Vermont Legislature SmartTranscripts:

[Speaker 0]: Today is the twenty first still. It's Wednesday, '1 fifteen, and we are continuing our work on corporate and business taxes and consistency. And sort of the overarching question we're trying to answer is, should we conform? And if so, how? Or if not, how? And so I asked Pat and Kirby to prepare just really further testimony to help us get our heads around that. Sure. Pat, too. Thanks.

[Patrick Higley (Joint Fiscal Office)]: Good afternoon. Patrick Higley with the Joint Fiscal Office. Yeah, so here to talk about corporate income taxes, I'm gonna sort of work towards setting up Kirby's discussion about some of the legal aspects of link up and conformity and some of the questions that go along with that. To do so, I'm going to sort of maybe reframe your brains from the conversation you were having this morning and go through some materials I hope you're familiar with from some of the previous testimony we've had, but wanted to sort of touch base on them again because they're really important in understanding some of the peculiarities and what have you with the question of coupling and decoupling. So just to dive in, so Vermont taxes businesses in a couple of different ways. The one we're going to focus on today has to do with C corps or what you would traditionally think of as corporations. These are the ones that are subject to Vermont corporate income tax, as you would probably infer from the name, but this is not including a whole different sort of genre of businesses that we think of as or know as pass through entities. These include things you would probably be familiar with, LLCs, partnerships, S corps, sole proprietorships. These are all considered pass through. They are not subject to the last corporate income tax. They are They'll issue a form based on the ownership stake in that business signifying they're part of the profits, and that flows through personal income taxes. So sort of an entirely separate system altogether from corporate income taxes. If you remember, there are some instances when LLCs can opt to file as a C Corp, but they have to actively choose to do so. And so question of what is a corporation, what is a C corp, is they can be organizationally very complexly set up. And so one thing that you see in Vermont and in many other states is establishing what constitutes an entity or what constitutes a corporation. Vermont has opted to do what is called humanitarian combined reporting. It combines reporting, combined reporting treats all affiliated companies. So this includes the parent, all subsidiaries as part of a unitary group. And in their reporting, what they're required to do is look at all of their different entities within the group, their net sales, or sorry, net income, their sales, and treat it as one. You just file one return for the entire group, even if it might have a lot of different parts to it.

[Representative Carol Ode (Member)]: Does the unit charge in biomeporting apply to related businesses that are associated with the nonprofit? I'm

[Patrick Higley (Joint Fiscal Office)]: not sure I know the answer to that, but I can look into that.

[Representative Carol Ode (Member)]: Including when they had overlapping boards?

[Patrick Higley (Joint Fiscal Office)]: I would assume so, but I don't want to go out on the limb and confirm that. I

[Representative Carol Ode (Member)]: think we can do a

[Patrick Higley (Joint Fiscal Office)]: little research while I'm up here. So unitary combined reporting, it applies to multi state businesses that are part of a unitary group, like we just talked about. And it's that portion of that unitary business that occurs both within and outside US borders. Treating the C Corp as a singular entity, what they're going to do is when they go to file their taxes, there's this IRS eleven twenty form. We looked at this and it's important when thinking about, as we'll see in a second, things that are above or below the line, above the line meaning they affect Vermont taxes, below the line meaning they don't. And the reason that's important is if you're coupled or linked up to something that's federally above the line and the federal government passed a law that changes those things and you're coupled, those flow through, right? So again, here's the form. The first step of the equation is looking at all the things that go into determining money coming in for total income. And so, that's not the same thing as sort of net income, which is our basis. This is just all the money sort of coming in because the second step on the form lines 12 through 27, this is where all the federally allowed exemptions and deductions come into play. And I have a section a little later on where we'll have a chance to review from HR one, the provisions that are flowing through. But each one of those provisions that Vermont is coupled to and are flowing through are going to show up somewhere in these lines 12 through 27. So, so line 28, that's Vermont's starting point. That's total net income and that's going to apply to the entirety of the unitary group. So the parent and all subsidiaries. And a couple of quick things to changes that Vermont made recently that sort of go get at the combined unitary reporting was there is a repeal of eightytwenty language, which basically meant that previously, if a C Corp had a subsidiary that had its primary source of sales from overseas, in this case defined as 80% or more, it was excluded from the sales of the C Corp. So again, it's just drawing in more of those subsidiaries and treating the entire corporate entity as a one singular file, basically. And then there's the Joyce Finnegan methodology. Again, this is getting at some of the questions about what counts as a corporation and what should be included in a return. So previously we had a choice methodology which limited a C corp's nexus in Vermont only to the subsidiaries that had the nexus there. So meaning that only the subsidiaries that had nexus in Vermont were required to report their net income and for the purpose of the apportionment, only the sales from those subsidiaries that had the Nexus. Under Fin, again, if you have one subsidiary with Nexus here, the entire group is considered to have nexus, so they all need to be recorded. So those two factors lead us into one of the most important things to think about is that Vermont has a single sales factor. We only care about what portion of your total combined group sales were into Vermont and how that compares to your national sales. And so you may recognize this equation. So this piece here is pulling in all of the combined entities, total net income that was that line 28 from the form eleven twenty that we looked at. And then this part of the equation here is the single sales. So you can see you're taking total entities, net income. You're saying what portion of that was into Vermont, that percentage, you have to report as your Vermont net income. And that's the amount that gets subject to Vermont's corporate income tax brackets, the alternative minimum tax, what have you. And so, I've used this example before, but this is just to show you how three different corporations that have the same taxable income, but treat the Vermont market very differently. So in this first example, corporation A, dollars 1,000 in income, none of those sales are in Vermont. So because they're not accessing the state of Vermont's market, Vermont's not going to be taxing any of their income. Example B, this is the opposite end of the spectrum. They could be based in Michigan, but sell exclusively to the Vermont market. And so 100% of their taxable income is going to count as taxable income in the state. And then the third just being a middle road, they sell half their merchandise to Ohio and the other half to Vermont. So again, half of their net income is going to be a portion of Vermont. And so what I just want to highlight here is that Vermont is completely agnostic about where the corporation is based. Really, what the tax is based on is your activity in the state, your selling activity in the state, what portion of your profits Vermonters are contributing to, if that makes sense.

[Speaker 0]: And so if we could have very profitable large corporations located here in Vermont, headquartered here in Vermont, registered here in Vermont, who their sales might be to say the US government. None of that would be into Vermont. And so they might pay no corporate taxes.

[Patrick Higley (Joint Fiscal Office)]: There is some, I believe so, yeah. The example of the federal government gives me pause for a moment.

[Speaker 0]: Didn't need to use that as a metaphor. Pretend I didn't.

[Patrick Higley (Joint Fiscal Office)]: So let's say Texas, whatever. Yes. If they're exclusively selling out of state and have no sales to Vermonters in state, liability is going to be zero. We do have a minimum tax, the corporate minimum tax. So that is still dependent on sales into Vermont. So the way that works is you have zero or negative income, but you are showing positive sales into the state, then you're still going to have be subject to that schedule.

[Representative Charles Kimbell (Ranking Member)]: So that

[Patrick Higley (Joint Fiscal Office)]: that's an instance where you're showing zero or negative net profit. But you still have

[Speaker 0]: a high gross profit portion to the state.

[Patrick Higley (Joint Fiscal Office)]: Yeah, I think the lowest amount, the lowest minimum amount is like 100 and it goes up to maybe a 100,000 for sales over 300,000,000 into the state. It's right here. So a 300,000,000 and above for those gross receipts into the state, if you don't have positive net income, that's where you hit that top minimum tax rate.

[Speaker 0]: So, it's not gross receipts from the state, it's gross receipts into the state? Yes.

[Kirby Keaton (Legislative Counsel)]: Yep.

[Patrick Higley (Joint Fiscal Office)]: Yeah, top marginal rate, 8.5, starts at 25,000, which is relatively low. But Vermont does still have a progressive marginal tax bracket when it comes to C Corps. Okay, so that's sort of the quick overview to sort of frame us all in terms of what does it mean to be coupled or decoupled in the treatment of a unitary group? And so I know some of the conversations today that Kirby is going to get a little bit more into is what does linking up a couple mean? I'll just start by saying and elaborate later. All the provisions I'm going to go through were changes in HR1, and because Vermont is coupled to the part of US statute where these changes were made, they flow through to the state. So here's a list. I'm going to go through these slide by slide, so I won't read the list right now. But these were all changes that were above the line Romano's coupled to, so they're going to flow through. So first, there is the change to the deduction for domestic research and development expenses. And what this did was really change the amortization schedule. Previously, after TCJA, those expenses had to be amortized over a five year schedule. But this change, and it's actually reverting back to a pre TCJA treatment is saying you can claim this full deduction in year one. And so what this does is effectively, it's going to be front loading all of those expenses. So we, in conjunction with the tax department, are thinking about it a little bit like a tax shift, meaning over the long term, not a change, but it's really gonna be front loading some costs right away. And when I say a shift, we're talking many years for it to fully smooth out. In the near term, we're expecting this to have a negative impact on corporate income tax revenues in Vermont by about 2,300,000.0 in fiscal years twenty six and twenty seven. But as it sort of smooths out over time, as it becomes the norm, that just sort of slowly decrease over time.

[Speaker 0]: And so you don't Do you anticipate any increased use of that deduction since it doesn't have to be amortized?

[Patrick Higley (Joint Fiscal Office)]: So I think that's definitely the goal of it. And I think

[Speaker 0]: What's the goal of it?

[Patrick Higley (Joint Fiscal Office)]: To increase domestic research and development spending because it's more attractive for companies in the short term to So

[Speaker 0]: increase the use of the deduction. Right.

[Patrick Higley (Joint Fiscal Office)]: And so what we used in our estimates clearly was using some assumed growth rate in the usage in addition to the increased spending on research and development. Fortunately, what we were using was kind of a black box methodology. And I know the tax department was able to look at returns from when we switched from the pre TCGA to the five year amortization schedule. Now that we're switching back, we have some insights we can glean from that for the estimate.

[Speaker 0]: Such a different economy.

[Patrick Higley (Joint Fiscal Office)]: Yeah, certainly.

[Speaker 0]: Not just in terms of growth, but in terms of what it's made out of.

[Patrick Higley (Joint Fiscal Office)]: So that was research and development.

[Speaker 0]: Oh, sorry, I have one more question. So you said mostly that it's spreading out, but you're also anticipating growth in addition to the

[Patrick Higley (Joint Fiscal Office)]: There's an element of growth in it. But ultimately, don't know if the growth is really a needle mover. I think the primary impact we're seeing here is it's really front loading a lot of stress.

[Speaker 0]: And so if it's not a needle mover, does that mean that there's not an anticipation of a lot of actual increased research and development?

[Patrick Higley (Joint Fiscal Office)]: I think that question depends on who you ask.

[Speaker 0]: Yeah. But it seems like that's built into the assumption. But you can't We the

[Patrick Higley (Joint Fiscal Office)]: don't know what the assumption was, but it seemed pretty clear from our work through it that there was some assumption that it wasn't purely the cop shit.

[Speaker 0]: That's the congressional

[Patrick Higley (Joint Fiscal Office)]: That was the joint it's either joint committee on taxation or joint tax commissioners, one of those two. But they operate kind of like the CBO, but specifically for tax policy. Okay, second thing. HR1 expanded the limit to which corporations can deduct interest paid on loans for a business purpose. There are some limitations to how much of that there is, but ultimately the big thing here is that they expanded the amount of business interest paid that can be deducted from 30 to 50%. So just allowing you to deduct at a higher rate that interest that you're spending. And again, because Vermont's coupled to this, it's above the line, that's something that is going to be flowing through absent any changes. And this is one where we're estimating this to reduce revenue from corporate income taxes by about a million dollars annually moving forward starting in fiscal year twenty six. So next one was This one, when I was first working through it, it seemed the most complicated, but after a while, actually it seemed quite simple. So in '20 It's the exceptions from limitation on the business meals deductions. In 2022, TCJA eliminated a general deduction on business entertainment expenses, but it still kept a more limited deduction for food and beverages provided by employers to employees. HR1 kept these restrictions, but created a few new exceptions. And that included instances where an employee pays what the general public would pay for like a lunch in a cafeteria, for example. Meals provided to cruise on commercial vessels and oil platforms and meals provided on certain fishing vessels and facilities. And I guess just to tie back to sort of the overview I was doing at the beginning here, Vermont doesn't have oil rigs, we don't have really have fishing vessels, right? So you'd think this wouldn't really apply here. But again, remember, we don't care where a corporation is based. So as long as they have sales into Vermont, these provisions would flow through. In this particular case, we're not expecting it to really have any impact on Vermont revenue collection. But again, I just want to highlight that while the activities here don't necessarily apply to Vermont, for the most part, if they have sales here, they are going to flow through.

[Speaker 0]: So it could be meals on a lobster boat in Maine. It could be meals on a fishing boat in Alaska. It could be martinis in New York City.

[Patrick Higley (Joint Fiscal Office)]: I don't know about the martinis, and I think that was actually the limitation. Get

[Speaker 0]: rid of the martinis.

[Patrick Higley (Joint Fiscal Office)]: Yeah, I think the example, Kirby, gave a couple weeks ago when we first went through this was think of the lunches they would do in Mad Men, where they get the lobstetails, three martinis, and just deduct that as a bed of soup.

[Speaker 0]: Do you like imagining that, actually?

[Patrick Higley (Joint Fiscal Office)]: So next we have the limitation on expensing for depreciable business assets. HR1 increased the maximum amount that the taxpayer may expense for the cost of qualifying depreciable business assets in lieu of recovering the costs through depreciation. Basically, it's allowing you to front load this. So previously, of sticking to a depreciation schedule over time, you could just claim a lot of that upfront. The previous maximum amount was a million dollars annually, and this has expanded that to 2.5. This is really focused on small business, businesses. So if you think of a really large manufacturer, they're going to have more than a million dollars depreciable assets, think their factories, machines, what have you. So this is really focused more on small businesses, but it is allowing them to claim some of that depreciation and offset their tax liability upfront. And again, we're coupled in this treatment. So this is something that would flow through with LinkUp. And the change is estimated to decrease state corporate income revenues by about 250,000 in fiscal year twenty six, but then increased to about 600,000 in future years. Part of the ramp up has to do with it takes a little time to purchase, build those depreciable assets. So, it is a bit of a ramp up. Okay, so the special depreciation allows for qualified business assets. So HR1 now allows a deduction for qualified production property of 100 of its adjusted cost basis. And so 100% bonus depreciation, and this is specific for qualified non residential property, and it has to be used in manufacturing or production of tangible personal products. And further, those tangible personal products are limited to agricultural and chemical production. So it's somewhat limited in the type of business that it's focused on, but it is allowing a bonus depreciation of 100% for that production property.

[Speaker 0]: So

[Representative Carol Ode (Member)]: what can you help me about?

[Patrick Higley (Joint Fiscal Office)]: Well, I would think that if you are manufacturing You're a corporation manufacturing. Corporation manufacturing like a pesticide or maybe you're refining gasoline, that kind of stuff, the production property, you're allowed a bonus depreciation. Again, so yeah, it's basically allowing you to skip the thirty nine year amortization schedule for the depreciation and claim that right up front to offset immediate costs and your immediate tax liability.

[Speaker 0]: So in a scenario I'm imagining a scenario where I think a lot of fertilizer type manufacturing happens, say, in the South. And so they're building a plant in, say, Alabama to manufacture something that enriches soils. Most of the environmental damage of that's happening in Alabama and all the jobs are happening in Alabama. But then that company sells that product in Vermont. And so it's reducing the amount of taxes we would get, corporate taxes we would get from that company?

[Patrick Higley (Joint Fiscal Office)]: Yeah, you have the gist of it right there. So yeah, this says, sorry.

[Representative Carol Ode (Member)]: So we're not talking about food products, cheese or whey or maple syrup or maple candy, not that kind of stuff. Talking about additives to the egg business process.

[Patrick Higley (Joint Fiscal Office)]: I have to look at that. That's an interesting question. That's like, I'm wondering with a large like agribusiness, if you're counting a silo that they might have on one of their properties, that's something I need to double check on.

[Speaker 0]: And one thing I want to ask the Chamber of Commerce when they come in to testify on this is how many of Vermont's businesses and what size of Vermont businesses are actually organized as C corp. As a C corp, right? Because it's really a very limited swath of taxpayers that are located here and paying this tax. And so I really want to get our heads around it a little bit better. It's just a particular because we get a lot of revenue from them. They just might not be located here.

[Patrick Higley (Joint Fiscal Office)]: Questions. Purdue? Yes. It's like one of their slaughterhouse processing plants. Yeah, want to double check on that, but that logically Whatever.

[Representative Charles Kimbell (Ranking Member)]: Yeah, I get to write it off. So they sell a lot of chicken here, so they're not as taxable even though Yeah.

[Patrick Higley (Joint Fiscal Office)]: I get all my chickens from the farm down the road from my house.

[Representative Charles Kimbell (Ranking Member)]: Well, that's good for you.

[Speaker 0]: It's beautiful. None of this tax policy would apply to that?

[Patrick Higley (Joint Fiscal Office)]: Of course. Nope. Probably a sole proprietorship.

[Speaker 0]: Ask them next time you're buying the chicken.

[Patrick Higley (Joint Fiscal Office)]: What do you buy for chicken? I

[Representative Carol Ode (Member)]: got it.

[Patrick Higley (Joint Fiscal Office)]: So this does have a cost. Again, it's a bit of a ramp up. So we're estimating approximately 250,000 in fiscal year twenty six, but this could rise significantly over time. It does take a while to build the production facilities. So yeah, increasing over time, we came to about 3,500,000.0 in fiscal year twenty seven, 5,200,000.0 in fiscal year twenty eight. So again, this 100% bonus depreciation for production facility, you know, these those are very expensive things. They're very valuable assets. You know, as you produce them, as you build them. If a lot of them come online, this could end up being something that's quite expensive in terms of corporate income tax collections. I should note that it's specifically the properties built after 01/19/2025. And it sunsets 2029. Okay, I know you heard a little bit about this when Carl Davis from itap was in here. But just to remind you, there were a couple of changes that were made to the treatment of foreign derived income. So there's two things that were previously on the books, global intangible, low tax income, and then there's also the foreign derived intangible income. What HR1 did was redefine these bases and conveniently renamed them, I think, two preferred acronyms that Carl liked was necktie and today. So that's what we're talking about. And so what they did was they increased the base views to calculate those foreign derived intangible income, the FDII now today, while also increasing the percentage of that income that can be deducted, which effectively lowers the tax rate. But what you're doing right is you're increasing the amount you can deduct while at the same time increasing the base of that. And the other piece of the equation is that at the federal level, they allow credits for foreign taxes paid. That's not something that we allow on the Vermont return. So in effect, what that does is it's a net increase in Vermont for revenue because we don't have that additional offset. So the two offsetting pieces are the deduction and the tax credit. But in this case, we're anticipating the base increase is going to outweigh the deduction increase. We all following that? So it's a little bit of a It's skewing one way in absence of the credits, I guess. So that was FDII to today. So guilty, there was a 10% deduction in calculation of what that income was right off the bat. There's another deduction after that. But in a similar sense, they increased the base by removing that 10% that you could exclude while also increasing the amount that could be deducted. And again, the net effect here and renamed it necktie, The net effect here is again, a increase in revenue to the state. And Vermont is coupled to this type of treatment. And so, like I said, estimating an increase from these two expansions of the basis and increase in the deductions to be about 2,500,000 increase in fiscal year twenty six, and then approximately 3,200,000 increase at future fiscal years. So that's going forward. And that's perfect. Some of the other provisions have subsets. So there was another thing, there are changes to the pro rata share rules. HR1 changes the treatment of controlled foreign corporations or CFCs. Quick definition, a foreign corporation is a CFC if it has at least 50% of voting power or value of the stock that are held by US shareholders. So that's what that acronym means. So now each shareholder must include in their gross income, their prorated share of the CFC's passive income in that tax year. So taxpayers that hold these CFCs will have to report more gross income than they would have previously, because they're having to include that prorated passive income from the CFC. And this does flow through to Vermont because we are coupled here as well. And so this change is not expected to change revenue immediately in '26, but we are estimating a slight increase in revenue moving forward about a 100,000 in fiscal year 'twenty seven, and then 240,000 in 'twenty eight, and then sort of run gradually after that. This is a sort of small piece, but again, in the discussion about coupling, linkage, this is something that we're linked to and flows through to Vermont because we're coupled.

[Representative Charles Kimbell (Ranking Member)]: Do you think that those corporations would respond to some pressure from their shareholders in The US to change it from passive to active income? Not sure I understand it. Well, it's only on passive income, and the company has the ability to rearrange the chairs on the deck sometimes. So in order to move it under a different category of income or change how they report things so it's no longer passive, but it's active income.

[Patrick Higley (Joint Fiscal Office)]: I guess I'm not quite sure what that would look like, but I can think about it. I don't have a good answer for you right now. Generation question. So there's another change, there's a renewal and expansion of opportunity zones. I know I got a couple of questions about these two weeks ago when we went through them and interestingly, so when these were first started, there was no provision in statute requiring that the feds write annual reports on them. So there's a real dearth of information available, but I continuing to look into that a little bit more to see what I can find in terms of

[Speaker 0]: Because know that they should get baseline information they're passing you?

[Patrick Higley (Joint Fiscal Office)]: Well, in HR1, they are now required to do annual reporting. So maybe there will be some good to come out of that. The reporting requirements are always good.

[Representative Carol Ode (Member)]: Yes, we're getting consistent baselines.

[Patrick Higley (Joint Fiscal Office)]: So opportunity zones encourage investment in qualified opportunity funds to support real estate development opportunity zones. And this is a situation where investors can elect to defer gains from their investments as long as they hold them. So the longer they hold them, the greater the tax benefits they receive. And Vermont, because I didn't know this at the time, but Vermont does actually have 25 opportunity zones. So none of this treatment is changing in HR1. What is changing is it's creating these new qualified rural opportunity funds, which is just expanding it to make more types of areas eligible to qualify to become one of these rural opportunity zones. And these again, these are changes that flow through to Vermont, there's no immediate impact zones can't aren't going to start being designated and set up until 2027. So this is not something that has an immediate impact. There's the existing zones and there's nothing changing with those, but it's this new type of zone that is being set up starting in 2027.

[Representative Carol Ode (Member)]: So my understanding of the research on opportunity zones is that you tend to get growth in the zone at the expense of development outside the zone. So is this about where growth happens?

[Patrick Higley (Joint Fiscal Office)]: Well, so cannibalism is certainly a thing that happens with any kind of public investment. It's a term that's used.

[Speaker 0]: I know, because some of

[Representative Carol Ode (Member)]: us have used that with respect to it.

[Patrick Higley (Joint Fiscal Office)]: I've also heard crowding out with investment. But I don't know if that was the specific impetus, but that's certainly a phenomenon that's been studied and researched. Is the opportunity someone like an EB-five? Is that one and the same thing? No, I don't know. One of those is, those are tied to different, those are different programs. No visas. Well, I mean, is this an opportunity? Well, am positive. I think that project may have actually I need to double check the map that might have actually been in an opportunity zone by coincidence.

[Speaker 0]: Can you I created an elaborate scenario involving Arkansas and Missouri maybe last time. Can you run through that example for us? I don't need it to have the same states.

[Patrick Higley (Joint Fiscal Office)]: So I think if I remember correctly, if you are a Arkansas based corporation and you invest in an Oklahoma opportunity zone

[Speaker 0]: That was the state.

[Patrick Higley (Joint Fiscal Office)]: And you have positive net income and sales into Vermont. This flows through. Those are kind of the conditions. I believe that hits everything.

[Speaker 0]: So the benefits if there are benefits in the Opportunity Zone, they would be mostly realized in either Arkansas or Oklahoma. Yes. And we would experience a reduction in revenue here in Vermont.

[Patrick Higley (Joint Fiscal Office)]: Right, because we're coupled to that treatment.

[Speaker 0]: Thank you.

[Representative Charles Kimbell (Ranking Member)]: It's a long time.

[Patrick Higley (Joint Fiscal Office)]: Yeah. Well, so this is an existing program that's just being extended. So charitable deductions. So previously, corporations could deduct charitable contributions equal to up to 10% of their taxable income. The only change here, and this is maybe the simplest change that's been made of all the things we've looked at, they're just now changing it to you can only deduct above 1% of taxable income up to 10%. So whereas before, overall it was 10%, now it's essentially gone to 9% as long as you're above that 1% threshold.

[Speaker 0]: So we often have a bill on the wall about exempting the sale of gold if it's more than $100 I think, of gold, something like that. Is that a similar thing? I find it very confusing. I don't understand why you would create that only if you

[Patrick Higley (Joint Fiscal Office)]: So the specific example of so for this specifically.

[Speaker 0]: Yeah, thank you.

[Patrick Higley (Joint Fiscal Office)]: And then I'd like to opine on gold.

[Speaker 0]: Please don't. Sorry, I brought it up.

[Patrick Higley (Joint Fiscal Office)]: So, I mean, this does save some money on the federal level, which could have been something they're trying to do. But by implementing that 1% threshold that you have to get over to qualify for it, it's instead of capping it at 9%, where you just go up to 9% and call it a day, this is making you up to 10% to fully realize the deduction. By being above the threshold, that's the only way you can maximize it, I guess. That kind of makes sense.

[Representative Carol Ode (Member)]: Wouldn't that increase people's charitable giving? Because they wouldn't want to be below the 1%, so now they're going to get between 1%.

[Patrick Higley (Joint Fiscal Office)]: Well, I mean, up to 1%, you're not getting any deduction, right?

[Representative Carol Ode (Member)]: So, you want to give at least 1%. Access is 1% being deducted, so you're giving greater than the 1%.

[Patrick Higley (Joint Fiscal Office)]: And I mean, if you only give 1%, you're getting no deduction, right? It's gonna only be, it's only on greater than 1% up to 10%. Why

[Representative Carol Ode (Member)]: have the 10%, is that, aren't they thinking, well, there'll be fewer charitable contributions?

[Patrick Higley (Joint Fiscal Office)]: Well, I guess the cap is basically saying you can't deduct all of your taxable income away. So because if you tax all of your tax liability away, then there's nothing there's no revenue for the feds to collect. So not expected to change state revenues in '26, but is estimated to sort of grow gradually over time. And as starting in fiscal year twenty seven, be about 140,000 because again, this is something Vermont's coupled to, we'd like to, it'll flow through. So that's a review of the provisions and it is a quick highlight of corporate tax treatment in the state. You've seen this table before. It does include a couple of things that are not corporate, but these are all the areas that Vermont is coupled to, were linked to, expected to flow through and their anticipated revenue impact in fiscal years 'twenty six and 'twenty seven. That's everything. Thanks, Pat.

[Representative Charles Kimbell (Ranking Member)]: Just wanna ask a question. In making your calculations, Pat, I

[Patrick Higley (Joint Fiscal Office)]: was thinking

[Representative Charles Kimbell (Ranking Member)]: about the you need these separate sections of lines. To what degree do you have visibility into those lines from the tax department? You know what mean? From the 1120s? Are they just aggregating all of the different

[Patrick Higley (Joint Fiscal Office)]: So great question. The tax department doesn't have these either because those are federal forms. I probably should have clarified that the eleven twenty is a federal form. And a lot of these deductions that actually walked through have their own supplemental forms that you attach to the eleven twenty. So I guess in that way, we don't have a lot of visibility. And that's why a lot of our reliance and our estimates was on the JCT release. So it helps make a complicated estimate and subject more complicated.

[Representative Charles Kimbell (Ranking Member)]: Do you know of JCT's track record and their estimates equaling what actually happens?

[Patrick Higley (Joint Fiscal Office)]: I guess I don't exactly. Well, I know that they are essentially a it's similar to CBO in that they where CBO does economic projections and policy scoring from that lens, JCT does a similar role with tax policy. I have no reason to doubt them. They essentially fill a very similar role that I am providing to you today.

[Speaker 0]: I think sort of my follow-up question to Charlie's question is I'd love to understand a little bit more about Vermont impacts last time this all happened, like when we made the personal income changes and when we didn't make corporate changes. But I know that often when we look at national numbers and scale them to Vermont, we wind up in all these situations because we just have a weirdly shaped economy in a lot of ways. Are they doing the scaling? Are you doing the scaling? And what do you think the impacts of the scaling are?

[Patrick Higley (Joint Fiscal Office)]: We were. So they did their estimates on a national level. And we looked at a bunch of different scaling options. We can talk about that more if you want.

[Speaker 0]: I'm glad to say you're the one doing the scaling. Yes. Okay, great. Thanks. Because you're used to doing that. Yep.

[Representative Carol Ode (Member)]: Yep. So the child and dependent care tax credit expansion, what we did last year was went to 100% of federal exemption. This is gonna change.

[Patrick Higley (Joint Fiscal Office)]: So last year so the 100% figure that was applying to the earned income tax credit, and those were the individuals without kids because their credit amount was so small. I don't believe there were any CDCC changes last year.

[Speaker 0]: I think that was a couple

[Patrick Higley (Joint Fiscal Office)]: years ago. Would have been It was three years ago. I think.

[Representative Carol Ode (Member)]: Yeah. Seven years old. Yeah. And that

[Speaker 0]: was the child tax credit.

[Patrick Higley (Joint Fiscal Office)]: Child tax credit.

[Speaker 0]: We will schedule some testimony specifically on the child and dependent care credit. But I wanted to get time to figure out more of the overlap with CCFAP questions.

[Representative Carol Ode (Member)]: Perhaps I have a little bit of time here,

[Speaker 0]: and I apologize.

[Representative Carol Ode (Member)]: Can we have an economist in here to talk about what they think about the two different choices we have? Sure.

[Speaker 0]: I mean, we had Tom Kabat here, but we can Yeah, totally.

[Representative Carol Ode (Member)]: It's fine. So what?

[Speaker 0]: Yeah, I mean, imagine every We've had

[Representative Carol Ode (Member)]: a few

[Speaker 0]: economists. Pat, you don't do you consider yourself an economist?

[Patrick Higley (Joint Fiscal Office)]: I have a master's in economics. But I do not.

[Speaker 0]: And the folks we had from last week, sure, also consider themselves economists. And we had Tom, but we can get a more we can get more people to absolutely get them. Kirby.

[Representative Carol Ode (Member)]: He's sharp. For

[Speaker 0]: me, is very sharp. He's his

[Kirby Keaton (Legislative Counsel)]: degree in land economy, which is like half economics.

[Speaker 0]: Land economy?

[Kirby Keaton (Legislative Counsel)]: It's like environmental health and economics put together.

[Speaker 0]: So fun. Put a Yeah. Very special tax specialization. Functions differently than other tax stuff, than other law specializations.

[Kirby Keaton (Legislative Counsel)]: Good afternoon. Kirby Keaton, legislative counsel. We're going to go a totally different direction. I'm not going to rehash Pat's stuff. He's kind of setting the stage for some specific questions that you have. We are going to take a step back and look at some bigger picture questions, hopefully. So we are going talk about corporate income tax and conformance with the federal tax code. We are going to start by looking at the Vermont statute, that is our link up, and we are going to break that down a little bit to start the conversation. First part, when Vermont links up each year, we link up to a specific date. The most recent link up was last year and we linked to 12/31/2024. To understand some of these things better, we have to muddy the water a little bit. So I'm going to muddy the water. And I'm going to say, Vermont considers itself to have rolling conformance, as in, we go along with federal changes every year. That was what rolling would mean. Static conformance would be, we're sticking to a time and place and we're going to stick with that. Like California and Massachusetts are the two states that are the most static and they stick for a very long time to a specific date. Technically though, Vermont is static. We stick to a date, That's a date. We just, tradition, always update it. So we consider ourselves rolling, just like by tradition, we always balance the budget. We consider ourselves But you guys don't have to do that.

[Speaker 0]: We're the only state that doesn't have to do that, I think, right?

[Kirby Keaton (Legislative Counsel)]: I don't know. I wouldn't be surprised to learn that you're the only state that actually does do it.

[Speaker 0]: I think that might be true, too.

[Representative Charles Kimbell (Ranking Member)]: I

[Kirby Keaton (Legislative Counsel)]: say you're the only state, like I'm Okay, not so that's the first thing about this section, right? Rolling conformance, although technically static. Second thing, the PIT and the CIT are in the same chapter together. When we do conformance, we're doing both at the same time. There's reasons why in statute these things are in the same chapter. They are intermingled together in ways. They are not two distinct taxes really. The difference between the PIT and the CIT is who has to pay. It's about who's the taxpayer for each one of these things. So when we think about corporate income tax, this is the tax that the entity that is a C Corp that it pays. Their shareholders could be individuals who get income from that corporation who also pay personal income tax. It's just what entity you are determines which of these things you pay, but some of these provisions and things kind of go back and forth depending on who's paying, who's the entity, what's going on. So again, this is kind of muddying things to say, there's a reason why this stuff can be confusing because of that, but my point is, when we talk about decoupling, it's not even so black and white as to say we're going to decouple from the corporate income tax, because it's hard to separate that out in all cases from everything to do with personal income tax. And we are going to go through an example to show you that too. The other thing about this section, about the link up section, is conformity is subject to selective modification and decoupling and it is kind of implied right in this section. It says, after it says that we will adopt the laws of The US when it comes to the tax code, it says and shall continue in effect as adopted until amended, repealed or replaced by an act of the general assembly. And that happens. We know that especially on the personal income tax side, Vermont has done some things to selectively decouple, and it's implied that that's going to happen, and I would also note for you, there's no state that 100% conforms to the federal tax code. They all, in some ways, selectively decouple. And so it's almost implied that that's going to happen.

[Speaker 0]: I just want to put that picture together with the idea that a lot of the corporate taxes that are paid into Vermont are paid Those corporations pay taxes in maybe all 50 states, maybe 48 of those states.

[Kirby Keaton (Legislative Counsel)]: Yes. There's gonna be Sorry. Yeah, I was just like, where is this going? There's gonna a different tax code in each of those states. Not gonna all None are exactly identical to one another.

[Speaker 0]: Sounds annoying, but apparently they're

[Patrick Higley (Joint Fiscal Office)]: used to it. This

[Kirby Keaton (Legislative Counsel)]: is an area where one accountant working for a large corporation fills out their Vermont return, other people within that organization don't even think about it. That's something that happens. Okay, so what if Vermont chooses not to link up? Well, Vermont would have static conformity. And if you chose not to link up this year and go with what's on the books right now in the law, your static conformity date would be 12/31/2024. Like we were just saying, I mean, that's kind of actually technically what you're doing already. We are in static conformance right now that way. Let's go beyond that. What else does it need? So the big picture thing is the default, which would be the inverse. Right now with rolling conformity, the default is all of the federal changes are brought into Vermont, all of those that flow through. By the way, when we talk about flow through, it's basically what we haven't chosen to decouple from already. Things that don't flow through is because Vermont made the choice to decouple for that. For instance, when we talk about above the line deductions and why that matters for Vermont, it's because Vermont chose to start taxable income at AGI. If you chose to start at a different place, but when we talk about what flows through, mean different things, different things would be decoupled from already. So that's a way to think about it. I mean, choices the general assemblies have already made to decouple are why certain things flow through and why they don't. The default though, if you were to have static conformity, would be any future federal changes, including the ones most recently passed last year, would not automatically flow through at all. None of them would. You would have to actively choose which ones you want to conform to. As of now, those that do flow through because of our at least partial conformity, based on AGI and other things, you have to actively choose to decouple from if you don't like them. So the default is different. And we're gonna go into kinda what it would mean to flip that default, to say that the default is, like a state like California that has static conformity, every year there could be hundreds of federal changes. California chooses which ones it wants to conform to because it has static conformity, does not automatically have any of that stuff flip through. We are going to get to that in a minute.

[Representative Carol Ode (Member)]: Help me understand, give me a concrete example of where the default being active decoupling might be adverse to the state. We're making changes now based on a certain set of changes in each one. Would it always be the same? I don't know if I'm asking the question. I'm trying to figure out the advantage of static conformity versus actively decoupling.

[Kirby Keaton (Legislative Counsel)]: I think in either case, the ideal, what you would envision, is that the general assembly is considering every change, every year, and deciding whether that's right for Vermont. And whether you have static conformity or rolling conformity, you can do that. It's what you want the default to be. Under static conformity, the presumption is that none of that stuff happening at federal level is going happen here, unless we actively choose for it to happen. The default. Now, under rolling conformity is those things will flow through, you have to decide which ones to reject.

[Representative Carol Ode (Member)]: So this would basically push a future legislature to actively make an intentional decision every time there's a federal change. We're going

[Kirby Keaton (Legislative Counsel)]: to get into this, but it also means that the state itself, the Department of Taxes, if you have static conformity, they still have to be aware of every federal change that happens and then react accordingly for everyone individually. They would have to make sure our forms are changed so that those things that don't flow through, don't flow through. And they would have this exercise that we've done this year to look at HR1 and to track every part of it, would have to be done every year, and actively removing Vermont from it unless the General Assembly decides to go with it. So that is part of the point I want to make here, so you are aware of the work that it would entail to have static conformity. So moving on, question decoupled from the entire Internal Revenue Code, that would be the federal tax code, or just the parts relating to the corporate income tax? Well, states vary whether they have rolling conformity and static conformity. It's roughly even when you look at a chart comparing what states have rolling conformity and which ones have static conformity. And then there's a few states, I think there's about three when it comes to corporate income tax, like Arkansas I looked into a little bit. They start with federal gross income, but they do not adopt the entire tax code. They conform to only a few parts really and some of those few parts they do conform to are also static, like this deduction as it existed in 2001, something like that. So that would be an example of one that's a state that's the least conforming to the federal code. I would not have been able to find a state that actually has a rolling personal income tax conformance and a static corporate. That's a combo that doesn't seem to happen and it is a combo that my presentation sort of implied though. Is like what would it be like if we decoupled from corporate income tax? In my mind that means we have rolling PIT, static CIT. That is not something that I found. We can look

[Speaker 0]: But aren't we static? Or static?

[Kirby Keaton (Legislative Counsel)]: We consider ourselves rolling. Technically, we're static.

[Patrick Higley (Joint Fiscal Office)]: In

[Kirby Keaton (Legislative Counsel)]: the presentations that have been put on by Legislature Council in the past, in this committee, for years, those presentations seem to be rolling.

[Speaker 0]: I always find that confusing.

[Kirby Keaton (Legislative Counsel)]: Because we

[Speaker 0]: do link

[Kirby Keaton (Legislative Counsel)]: up every year. Functionally, we consider ourselves rolling. We identify it rolling.

[Speaker 0]: And all the decoupling that we did on personal income tax eight years ago? That one that was?

[Kirby Keaton (Legislative Counsel)]: That wasn't that old ago, was

[Patrick Higley (Joint Fiscal Office)]: Yeah, I think

[Speaker 0]: it was eight years ago.

[Patrick Higley (Joint Fiscal Office)]: It was '19.

[Speaker 0]: Know, it's really intense. When we did that, we did a lot of decoupling that allowed us to do rolling conformity, but in a way that had less impact, like the Feds had less impact.

[Kirby Keaton (Legislative Counsel)]: Yeah, and I think that's the nuance I'm partially getting at here. Whereas it's like, if you decouple Like changing to AGI was something Vermont did at one point, and that was decoupling from a lot of stuff, that means that those things don't flow through. Like, any future changes relating to all those things that we're decoupled from. So sometimes, a decision not conform on one thing can that it can have a ripple

[Representative Carol Ode (Member)]: effect. So, Chef Smith was speaking when that happened, a graduate of Ways and Means Committee. So he, that's why. Was he? Yeah. Okay.

[Patrick Higley (Joint Fiscal Office)]: So

[Representative Carol Ode (Member)]: we could figure it out from that.

[Speaker 0]: I think that was before 2018 then.

[Kirby Keaton (Legislative Counsel)]: Anyway,

[Speaker 0]: we're going to do some research on the fiscal impacts, and maybe in that process we can figure out the year.

[Kirby Keaton (Legislative Counsel)]: So here's all the states and DC and Rowling are static. This is according to this trade organization that works for corporate tax payers, council and state taxation, they put down, like a third party out there, they put down Vermont as static because we have a dating statute. And they were like, that's what they saw, and they said, oh, that's static.

[Patrick Higley (Joint Fiscal Office)]: They asked for a security? Definitely.

[Kirby Keaton (Legislative Counsel)]: If we want to explore static, we want to explore decoupling from corporate income tax, we can look at the states that are in that middle part there that have done that. Again, if they're static for CIT that heavily implies that they're either static for personal income tax also or they don't have a personal income tax in some of these cases. I always kick myself when I say something wrong. I use Florida as an example.

[Speaker 0]: We have all been thinking about that ever since that happened.

[Kirby Keaton (Legislative Counsel)]: Florida is an example of somebody who didn't have a corporate income tax and they have a 2% corporate income tax. It's like, of course, it should have said Texas. So, apologies for using the wrong state in my example.

[Speaker 0]: Have you been thinking about that too?

[Patrick Higley (Joint Fiscal Office)]: I have to back up half a slide. Yeah, absolutely. If we're static because we went through a date, what do they do in other states? Is it, well, you look it up to what date is, decide what our tax is today?

[Kirby Keaton (Legislative Counsel)]: It would be that they have a statute. This is hypothetically. You could have the Vermont statute that leaves out that part that's highlighted right there. So the statutes of The United States relating to the federal income tax, but without regard for the rates, are hereby adopted. And then language saying that any as amended or to signify that any future amendments are also incorporated Otherwise,

[Patrick Higley (Joint Fiscal Office)]: I'd hate to be a tax accountant in one of those states.

[Kirby Keaton (Legislative Counsel)]: Does that have the static? It's to be better. How do

[Patrick Higley (Joint Fiscal Office)]: I know, look it up today?

[Kirby Keaton (Legislative Counsel)]: Oh, well they gotta learn the federal law every year anyway.

[Patrick Higley (Joint Fiscal Office)]: And they

[Speaker 0]: have to file in all the states.

[Patrick Higley (Joint Fiscal Office)]: Most of

[Speaker 0]: them are kind helpful. And they also, you know, the harder it is, the more they get paid.

[Patrick Higley (Joint Fiscal Office)]: Ready to back to school.

[Speaker 0]: Yes. Representative Ode. This is the whole

[Representative Carol Ode (Member)]: topic I want big time, but share it for about the other topic. I thought I read this before I left my household.

[Speaker 0]: Okay, I think it's all the

[Patrick Higley (Joint Fiscal Office)]: same topic.

[Representative Carol Ode (Member)]: Well, I don't know if business people are less likely to start a business here if they think we're static. Well, how does businesses feel about it? Because I

[Speaker 0]: don't think economists usually tell us how businesses feel.

[Representative Carol Ode (Member)]: Me tell us who's coming in.

[Kirby Keaton (Legislative Counsel)]: This goes to what we're talking about. The way Vermont taxes corporations does not really affect whether a corporation is based here or not. But maybe there might be like a no, I was going make a joke about some business in Hawaii that's like, was going incorporate it, Vermont's too hard. I don't think that happened.

[Patrick Higley (Joint Fiscal Office)]: We

[Representative Carol Ode (Member)]: don't think here what comes through the Feds.

[Kirby Keaton (Legislative Counsel)]: To Vermont? I honestly think that large corporations do not think about us.

[Representative Carol Ode (Member)]: I didn't think that would be the answer.

[Speaker 0]: Because of the apportionment. Right. Yeah, I get that. But that's the whole part, but there

[Representative Carol Ode (Member)]: are other, all the other things like Deductions above the line? Yeah. No, I mean all the depreciation and everything. Except all above the line? Alright. Never mind.

[Speaker 0]: I was worried about nothing. I mean, this is

[Representative Carol Ode (Member)]: a conversation we need to have. We link it up and all the time anyway, it doesn't make a difference. This is more like a practice preference, right? Okay,

[Kirby Keaton (Legislative Counsel)]: so we're going move on. This is meant to just kind of show you the landscape and to point out that if you're thinking about static performance, those states in the middle are places to look for examples of how that's done. Again, this is specific to corporate income tax. Okay, so some questions here or some themes. Static conformity states, most static conformity states periodically update their date of conformity. So it's not like they're static in time for decades and decades and decades. California just updated theirs, they have waited ten years. So it went from their static date was 2015 and they just changed it to 2025. 01/01/2025 means before HR1, so they did not conform up to that, but everything before that they did, and I'm going to talk about California in a second. Static conformity stays could be seen as a version of rolling conformity with pauses that last for years. So not to muddy this up too much, but we're creating this binary of rolling and static, but really it's just same stuff. And then so for rolling conformity states, some rolling conformity states automatically decouple from any federal change for the state revenue impact of x million. So even though they're rolling conformity, they automatically bring in federal stuff. They have folks like wonderful Pat Titterton who monitor to make sure there's any fiscal impacts of any federal changes. And once it hits 15,000,000, they say, nope, not conforming to that one, Revenue impact 15,000,000. The legislature is going to have to actively decide whether it wants to conform to that one. So that's something that's done. Maryland and Virginia are two states that do that. All right, so let's talk about California for a minute.

[Representative Carol Ode (Member)]: Sorry, quick follow-up to that last one. Is that aggregate impact of

[Patrick Higley (Joint Fiscal Office)]: the federal tax bill for the trigger of x million. So it's like, okay, this one piece is going to happen in the tax of x million or this whole package hasn't been.

[Kirby Keaton (Legislative Counsel)]: It's piece by piece from what I've seen. It is, We look at the business interest deduction limit change specifically, not the whole of HR1. California uses static conformity, it recently linked up tax year 2025 as I mentioned a minute ago. Its last link up was ten years before that. That is considered a large gap when it comes to static conformity. It's like this is one of the more extreme examples. When they did link up in 2025, there's been more than 1,000 federal tax changes that took place in that ten year period. They've had to review it, they are still reviewing it, they are still deciding, They're now having to decide, making some selective decoupling decisions. So again, just kind of break down this black and white thing. Though they're static state and they're a static state that stays static for a long period of time, they're really dealing with the same thing that Vermont's dealing with right now and their role of conformity would deal with and there's no getting around this having to selectively decouple. Let me come up no matter what approach you take. California plans to pass a cleanup bill to synchronize the California code with all of these changes. That's underway right now, is my understanding. So what happens in California between these conformity years? California has a it's a very big state, that's like the country, and they have multiple tax agencies, and one of important ones is the state franchise tax board. It issues an annual summary of federal income tax changes. They have a website where they go by and again, as Representative Waszazak was asking about specifically and how this works, the Franchise Tax Board takes every singular change at the federal level every year and they track that and they put out these reports. It's a this change happened at the federal level, this is a summary of it, does California conform question mark, and because they're static conformity it's almost always no, but sometimes yes if they pass the law to do so. And so they track this very closely. They also publish guidelines every year for California income tax adjustments and they have to update their forms annually to account for any federal changes that are not adopted. So it's a big, big project for California every year under this setup. So moving on from that example, we are going to use an example of decoupling from the most recent federal changes, and going to walk through in some more detail about the questions that Vermont would have to deal with, just to decouple from this, whether it's static conformity, roll up conformity, just whatever the approach is or how Vermont encounters this or enters into this, these are the things you have to go through to decouple from one change. So before HR1, when it comes to qualified small business stock, if you remember from our discussions before about this, this is stock that if it's held for five years, you can exclude 100% of your gain from it from your income. HR1 has expanded that, made it more enticing, so that after H. R. One, you could hold it for three years and still exclude 50% of your day. You could hold it for four years and exclude 75% of your day. Before H. R. One, there was an exclusion cap of $10,000,000 Now the exclusion cap is all the way up to $15,000,000 As far as a business asset limit, that is the business that can issue this stock, the corporation that can issue this small business stock. They could only issue it as small business stock if they had assets up to $50,000,000 that was changed to $75,000,000 Also after HR1, that asset limit is now going to be adjusted for inflation. So that $75,000,000 is going to grow now. Previously it was $50,000,000 and stayed there. All right, so let's decouple from this. For stock acquired after 07/04/2025, which is when the HR1 changes take place, Vermont would have to on its specific corporate return and on its personal income tax return, because I am going to take a step back and talk about how muddy this is. A corporation or an LLC or an individual, all of them could own qualified SALT business stock. All of them could sell it and have a gain. The gains from this could be reported on a corporate return or a personal return. So we were talking before about seeing these as distinct things, this doesn't always work. So for both returns, Vermont would have to require an add back for the partial exclusion of gains held for three or four years, because we're static now when it comes to that. We're not allowing this new change, you can't, you got to add it back if you didn't hold it for five years. We have to add back the exclusion cap, so if you excluded more than $10,000,000 on your federal return, got to add that back on the Vermont return. Not allow an exclusion for stock that was issued by a business with business access exceeding 50,000,000 without regard for the new inflator. Questions arise about how Vermont can actually double check that. If at the federal level that asset limit is at $75,000,000 and the feds have allowed it, how does Vermont check that? But we at least would have on the form question or the schedule that goes into the form. Question, was this stock issued by a business with assets exceeding $50,000,000 If so, add it back, you can't exclude that.

[Speaker 0]: And so that's under the assumption Is that the assumption of decoupling or the assumption that we are staying statically conformed?

[Kirby Keaton (Legislative Counsel)]: This is decoupling no matter what led to it. Whether it was led to it because we continue to do rolling conformity and Vermont has chosen we don't want this, because you've seen presentations, I use it as an example partly, because you've seen presentations where people have told you recently, don't allow this, decouple from this. This would be the case if we had rolling conformity and you selectively chose not to decouple here, and this would also be the case if we had static and you chose not to couple up to it. In either case, this is the process for this one change that the state will have to go through. So the forms and related schedules would be amended, the taxpayers would have to calculate their qualified small business stock gains separately when it comes to Vermont, and as I mentioned before, this might be business related, but these things would flow through to the personal income tax. So this is something that, there's no such thing as decoupling for just corporate when it comes to something like this. Another example, and if we're running out of time, let me know.

[Representative Charles Kimbell (Ranking Member)]: So

[Kirby Keaton (Legislative Counsel)]: you've recently heard about the business interest deduction limit.

[Speaker 0]: I mean, in less 30, it's running out of time.

[Kirby Keaton (Legislative Counsel)]: Thirty minutes? Yeah, got plenty of time. It's another example. There's HR1 changed the business interest deduction limit. Before HR1, that was based on the limit for this deduction is what we're talking about, right? And what's the upper amount that you can deduct? Before HR1, it was based on earnings before interest and taxes, which did not include a lot of different ways to increase that number. After HR1 it's allowing you to include depreciation and amortization into that calculation. By including those things, your limit gets bigger, like the depreciation and amortization you have on property that you're holding. Once you add those numbers to it, it gets bigger. So with the limitation getting bigger, the deduction gets bigger. So before HR1, there was less what's called for the purposes of this deduction, adjusted taxable income, and therefore there's a smaller deduction. After this change to the calculation on this limitation, your ATI is bigger for versus calculation, which means your deduction is larger, if you have business interest. So what does it mean to decouple from this one? In this case it's for tax years beginning on or after 01/01/2025, because that's when the HR1 changes take place. The forms and the related schedules for corporate tax would be amended and taxpayers would have to calculate the business interest limit separately and they would use what's called the EBIT version of the calculations to decide their business interest limit for Vermont specifically. So whatever they put on their federal return, we'd say no, recalculate that, use this other schedule. What is it now? And then there's the question, would Vermont also decouple from the constraint on certain elective interest capitalization? There was this whole side thing that came with this limitation, which is a restriction on taxpayers that's meant to constrain ways for them to avoid tax. So I just threw that out there to say that even if you want to decouple from this thing because you're like, this is the business interest limit, we don't think you should be able to deduct so much, we want to decouple from that. Well, do you also want to decouple from the part of this that's intended to help with tax avoidance, because you probably don't. So that question comes up, And this is one change and one question. And if you had static conformity, both of these things would automatically not be included, and you'd have to make an active decision to couple up. So just a couple of thoughts at the end here. Rolling or static, right? Both approaches require selectively decoupling from certain IRC provisions, in some ways these are just words, semantics, you're making your decisions to decouple individually no matter what approach you're walking into it with, it's just what you want your default to be. Static overall does require more work from the state itself, maybe not from the legislature, but from the state itself. It means the state has to carefully track every federal change and make sure that that doesn't flow through unless the legislature has actually decided to. Be aware that no state adopts the entire IRC without modifications. Decoupling and such is a common thing when it comes to state income taxes. And the big difference really is what's your default? Do you default to adopting federal changes or not? Any questions?

[Representative Carol Ode (Member)]: You don't have any questions?

[Speaker 0]: When I think about this question of the tax department needing to track changes at the federal level and their impact on Vermont taxpayers, That to me seems like, given all that is changing in these moments, that seems like a useful function no matter how we're structured for conformity or not conformity. Apologies to the people who work at tax that might be watching this and knowing that I'm asking them to do more work. But it seems like right now, we really need all of state government to be monitoring what's happening at the federal level, because so much is changing in both our economy and the law. Anyone else have any questions for Kirby? Only one.

[Representative Charles Kimbell (Ranking Member)]: 12/31/2024 is the conformity date. So that said, I'm surprised it's not 12/31/2025, but if we go back, because the changes in HR one are effective 01/01/2025. Yes, we wouldn't be able to capture those proactively. Yeah, got it. Everybody answer my question.

[Representative Carol Ode (Member)]: Thanks Kirby.

[Kirby Keaton (Legislative Counsel)]: The changes from HR1 had different effect in basically what James was talking about.

[Patrick Higley (Joint Fiscal Office)]: Some

[Kirby Keaton (Legislative Counsel)]: were basically on passage starting July 4. Some of them are January 1 this year. Some of them are 01/01/2027.

[Speaker 0]: Some of them were we talked about one that was retroactive, but also an incentive. Right? That one came up last week. Yeah. Should we wait for whatever you can

[Representative Charles Kimbell (Ranking Member)]: Okay, cool.

[Speaker 0]: I think next steps for this is for us to go deeper into each piece and figure out what we want to be doing and hear from a few more witnesses, including the chamber, to understand actually what businesses we're talking about here in terms of Vermont impacts. Does anyone have anything on that before I go to public service announcements? Okay. Really appreciate everyone just thinking about it over the next few days to figure out how we want to tackle this. Public service announcements. We have two bills that we're going to need to vote on soon. After the floor, we have six forty eight, H-six 48. My understanding is it has no revenue impact at all, but it's being referred to here because of the underlying the way that happens. If we're really lucky, might be the first one if someone says de minimis. Enough, great. Might not. I don't know. Don't want make any promises on Pat's behalf.

[Representative Carol Ode (Member)]: Do we already have a de minimis?

[Patrick Higley (Joint Fiscal Office)]: No. I've mentioned it's really set

[Representative Carol Ode (Member)]: to date.

[Patrick Higley (Joint Fiscal Office)]: It's brought up.

[Speaker 0]: And so we don't there's no action on the floor today. And so at 03:45, whether the floor is the announcements are finished or not, please just come back here. Forty five minutes of not action on the floor seems like enough, and I don't want to leave our witnesses waiting. If we had a bill actually up for action, I wouldn't do that. But is that okay with everyone?

[Patrick Higley (Joint Fiscal Office)]: Yeah. It's okay. Sorry, just is it $3.45 either way?

[Speaker 0]: Yeah. Let's 03:45 either way. Is that okay? Anyone have any, like, guests visiting? Hockey teams, anything? Okay. And tomorrow, we're going to, somewhere on the schedule, we're going to talk about we're going to look at the immunization bill and do a straw poll on it rather than having it be referred to us, because there's also a fee in there. It's not a new fee. It's just fee in the underlying statute. If folks do you know the bill number?

[Patrick Higley (Joint Fiscal Office)]: Three

[Speaker 0]: Okay. If folks could read that between now and then and talk to someone on

[Representative Carol Ode (Member)]: 545.

[Speaker 0]: 545. If folks could read that before tomorrow and talk to someone.

[Representative Carol Ode (Member)]: Today's calendar.

[Speaker 0]: It's on today's calendar. So convenient. Talk to someone on services or health care about it so we can move fast because we have very limited jurisdiction over it. And I feel like I'd

[Representative Carol Ode (Member)]: work for public Oh, I have two more.

[Speaker 0]: Also, tomorrow, Commerce Committee is hearing testimony on the CTE proposals from the administration. I did not manage to coordinate with the other chairs in time to do a joint hearing on that, so we wanted to. And we have the administration scheduled with sort of all of their proposals for the year, tax department and Adam Gresham. And so I'm gonna ask folks to watch that testimony on the video, maybe on Friday afternoon, and just, like, let you know if you want us to do, like, a full hearing or have them in for questions or, like, what people think the best approach would be for

[Patrick Higley (Joint Fiscal Office)]: us to do that.

[Speaker 0]: Thank you. And yesterday, I think, maybe today, the education committee took testimony on an equitable budgeting model that Burlington School District is using. And so if anyone wants to watch that and let me know if it would be helpful to have them come in and do a repeat performance or to just send people to that testimony, that would be helpful, too. Those are all of the public service