted, you have to deal with conformity first off. You have to be conscious of how your code is changing or not changing as a result of that. But there's other things going on at the federal level that might also encourage you to think about a change in state level policy. So two things just to be on your radar. We have seen a lot of reductions in IRS funding lately. Thinking about whether there's anything you can do to shore up tax compliance in your state in the wake of a smaller IRS could make sense. And then again, to what we were talking about earlier with the distribution of the federal cuts, And are some of these not really in alignment with your values? Would you want to claw back, say, the high income tax cuts? Would you want to say maybe offer something extra to the low income folks who aren't getting much out of the federal bill? Discussions Those I think weren't happening. Those are discussions that are happening in other states, I could say.

[Speaker 1]: Are you you said you're gonna spend more time on the decouple. Are you also gonna spend more time on the other responses? Or should

[Speaker 2]: I don't have as many slides on that. We could we could talk about that now if you'd like.

[Speaker 1]: The tax compliance you know, we're a small state.

[Speaker 2]: Yes.

[Speaker 1]: With a very small and mighty tax department, but it's small. Better funded than some other divisions of state government, but small. And we are wildly dependent on the IRS for our compliance. In previous years, we've had language to sort of start exploring interstate compact type ideas that didn't make it all the way through into law. But what are other states doing in this tax compliance space as the IRS shrinks?

[Speaker 2]: Well, there has been some hiring of laid off IRS workers.

[Speaker 1]: Yes. Go. That's exciting. Yep. There

[Speaker 2]: are A lot of times the state enforcement effort focuses first on those items where the state knows the IRS is doing nothing or next to nothing. And so one thing that comes up a lot is residency. Our folks reporting their residency correctly. New York is very mindful, notoriously mindful of this. So that's often a focus of state tax enforcement historically. But if you're concerned that the IRS is gonna miss more things in general than it had before, that that could be worth rethinking. I I think you would want to get tax administrators in here to talk about where the very specific gaps are gonna be. I just wanted to flag this as a general issue. There are also you know, one common concern in state level policy is the use of trusts. And so, making sure you have a set of rules around trusts that is very tight and enforceable and cannot be easily gamed by. There are accountants and lawyers who specialize in trust law who are very good at what they do. And if you leave an opening, they're going to find it and they're going exploit it. And you want to make sure that you're levying your income tax in a way that's based on economic reality, not on how good your lawyer or your accountant is. So New York and California especially have enacted some well regarded trusts, taxation specifically for antitrust rules around trusts. So I think that's one place worth thinking about.

[Speaker 4]: Thank you. Yeah. Sample comes from reading a study and said that actually, Whittenden County had a disproportionate high number of tax audits in your county compared to rest of the state. I think they're hitting in Vermont both lower than hers. I don't know it's about five years, perhaps for that reason.

[Speaker 1]: Do you mean IRS audits or IRS? Thanks. I just want to

[Speaker 4]: go back to your first question, Karen. Before you go on, would you be willing to talk about, are there any high level big picture trends that you're seeing and how people are responding to the issue of conforming to these decisions?

[Speaker 2]: Well, yeah, there are I think the states are coming at this cautiously and deliberately. And part of the reason for that is there's more anxiety about their state budget outlooks in general than there has been for the last several years. And so states are saying, We didn't come up with these tax cutting ideas and we're not just going to automatically adopt them. We're going to think hard about whether we want to do this, because we're concerned about our budgets maybe for this fiscal year. But we're also taking a three, four, five year time horizon and looking out like, Hey, we're going to have some additional expenses here around SNAP or around healthcare or our provider taxes are gonna be dialed back. We're looking at some longer run challenges and so we're trying to think beyond the current budget cycle. Do we wanna sign up for a tips deduction for the four years or potentially more when we know that, you know, we have reason to be worried about what our budget's gonna look like three or four years from now. So I I am this is all this is a very live debate in The States right now. This conversation is happening everywhere. But I think they're bringing some skepticism through. They're really putting these things under the microscope. It's not always breaking down along parts and lines. I can add that as an addendum. Some of these things are not It's not a purely partisan debate.

[Speaker 1]: This fall, the national conferences I went to with other revenue chairs, it was some of the least partisan conversations I've ever had at those conferences. It was really quite exceptional how on the same page folks were. Representative Page and then Higley?

[Speaker 6]: Yes, following up with Rebecca, the representative Holcombe, is there any forecasting on doing some of these things, whether it will attract more people to your state, decoupling, or whether people will leave the state by doing things differently. That's

[Speaker 2]: an interesting would say that affordability is a big part of migration, especially around, you know, this big top this really big ticket expenses that families face around housing, for example. Like, we've absolutely seen people move to areas with with cheaper housing. So I think that's a hard question to answer at a very high level because each of these you know, families at the lower, middle, or high end of the income scale, they're facing a different set of circumstances. Have different calculations in mind. High income people would generally Part of the benefit of having a higher income is you have more freedom to live where you want because you're not as constrained by affordability concerns. It's it's not you're not struggling to put food on the table. You don't have to move somewhere where the rent's a thousand dollars cheaper to to be able to put food on the table. So it's a different calculation. And these provisions are gonna impact people very differently across the income spectrum. Like the folks who are benefiting from the dependent care credit in meaningful way different, say, from the folks who are benefiting from some of the changes for business depreciation and that kind of thing. So I don't know. I can't There is literature around taxes and migration. What it generally finds is that things like housing are going to significantly outweigh the tax part of the equation. I think this is a recurring conversation that I always think.

[Speaker 5]: Carol, thanks

[Speaker 2]: a lot.

[Speaker 5]: Can you talk a little bit about top maybe federal cuts and what precipitated that endeavor to go that down that road. I mean, whether you agree or not, what's their thinking?

[Speaker 2]: The tax cuts or the spending cuts or both? The

[Speaker 5]: tax cuts in particular, I guess.

[Speaker 2]: Why there was such a large tax bill right now? So it was partly if we had Congress likes to wait until the last minute with things, and partly it was we had a lot of the twenty seventeen changes were expiring. So that was the impetus where it was basically viewed in the Congress as, Okay, this is a year where we have to pass tax legislation, was the consensus. Now, what should that look like? That was contentious. There were twists and turns along the way. There was a moment where it seemed like there was very serious consideration to extending a lot of the middle income tax cuts, but allowing the top rate cut enacted in 2017 to lapse. That was a surprising twist along the way that actually did come up. There were some high profile backers for returning the top federal tax rate to 39.6. Obviously, that didn't ultimately happen, but that's why there was a tax cut bill in 2025 because those 2017 cuts were expiring. And then when you have that vehicle where you know a federal tax bill is in the past, then all kind of other stuff gets added in. So that's when, you know, tips, the tip production got added in. Some of the new business tax breaks got added in. It was used as an opportunity to rework the international provisions for corporations a little bit, but that was the vehicle of it was the expiration.

[Speaker 5]: Thanks.

[Speaker 3]: Just wondering, the bottom item, clawback of these popular parts, is that more specific to those dates that are tied to the taxable income, not just the AGI? Because for Vermont, that doesn't mean that the tax the revenues from the top tax earners aren't necessarily going down, but their federal tax liability is going down. So clawing back what was not Vermont would be, let's get what they would have paid the federal government, I think is what you're saying with us.

[Speaker 2]: Yes, yes, that's a good clarification. Yes, that's right. And so I would say that, for example, Rhode Island's governor today is releasing his budget. I don't know if it's out yet, but his spokespeople indicated ahead of time that this is going be the first year that he backs a new top bracket. I think it's $600,000 or so of income for the top 1% of earners in the state. He's going to propose a three percentage point top bracket on the top 1% of Rhode Islanders. That's a change. He's been opposed to this for the last several years and he has changed his view on this in part because of what's just happened at the federal level. Both the tax cutting going on at the federal level, he knows that the high income folks in his state are getting a federal tax cut, but also the spending changes at the federal level. He's worried about what's going on and how Rhode Island's going have to pay more health health insurance expenses and SNAP expenses and so on. So I think that is a reaction to the federal cuts, I think that's a conversation that lawmakers are thinking about in other states too. Washington State's governor, for example, has also recently come out in favor of a millionaire's income tax in that state, and that's a change for him as well. So the conversation is changing partly because of the federal developments.

[Speaker 3]: Do you know in those cases you decided if they are decoupled? If Rhode Island and Washington are decoupled from the federal taxable income?

[Speaker 2]: So Washington does not have an income tax at all right now. So this is a change. He wants to actually bring one to the state, at least for very high income people. It's a significant change. It's going be a long debate. Maybe not in the legislature, but I think it'll wind through the courts and so on. It's a big thing there. In Rhode Island, they're linked up to AGI.

[Speaker 3]: Okay. AGI, not a tax reform company.

[Speaker 6]: You.

[Speaker 4]: Represent Ode. So you were talking about use of trusts and rules around these, especially something trusts. Did you just name them In

[Speaker 2]: trusts, in trusts, yes. Incomplete non granted trusts. It occupies the middle rank. You can almost sense the loophole right there in the name. Incomplete. There's no lawmaker that ever sat down and said, We want to authorize the creation of incomplete non granted trusts. This something someone came up with that kind of fell into a middle ground. And they were able to avoid simultaneously It's a way for extraordinarily wealthy people to transfer assets to heirs, while simultaneously avoiding both state income tax and federal gift tax. And so they were able to thread that needle. And this is an area I think especially where states are thinking about because we're not seeing a lot of attention at the federal level to this. So there is a state implication, but I see no reason to expect IRS or Treasury to resolve this for you.

[Speaker 1]: I'm going to let you get into the red zone

[Speaker 0]: now. Yeah.

[Speaker 1]: Was that a football joke? Yes. That's not working either. Okay. Took like a full minute to understand what you're doing.

[Speaker 2]: So, the first thing I'd like to draw your attention this is something you are coupled to. This is an exclusion. It comes out of AGI. This is something guess technically you don't have to make a decision on it. If you don't make a decision on it, you will inherit a larger tax rate here. This is the thing that will occur. Qualified small business stock. This has flown under the radar for a lot of people for a very long time. This started in the 1990s at the federal level. It started very small, and it's been Bill just after bill has increased at the federal level in a way that really flew under the radar. There weren't great federal data being reported on this until I was at a conference at the Department of Treasury in 2024, just an audience listening. And someone at the Treasury Department, they have access to the confidential federal data. And they said, hey, we haven't been reporting a lot about this tax break. Let's go take a look at it. And what they found was that this thing was swallowing up around 2% of federal capital gains tax revenue. But what had been flying under the radar, which is maybe 2% sounds small, but I can tell you the people in the room, it did not sound small. The people in the room were, wow. This is there's actually something here. And these were extremely knowledgeable people about federal tax policy, and they had no idea. This thing has snuck up over time to be a much bigger deal than anyone initially appreciated. What it is, is a this is an exclusion for early stage of capital gains for folks to invest early stage in a so called small business, which just that this means a business with less than it used to be 50,000,000 in assets. Now it's less than 75,000,000 in assets. But you have to be in the right industry. So you're not going to get this as a restaurant owner, hotel owner, or anything like that. There's a lot of industry exclusions because the actual intent here was to subsidize early stage investors in early stage tech companies and c corporations in particular. We know that most small businesses are not c corporations. You know, they're sole proprietorships, partnerships, s corporations, so on. So this was this was a tax break basically for venture capital investing in in tech companies. Oh, sorry. Do you have a question?

[Speaker 7]: Oh, no. It's up to the chair to

[Speaker 1]: You can finish your sentence.

[Speaker 2]: Oh, that's okay. Okay.

[Speaker 1]: Representative Masland.

[Speaker 7]: Yeah. We've done some work in previous years on into encourage businesses to grow in Vermont and to tax income that comes into the state from other places, and I haven't got the language exactly right. But the issue that you just brought up is something that we should look at, I think, carefully with regards to taxing. We I mean, for instance, we can tax out of state sales into Vermont, various kinds of stuff. This is in that in the big bucket of what you're talking about if they're trying to encourage businesses in Vermont, move here, and also to tax stuff that rightfully could be taxed in Vermont if we're clever about how we do it. So this It's somebody else's problem. I thought it'd be kinda sarcastic, but you understand.

[Speaker 1]: Mhmm. I I sent a quite detailed report about this to representative Burkhardt, but if anyone else also is interested in it, I'm happy to send it to the whole committee.

[Speaker 2]: Back to

[Speaker 1]: you, Carl.

[Speaker 2]: So to your point about businesses in Vermont, appreciate that entirely. I think there is a relevant distinction here. And this is a big part. This is kind of also a macro reason why I would encourage you to go provision by provision and think about whether it makes sense. Because one thing we sometimes see is that a policy that arguably makes sense at the federal level just doesn't translate all that well to the state level. If you think about what does this actually mean for our state? What are we getting out of this as Vermont? I would argue this is a case where that dynamic is in play because businesses in question here don't need to be located in Vermont and probably, in fact, actually aren't. The the tax break is for the the folks who have been able to invest money in those businesses at a very early stage. And so, actually, California, several years ago, ended up decoupling from this tax break specifically because it was frustrated by that fact. And it tried to say, wait a second, if we're gonna be offering tax breaks for business investment, we wanted them to be California businesses. They tried to do that, and it got struck down in court as a violation of discrimination against interstate commerce. And so they said, well, forget about it. We're not going to we don't want to subsidize Seattle tech companies and so on. So they ended up decoupling. And and this is a common thing you'll often see with business tax breaks if it's done high low if it's done pre apportionment.

[Speaker 7]: Yeah. I mean, this is helpful if California's gone first. We have something to learn

[Speaker 2]: from them.

[Speaker 3]: So Yeah.

[Speaker 2]: And, actually, that's my next slide here. Oh, no. Oh, no. I didn't I didn't do that slide. I'm sorry. I'm sorry. We do have a report. I think Representative Kornheiser maybe has access to that report too. California, Alabama, Mississippi, Pennsylvania, and now DC, just as of a month or two ago.

[Speaker 1]: A very funny range of states.

[Speaker 2]: It is. I think partly that's explained in a state like Pennsylvania and Mississippi. I don't think they pick these things up automatically. And when they sat down and looked at it, said, Do we want to go out of our way to couple this? Maybe not. So they haven't gone along with it. And DC has coupled And I clarify want one thing. We're talking about this now because this provision was already on the books, but it changed in this federal bill. But the impact of the change is not going to be felt for a few years because it's for investments made on the enactment of the federal bill or later. So there's a lag time in when the changes are going to hit. But I think states are looking at this. There is also an immediate revenue significance. You are foregoing revenue right now from the tax break that was already on the books, even before the federal bill was enacted. So DC I think this has been kind of a wake up call between the publication of the Treasury report that really shined a light on this in a way that we didn't understand before. And also the federal bill expanding this permission. States are starting to look at this more closely. In fact, DC has already decoupled specifically because of the Fed. These two things raised it on their profile. And I like again, back to this theme about things not necessarily being partisan. We have a wide range of organizations here that are not fans of this particular provision. You can see an author at AEI, Kyle Palmerlau, talking about it being inefficient, complex, unfair. The tax foundations made similar statements. So this is not something that is particularly beloved among the tax analyst community. Depreciation and expensing, I know that Pat presented on this last week or the week before. These are some of the larger this is the ability of businesses to immediately write off the cost of of certain expenditures they make for plants and equipment and and and that kind of thing. This is the largest revenue loss potentially for Vermont from conformity, and that's a general trend we see across states. We've seen a lot of scores coming from fiscal offices, departments of taxation, and so on. This is consistently showing up as the biggest ticket item. Similar to the point I was making about USPS, the rationale at the federal level was to encourage businesses to open more facilities, purchase more equipment, to upgrade their equipment and that sort of thing. That rationale does not necessarily translate as well to the state level because it's coming out of pre apportionment income and what that means in practice is if you offer a more aggressive tax break for these business investments, you're going offer it not just for investments in Vermont, but for investments in Nevada or Oregon or any other state. So this is part of the reason why historically many states have tended to decouple from these kinds of tax breaks because the revenue impact and because they don't see a whole lot of targeted in state specific benefit. I think it's a reasonable goal for state lawmakers to want to grow their own economy. Whether they want to grow the economy on the other side of the country is a different question. Say

[Speaker 1]: if a company from Arkansas was investing in Pennsylvania, but they had sales into Vermont, we would lose revenue here in Vermont even though that investment in Pennsylvania, we would have no positive effects

[Speaker 2]: from that. As far as I know, there's no legal way around that.

[Speaker 0]: So

[Speaker 2]: you end up in interstate commerce clause problems again. The other thing to keep an eye on are there are actually some aspects of these business changes federally that are retroactive. With the way that time works, it is not applicable to subsidize something, to incentivize something that's already occurred. So, if you're at it, if you're really putting this under the microscope, I would take a particularly skeptical eye toward anything that's retroactive as subsidy for investment that already occurred. People are already booked.

[Speaker 1]: We haven't I believe the House has generally been opposed to that. Yes. Yes. And

[Speaker 2]: so then there was a very interesting Michael Bologna, one, I think, of the country's best tax reporters, had a had a good story in Bloomberg earlier this month pointing to some of the decoupling actions taking place in places like, you know, Rhode Island, Delaware, and so on, Michigan. And so that makes that article be worth taking a look at if you're trying to understand what other states are doing on this front.

[Speaker 4]: Teddy, I see you taking

[Speaker 1]: a note. Once you look up that article, we sent it around. Sure. Thanks so much.

[Speaker 2]: Okay, I want to talk international tax. This is going to get kind of complicated. How are we doing on time? Are you okay?

[Speaker 1]: We're good. We have twenty five minutes. Sorry, thirty five minutes.

[Speaker 7]: We're good.

[Speaker 2]: Shifting gears a little, I want to talk international. And I wanna give credit where credit is due. I think there is something that that the federal bill actually made some progress on. And and we this started in 2017, and then it was solidified in the 2025 bill. And that's excuse me. We see this acknowledgement federally that you cannot administer the corporate income tax with blinders on. You can't effectively administer a corporate income tax if you are not paying attention to the full picture, especially what's going on with regard to foreign profits. We've all heard these stories about companies with the PO box and The Caymans claiming that's where they actually made all their money or they're making all their profits in Switzerland. This has been thoroughly documented by investigative reporters in the accounting literature and the economics literature. I've been to conferences and listened to representatives of corporate multinational corporate trade associations who have acknowledged that this is actually going on. This kind of international profit shifting to avoid federal corporate income tax and state corporate income taxes is a very real thing. And so the federal government has measures on the books designed to help curb this. And I think those are worth taking a close look at and seeing what kind of benefit Vermont can get for tax administration out of those. But my second point again is this question of translation. Just because there's something on the federal books doesn't mean it works for Vermont, or maybe it would work for Vermont, but you have to approach it a little bit differently for it to really make sense. And I think that's pretty clearly the case here. So we have a foundational difference in how the federal corporate income tax works and how the state corporate income tax works. At the federal level, the federal level is leaning heavily on it's looking at income broadly being earned across the globe, and it's offering partial deductions. It's offering foreign tax credits. The goal of the federal corporate income tax is not to tax legitimate company profits in Germany. That company is actually treated genuinely earning in Germany. We're not trying to overreach. But it pays attention to what's happening internationally, but it has to take certain measures to still tax the appropriate income and tax it in the right way. Vermont has a similar goal, but it approaches it in a different way. And this is the way the states in general approach this. And this is with formulary apportionment. And sales factor formulary apportionment in general. And so I want to walk through this relatively slowly, just because think to understand the international provisions, we have to have a super clear understanding of how sales factor apportionment works. So here's an example. A very simplified example. Imagine a company that's making a billion dollars in sales in in in The US, and they're turning about a 10% profit. So they make about a $100,000,000 of profit off of a billion dollars in sales. They have sales into Vermont. They're operating in Vermont in some way. Vermont gets to tax a part of that, but it can't tax all 100,000,000 of that profit. That would be overreach. That's not an appropriate role for Vermont. Vermont needs to figure out what part of that 100,000,000 it can tax. You could go to the company and say, oh, how much of that 100,000,000 did you make in Vermont? What they're gonna do in that case is probably saying, oh, no. We made all our money in Nevada. You know? So you can't do it that way. We have that's that's that's that's called you you if you were to take that approach, that's called transfer pricing. And there's a whole cottage industry of accountants and so on that are very good at manipulating that to claim that the profits are being earned in low tax and zero tax jurisdictions. So what Vermont and almost every other state does instead is say, okay, we don't care how good you are at drawing up flowcharts of where your profits were made. We want to know where are your customers. Tell us the economic reality of your company. Where are your customers? If you made 5% of your sales into Vermont, then we're gonna tax 5% of your profit because, you know, you don't have a company if you don't have customers. So that's that's the logic there. And this is sales So when someone says sales factor formulary apportionment, it's just an intimidating way to say this. You tax a share of profit based on where their customers are. Now, imagine this is this is a significant administrative change we're gonna look at here. So you're looking at this exact same company, but this is a multinational company now. They they have sales occurring overseas, it turns out they don't, you know, they half their sales are overseas. They have actually 2,000,000,000 in sales, but they're making 200,000,000 in profit off of that. Your sales factor, if you're bringing in any of this international income into the way you calculate tax liability, your sales factor is gonna shrink now. Right? You know, Vermont's a smaller part of that company's picture than you thought before. You know, actually, if you if you take a full worldwide view of things, only two and a half percent of their sales are in Vermont. It's still $50,000,000, but it's two and a half percent of their sales. But it's two and a half percent out of a $200,000,000 pie instead of out of a $100,000,000 pie. And so this is this is the difference between having a a myopic water's edge view where you can say, only care about what's going on in The US and I'm not gonna bother with looking at international income at all. Versus having a worldwide view. You can see that the calculation is different, but the result is the same. Because the point of bringing in foreign income into the calculation isn't to raise taxes or tax foreign income. The point is to prevent profit shifting and to neutralize that. If this company was instead saying, actually, of our $200,000,000 in profit, 150,000,000 of it was in Switzerland, then that would be a problem, and this would help to address that. But in this neutral case, which you said, this is not a tax increase on this company. It's just a different way of administering the tax. And so then, just to drive this home, and this can be relevant to federal provision I want to talk about in a second. Let's imagine this company expands its overseas sales. And so now, more than half of its sales outside The US. It's got 2 and a half billion in sales, 250,000,000 in worldwide profit. The sales tax apportionment factor is shrinking even more. But the company's bill remains unchanged again. So the point what this is illustrating is that you can take a worldwide view to tax administration. The point is not to tax legitimate foreign profit. And you can see in this case, the company makes more sales abroad. It makes more profit abroad. You don't get more revenue out of that because you're not trying to tax that. You're trying to just tax the appropriate share of the full picture. And if you don't have the full picture, you can't administer the corporate income tax well. So does this make sense? I'm going have a practical application in this in just a second. Does that make sense as a general? And again, this is different than the federal code. The federal code doesn't do this. This is foundational to the Vermont corporate income tax. The federal code doesn't do this. And so you have to approach taxation differently than the federal government because of that. One thing the federal government does is they offer a deduction for it was formerly a foreign derived intangible income. Now it's renamed as of January 1 in the bill, foreign derived deduction eligible income. It's a pretty bad acronym, honestly. This is pronounced the FIDE deduction. I didn't come up with that. Don't blame me. Today's deduction, what you're saying is this is a deduction for deduction eligible income. It's circular. But anyway, this is a federal provision, and it's basically export profits. The idea is to encourage It's an export subsidy for companies that do a lot of exporting. And what the federal government says is we're going to take this pool of income into a subcategory of profits that a US company is earning from their exports And we're to you deduct about a third of them. It was formerly 37.5%. And as of January 1, now it's pretty much exactly a third. You get to deduct a third of them and then and then we're gonna apply foreign tax credits. So we're we're effectively we're gonna tax we're gonna tax these profits federally, but we're gonna tax them at a reduced rate. But remember, from our sales factor example that I was just showing you. Remember, exports, this last section here, is basically a company that's increasing its exports. And Vermont is not trying to tax exports. You're already trying to avoid taxing exports. We have an explicit example here of a company increasing exports. Its tax bill didn't change a dime in Vermont because you have sales factor apportionment. If a company is exporting to France, you're not trying to tax that. You carry because those sales are not in the Vermont. That's not within reach of your code. So you are already because of this, you're you're already striving to to forego taxing export profits. Seduction, in my opinion, does not serve a purpose at the state policy level. You're already doing this through the foundation of your code. And we've seen again, you're not unique in this way. You're unique in many ways, but not in this are

[Speaker 1]: really need that validation. Ode, I didn't hear your question.

[Speaker 4]: I said, do other states think that about themselves? Oh, But

[Speaker 2]: sales factor formulary apportionment is the norm in the states. And because of that, many states have decoupled from this already. Colorado did it in August. They were you know, the deduction is it's it's there there are other changes going on with this that are actually expanding the deduction more technical in the way it's calculated. Colorado took notice and said, wait a second. Why are we conformed to this at all? So Colorado decoupled. Here's the full list of states that have decoupled from this. You do see some smaller states here, Maine and New Hampshire. You also see many of the larger states such that today deductions at the state level are actually more the exception rather than the norm. Around three quarters of state corporate tax revenues is collected under corporate state corporate taxes that do not offer this deduction. So companies, like I said, these are multinational, multi state companies. They're very accustomed to paying state corporate income tax without such a deduction in place because most most state corporate revenues collected under systems that don't have it.

[Speaker 1]: So what's the last one?

[Speaker 0]: So you said on the last slide that it doesn't really make sense from a state level to do this, but there many states, including us, that do have that deduction. Is that just a product of leftover coupling? Or is why is that? Why are so many states in orange if it's not a wise thing to do? It's to do.

[Speaker 2]: So this deduction was originated in TCJA in 2017.

[Speaker 0]: In 2017.

[Speaker 2]: You might recall that bill was signed in December 2017. States were not given a lot of time to to parse it. We were everyone everyone was scrambling when that bill was signed. It was really hard to make sense of what it meant federally, much less what it meant for states. And so the states, just they coming out of the gate. It was signed in December, the effective date was January 1. So there was no time to prepare. I think this point some of it is momentum at this point. They weren't sure what to do at the time. And then I think that's a reason to take this job, this conformity job in front of you right now, especially seriously. Because what we've seen this is a perfect example of it. If stuff doesn't get cleaned up in the first session following a federal bill, it often tends to linger. Fortunately, were given a few more months of notice this time, the general lesson still holds. Thank you. Okay, another acronym. This one might even be worse. NCTI is a nested acronym. You have an acronym inside of an acronym here. Net CFC Tested Income. CFC is Controlled Foreign Corporation. There's a split in the tax community about whether to pronounce it NICTI or necktie, and I am strongly encamped necktie. So I appreciate you guys would like to support me in that. I'd appreciate it.

[Speaker 1]: Since we all talk about this. So,

[Speaker 2]: necktie. This is different, but this is also a category of income that US companies are generating, but it's a different kind of income. This is the income that their foreign subsidiaries are generating or or claiming to generate overseas. And and in practice, what this is, it's a mix of of legitimate foreign income. It's the foreign branch of this is US companies. It's the foreign branch of a US company, but either make legitimately making money overseas or saying they make money overseas because they've happened to have found a jurisdiction with a lower tax rate overseas. That's the pool of profit we're talking about here. The federal code has Before January 1, this was called GILTI. So this has been renamed. But if you're familiar with GILTI, this is the successor to GILTI. The federal code lets you deduct formally half of this income you can deduct on your federal form. And now starting January 1, can deduct 40% of it. And so Vermont is conformed to this. You're including half of this in your tax calculation. And if you just update your conformity date, you're going to include 60% of it in your tax calculation because the deduction shrinks from 50 to 40. So the inclusion is effectively increasing from 50 to 60. Again, though, I think this is an area where the federal government does not have sales factor apportionment. So the federal government is saying, well, we see all this foreign income. We don't want to apply full tax to it. We're gonna tax it at a reduced rate. We're gonna often offer foreign tax credits to avoid double taxation. That's that's the bedrock of the of the of the federal system. In Vermont, again, you're not interested in taxing all of this either. No nobody I don't think you could find anybody that's gonna tell you to to tax all of this income. That's not the goal. You wanna tax the appropriate share for Vermont. And I think the most the the type of conformity that's most consistent with your corporate tax structure would be to bring all this in to your corporate tax calculations. Take the full view of things. Don't only look at 50 or 60% of it. Bring it all into the tax calculation and then apportionate using your sales factor, apportionate. So you you you can rely you don't need to to to lop off an arbitrary, you know, 50 or 40% of it. You you you bring it all in, and you tax the appropriate share based on that business's fundamentals about how much of their customer base is actually located in Vermont. The this is actually, I would argue, a somewhat more sophisticated system than what the federal government is doing, where they've chosen a percentage partly based on some academic literature around the scale of profit shifting, partly I think based on how they could make the JCT score work for for budgeting purposes for how much revenue they wanted to to raise from the system. But, you know, these are these are percentages that the federal government has chosen. There is a case for them at the federal level, but you can do better in Vermont, I think. I think you can find are only if you do just set straightforward sales factor apportionment, you're only going to tax a percentage of it, but it's not going to be some percentage you've plucked out of the air. It's going to be a percentage based on the company's customer base.

[Speaker 3]: Can I ask a question? Acme USA has a subsidiary Acme France. So their sales apportionment for Acme, they can say is coming from Acme France. So if they demonstrate that, it's a foreign corporation of Acme, but their sales are in Vermont, we can tax acne France. Yes. Just wanna make sure because it's not swept up underneath acne US, so we're already gonna be taxing for the other sales that are coming from a US division.

[Speaker 2]: Yeah. Assuming it's a unitary business, assuming it's a unitary business where they're sufficiently interconnected, then, yeah, you would treat it as one entity. Because when you don't, yeah, they spend, you know, company will stand off profit, and they'll say all the profit was in a subsidiary outside the reach of your tax credit. That's the last thing you want. You want to be able to tax the business, assuming that business works.

[Speaker 3]: Yep, got it. Forever a unitary thing.

[Speaker 4]: Just to make sure I understand, and similarly, ACNE Vermont, which has ACNE Taiwan, would tax on sales in Vermont but not on sales

[Speaker 2]: in Denmark. In Taiwan, and so one thing that, you know, The thing that this really helps to safeguard against is that we see in commerce department data that companies are consistently saying that their foreign subsidiaries are more profitable than their US ones. The reason is because they've been able to find tax shelters abroad. So they're reporting a large share of profits abroad, but the business reality is that a smaller share of their sales are abroad. So you're able to get around that shifting of profits if you look to the actual, if you just rely on the sales factor to get the job done instead.

[Speaker 5]: If I can, ACME Vermont, would they're the ones that declare their share of Vermont sales?

[Speaker 2]: The sales of the entire unitary business would matter under the system, under a system that includes necktie and the calculation, the sales of the entire and Pat and I were just emailing about this the other day to make sure this is right. But, yeah, in Vermont, the sales of the entire unitary business matter. So if if they're making sales in in in Texas and Vermont and in France, it would only be the fraction of sales in the Vermont that helps determine what share of its profits are taxable. If it legitimately has a lot of sales in France, it may not pay much Vermont tax.

[Speaker 5]: Again, it's up to them to make that determination. Is there any verification from us?

[Speaker 2]: On where their sales are? Oh, I like that question. Very good. The sales, you you have to so this is already yeah. This is a part I think it is worth there's an entire project at the multistate tax commission around sales factor apportionment and making sure that the gaming and the sales fact You know, there are potential ways to to gain the sales factor. So, you we we may actually made all our sales into France. So you have you have to Yeah. You absolutely have to enforce it. You have you have to take a close look at it and make sure the sales are really occurring where they are and that it's not some, you know, shell company set up in the middle that, you know, that we're saying that that's who we're making our sales to when that's really not an economically significant entity. It's just an accounting fiction. So you do you do have to audit it. But you already have to audit it under current law. This isn't really a change from if you have a sales factor apportionment, you already have to take enforcement of the sales factor seriously.

[Speaker 0]: Okay. Great. That's it.

[Speaker 1]: Representative Masland? Yeah.

[Speaker 7]: Thank you. This may be similar to representative Waszazak's tech company, to what extent does Vermont or other states actually audit what goes on in other countries to find out who's telling the truth and who's not.

[Speaker 1]: I've heard from a number of people that there's an interest in getting more testimony on enforcement and audit, and so we will do that.

[Speaker 7]: I just have a question out there.

[Speaker 2]: Yeah. So, one benefit of I'm kind of moderate on the question of conformity. One benefit of conforming to neckties is that the income amount is audited by the IRS. It's a federal concept. The IRS audits that income amount. Now then you have the sales amount, which is potentially of less interest to the IRS. And so that is on I guess, I suppose on this topic we were talking about before of enforcement and the Vermont Department of Taxes having to fill in the gaps where the IRS isn't paying as much attention. Again, this is already happening under your code. This is not a change. The company can already consider say, you're already so it would be interesting to hear from the tax department on on what they're doing.

[Speaker 7]: Parentheses, if there's anyone that could be on there to actually do this work.

[Speaker 1]: Yes. And that's something we need to get some more testimony on. Alright. Yeah. We have two minutes left, I wanna make sure that you get the moments you need.

[Speaker 2]: I think, you know, I I think I think we've adequately addressed this. I mean, I just I was just close with a recap. Two big things we're seeing happening now are in the wake of a federal bill. First, how do we conform to it? What are we gonna conform to and what are we not? And second, do we want to think about other responses? Well, we're really like Rhode Island is taking, for example. Has any has the enactment of the federal bill changed our view on on anything in in regard to tax policy in general? So this is actually my last slide, so we don't don't have to belabor that if if there are any more questions, folks. I want to be sure to get out before the buzzer starts.

[Speaker 0]: Yeah. Just clarifying my understanding, I do this every time I talk about this, because I want to make sure that I'm right, is that a lot of the tax cuts in this big bill that could be seen as benefits to the working class or lower income people, such as the no tax on tips, etcetera, are temporary measures with sunsets, whereas maybe not all, but a lot of the corporate side where, frankly, more of the money is, are permanent.

[Speaker 2]: Yeah. That's absolutely right. I believe most of those have four year expiration dates and there's going to be a fierce debate federally about aligned with the next presidential election around potentially defending them. But yeah, they were done on a temporary basis in part because I think it was decided early on in negotiation process at the federal level that they were only willing to add, I think, 4,500,000,000,000.0 to the national debt. They couldn't go beyond that. And so having these tax cuts expire after four years, when so many other proponents will tell you that was not their intent, they had that expire after four years in order to keep it to that $4,500,000,000,000 target.

[Speaker 0]: Profits and extremely high tax benefits, I feel like that's something we should be talking for, Jess.

[Speaker 1]: I think there's going be some interesting context for today's testimony tomorrow when the emergency board meets and we hear our revenue estimates from our economists about what we see our revenues doing over the next few years compared to what we know the stock market is doing over the next few years, and that we're really seeing a widening gap between those two things. Yeah, representative, come on.

[Speaker 4]: Yeah, and I wonder, I mean, it's not technically our committee, but I think there's good, I assume there's good research on impact of tax cuts to the 90% versus the 10%

[Speaker 0]: in terms of impact on economic So,

[Speaker 5]: you say permanent, some of these are permanent. There's nothing, it's got to be a four year permanent. I think things can change under a new administration, correct?

[Speaker 2]: That's true. What's the presumption? If a bill doesn't pass, is it legally permanent? But yeah, sure, anything can be changed. It just changes the presumption. Is it permanent if you act or is it permanent if you do nothing.

[Speaker 6]: There's not a built

[Speaker 2]: in too. There's not a built in sunset. That's a good way to put it. Yeah.

[Speaker 0]: Yeah. So so so these corporate tax changes, there is no built in sunset as opposed to, like, the tax on tips has a built in sunset.

[Speaker 5]: Right. But, again, I think it's important to understand that the word permanent doesn't Yep.

[Speaker 2]: There's a lot of federal tax changes lately.

[Speaker 0]: I'd like

[Speaker 3]: to if you can work the other side of the table and with the tax cuts for the top were significant, the rationale behind them. And say and say, what was the rationale that supported them? So just because I'm sure you know the other side of the argument.

[Speaker 2]: So for example, in 2017, one of the few parts of that 2017 bill that was permanent was a large corporate tax rate reduction from 35% to 21%. We haven't really been talking about that today because that happened in 2017. But when they dropped the C corporate rate by that much, one thing that congress wanted to do as well, we also want to bring down the federal tax rate for these past three business entities. So we're going to enact this large 20% QBI deduction, but they did that temporarily. And so then they had to come back and enact this. And there's good IRA. We know that this is overwhelmingly benefiting very high income people. The IRS does report very clear data on this provision. So we know that they had to come back and cut these business entities' taxes by by a significant amount too. I think a lot of the, rate reductions and the business tax cuts, the overwhelming The rationale federally was that these are supposed to grow The US economy. As we've talked about how well that translates to Vermont, it's gonna vary. If you don't have a whole lot of control to target the benefits in state, that rationale might not hold up as much. But I would say most of the high end cuts federally. That was the rationale. Let's grow The US economy. And also, we can say that's a debated point. It's a debated point how effective it was federally. Regardless of your view on how effective it was federally, I think it's very clearly less effective at the Vermont level, because of the trouble with targeting an in state.

[Speaker 3]: I think that one of the follow ups that I've often heard in different circles is what percent that top 1% contributes to total tax amounts collected? The top 1%, even though it's such a small percentage, is still paying what 50% of the income tax? I don't know the figures, I'm making it up. I think that's what I've heard is a rationale in the past. So,

[Speaker 2]: yes, and that number changes over time also based on what share of income and economic resources they have. So you might have a very stable tax system over time. And if you have soaring inequality where the top 1% are collecting more and more income every year, well, they're also going to pay more and more tax every year because that's where the economic growth is directed. So that's partly a function of that higher percentage is partly a function of what does the tax law look like, but also the fact that we're in an economy where inequality has generally been widening over time.

[Speaker 6]: Yeah. Thank you.

[Speaker 4]: Yeah, Representative Burkhardt.

[Speaker 8]: So in addition to decoupling or conforming, are there states that are doing other changes to try to get at a more progressive tax code? So for example, one idea that's been floated is taxing capital gains in a different way because that tends to get at investment income. So perhaps for example, taxing capital gains when you monetize them in some way. So you're sitting here with a bunch of capital gains you're not really paying tax on until you exit those investments? Or could we change that in some way? Are any states doing things like that that are looking at ways of getting more of that upper bracket? Sure.

[Speaker 2]: Minnesota in 2023, Maryland in 2024, Washington State before that they have a selective tax only on capital gains. Part of the rationale for that is that especially at the extraordinarily high end of the income stale, there is very clearly a disconnect between the resources that extraordinarily wealthy families have and the numbers that show up on their tax form. A very wealthy person might report a large amount of income, but it's going be a tiny, tiny fraction of their overall wealth. Because they're not realizing a lot of gains. They're holding them, generally, pass on to their heirs eventually. So there's this tremendous concentration of resources that the income tax not attuned to pick up on. And I think there's been a growing awareness of that. And so one that is one part of the rationale for why a state would want to pursue higher rates on on capital gains or more generally on investment income. In Minnesota, it's not just capital gains. It's also a dividend income. It's passive business income where the owner is not involved in the business, but it's just reaping profits passively. I think there's a growing acknowledgement of the federal codies. Sometimes there are explicit preferences for capital gains. There is an explicitly lower rate federally for realized capital gains, but there's also a lot of gains that are never taxed at all. I mean, there's a huge share of capital gains in this country through the stepped up basis provision that never did report on anyone's tax return. And increasingly, they're not even subject to a state tax because the the sophisticated tax planning that's around the grats that's been going on with the federal estate tax, it's not being taxed in that manner either. So states are trying to fill that fill those gaps, fill those holes.

[Speaker 4]: Is anybody taxing so if you

[Speaker 8]: were to borrow against stock, for example, like, that's sort of monetizing things before you're actually exiting an investment. Is anybody doing that specifically?

[Speaker 2]: That's not happening, but that is being debated increasingly. Yeah, that's of interest too. That's another way. There are a lot of ways to get at the same problems here. This problem of income that never gets taxed at all, you could approach it through stepped up basis, you could approach it through mark to market, you could approach it through taxing the borrowing. These are all different proposals, but think they're motivated by the same concern.

[Speaker 1]: I think we're going to stop there, and I really appreciate your time and both coming all the way up here and presentation today. Thank you so much.

[Speaker 2]: Yeah. Thank you. It's an honor to have said you made so much time for me.

[Speaker 4]: Thank you. Thanks, Lynne.

[Speaker 0]: Thank you.

[Speaker 1]: Folks, we are back here at