Vermont Legislature SmartTranscripts:

[Rep. Emilie Kornheiser (Chair)]: Good afternoon. It is Thursday, February 5. We are still the Ways and Means Committee. It is 01:17PM, and we are taking more testimony on federal conformity and our link up with federal tax code, specifically in the context of corporate and business taxes. I'm gonna really encourage members of the committee and witnesses to use some discipline with language and not confuse businesses and corporations as interchangeable words because they have very different tax statuses. And so I might, if it starts to get confusing, try to interrupt and check-in again.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: I

[Rep. Emilie Kornheiser (Chair)]: think with that, Amy, would you like to join us?

[Amy Spear (President, Vermont Chamber of Commerce)]: I would. Thanks so much. Sit up there with me. Great. We're going to just stream one right into the other.

[Rep. Emilie Kornheiser (Chair)]: Keep it as Love it.

[Amy Spear (President, Vermont Chamber of Commerce)]: I will jump right in. My name is Amy Spear and I serve as the president of the Vermont Chamber of Commerce. Thank you for having us in today to talk about this. My testimony will be very brief, and we'll talk more about the business context. I'm joined by Mike Hackett, who will be our subject matter expert. So, please have lots of questions ready for him. One thing we want to set the stage with is federal conformity, I know, is in this room often treated like a technical exercise because it really is from a policy perspective. But for Vermont employers, it has a lot of real impact. So, we wanted to take a deeper dive on that today. So, right now, across the state, not a surprise to anybody in this room, are really navigating real and immediate disruption that's driven by federal actions that are beyond their control. So tariffs, trade uncertainty, shifting in federal policy, they're all affecting their supply chains, input costs, margins, and long term planning. I think it's important to emphasize that Vermont did not create these pressures, but at this moment in time, Vermont can decide whether to compound them or cushion So, our business community is very diverse. We have manufacturers, healthcare providers, hospitality operators, retailers, farmers, professional services firms, and globally connected companies all feel these impacts differently. And I think it's important to note that they are all feeling these impacts. And at the same time, they operate under different tax structures, but they do share one reality. And that is that state decisions that are made matter of the war when the federal policy is unstable. So, when we're seeing instability at the federal level, stability provided by the state is very important. So, I do also want to emphasize that in moments like this that we're sitting in, in this room right now, conformity is, to a certain extent, it's really not about supporting federal policy, but it's about supporting Vermonters in spite of federal uncertainty. So, from the chamber's perspective, the most important conformity decisions are those that provide stability, breathing room, particularly around research and experimental expenditures, business interest deductions, expensing of depreciable business assets. And that's because these provisions really help businesses reinvest, modernize, and plan with confidence at a time when external forces are already disrupting their operations. So, this is an opportunity for Vermont to act deliberately on behalf of its employers. Conforming to these key provisions, which Mike will talk more about when he gets underway, I want to be clear that they allow Vermont to offset their impact that's happening at the federal level, reduce friction that businesses are experiencing, and help them stay focused on investing in people, equipment, and communities here at home. So, the lens that we would ask this committee to consider when you're looking at all of these conforming changes is, does this decision help Vermont businesses absorb uncertainty rather than amplify it? Does it support investment and resilience? Does nonconformity add cost without improving outcomes? So, know that we're in a volatile environment, and clarity and predictability are really powerful tools in policy choices that can be made now. So, we really appreciate this committee's leadership and the opportunity to weigh in on this discussion. I know you spent a lot of time talking about federal changes thus far, and there's many of them and they're complex. So, it's why I'm really glad to be joined by a subject matter expert that can field your questions and hopefully provide some additional context beyond the level setting that I just said today about the business environment.

[Rep. Emilie Kornheiser (Chair)]: So with that, yes, I have a question for you before do. Yes, and maybe other people do. I'm sure. Have you been able to figure out So where people

[Amy Spear (President, Vermont Chamber of Commerce)]: I do have some context.

[Rep. Emilie Kornheiser (Chair)]: That would be really helpful.

[Amy Spear (President, Vermont Chamber of Commerce)]: And I guess that could be the answer that you want. That's fine. So I'm gonna forewarn that. So the data gap is real there, for sure. So we don't collect that information from our members. I don't know if I

[Rep. Emilie Kornheiser (Chair)]: finished my questions. Don't know

[Unidentified Committee Member (pre–Tax Department segment)]: if anybody knows what we're talking about or stuff.

[Rep. Emilie Kornheiser (Chair)]: I wanted to know, based on the chamber's membership, how many of the chamber's membership are corporations, what their tax status is, basically. So that as we're having these conversations, even Amy has a sense of who she's representing in this context. Yeah. So there's

[Amy Spear (President, Vermont Chamber of Commerce)]: a data gap because we don't collect that from our members. And there's no publicly available information on who is whom in that context. I can tell you that when we're talking about our members and the, I would say, who they employ, I can tell you that our membership represents over 75,000 employees in the state

[Rep. Emilie Kornheiser (Chair)]: of Vermont. That is helpful context. But it's good to know, I guess.

[Amy Spear (President, Vermont Chamber of Commerce)]: So it's good to know. So I wish I had more clarity around that answer, but there really is a data gap there. But maybe tax can provide some additional attention. Okay.

[Rep. Emilie Kornheiser (Chair)]: And that might be a fun thing to figure out in future years. Yeah. Cool. Thanks. Anyone else have a question for you?

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Okay. Think I'm gonna share my screen here. I'm not a tech expert.

[Rep. Emilie Kornheiser (Chair)]: And yet you are able to oh. Are

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: you? Are you good? See if I can give her this now. Okay. There we go.

[Amy Spear (President, Vermont Chamber of Commerce)]: More of an expert than you realized.

[Rep. Mark Higley (Member)]: Wow, I think I'm out

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: of mistakes on the technical side. All right, so thanks for having me. My name is Mike Hackett. I'm a tax partner and leader of our tax group up at Gallagher Flynn, and I put together some slides to sort of kick off the conversation, maybe level set, go through some particulars, a little bit of nitty gritty tax on accounting in there, so apologies, but I feel like it's important to set the table. And my goal is that once I do that, please stop me along the way if you have questions. It's probably easiest as we go by topic, but then when I'm done with that, it's surely not going to take a whole lot of time and I'd love to just answer questions and be a resource for anything that you've all talked about or battered around and want to bounce off of me. So I want to be clear about there's a lot of tax provisions in HR1 that Vermont could conform or not to, and I'm trying to just declutter the field a little bit and take a few things off the table to focus in on what I think it's worthwhile talking about. There's a lot of talk about tax. Personal income tax changes that were part of HR1. So this was the headline ones are no tax on tips for certain taxpayers, no tax on overtime for certain taxpayers, auto interest deduction, and an enhanced senior deduction. From a CPA's perspective, these are somewhat irrelevant for Vermont taxes as they don't track to the way that we compute Vermont personal income tax. So in my view, these are not worthwhile discussion topics, and I just want to Agree. Table and compute the picture. And Emilie, I guess I wrote something in here that is along the lines of what you were saying. So I'm glad I did just to be clear about what we're talking about and the types of business tax. So switching over to business income tax, the areas I'm going to talk about apply to all entity types. So if you're a sole proprietor, if you're an LLC, you're a partnership, an S corporation, a C corporation, all these provisions apply to those taxpayers. I'll go through each one of these in a little bit of detail, but I kind of pulled these out as the major headline items that are worthwhile talking about. And again in the interest of sort of clearing the field, I wrote at the bottom of this slide, bonus depreciation is something that I don't think the state, I can't say ever because I haven't been here forever, but I can't say, I'm pretty sure in the last twenty and thirty years have never conformed, so it's probably not worth talking about, and many things do not conform to bonus depreciation. So we can kind of take that first bullet off the table for productive conversation. So the first change was to Section 179, which is a depreciation code section, which allows businesses to deduct up to a million dollar prior law before HR1 changed it, was deducting up to a million dollars of their capital expenditures. And that phased out at $2,500,000 The new law, which I mean to be HR one, has updated some figures in that. It's expanded to $2,500,000 of the actual expense, and the phase out is now higher at $4,000,000 So Vermont already conforms to the old law and the new law simply updates the limits. I think the practical application we would see is a lot of this is keeping up with sort of rising costs of our local business. Decoupling from it would keep the old limitations stale, not really reflect the rising prices. But a wrinkle here, just from a practitioner standpoint, it causes additional costs and compliance for now having to track multiple sets of laws for the same taxpayer. Anytime we can follow the federal rules, I don't mean to paint us as lazy, but we do pass on our costs to our clients. And if we're going to spend more time now tracking a whole different set of rules for just state purposes, we've now doubled the work in that area. So I say that a few times throughout this. I don't mean to do it to hammer home the point, but just point out that these are real costs for taxpayers. When we decouple, we now create two systems that are running parallel.

[Rep. Emilie Kornheiser (Chair)]: I guess a question that's gonna keep coming up in my mind through that, which I don't know if we can answer at this time, is the businesses that accountants are working with in this context, how many states are they filing in already? And so I know that every state has slightly different tax code, so you're already doing stuff fresh for each state.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yeah, I would say for us we're by far the largest and we still have a large CPA firm, we still have a large contingent that probably only file in Vermont. In front of a room like this, I'd hate to make up a number that's completely false, but it's meaningful amount. We certainly have many taxpayers that are filing in 45 states. And yes, you're right, depending on how many states, that does add quite a bit of complexity. For all other CPA firms in the state, that percentage of Vermont public businesses probably grows. So this would probably hit smaller CPA firms and smaller clientele a lot harder than it would for us. So that's section 179 depreciation. Obviously, this hits it's industry agnostic. This hits any business, but we see this mostly in manufacturing, construction, software with infrastructure, a lot of key Vermont industries. The next one is section one sixty three j. This is interest deduction limitation. And the old law was in effect, from '22 to '24, so it wasn't that old. But it essentially limits a business's ability to deduct interest expense if they don't have enough EBIT. So a business that is certainly losing money on that basis is not going to be able to deduct their interest expense. They're going to have to carry it forward. And there are other permutations that it could be. I don't need to go through all of them. And essentially, new version of that under HR1 is changing it to an EBITDA basis, which is adding depreciation and amortization, which is the way it was prior to 2022. Obviously for capital intensive businesses, EBITDA is much higher than EBIT. And so businesses that are borrowing to fund expansions, new workforce initiatives, etc, under the or sorry, under the old current, law are able to deduct less interest expense. So it's raising their taxable income. Again, I think Vermont always conformed to this. This law was new in the 2017 TCJA. Prior to 2017, 163J was a different provision entirely. So since 2017, Vermont has conformed, and decoupling would be a first in that. And then it would limit business's that ability to deduct that interest even more and then cause another to park or off the track in parallel. This one sorry, go ahead.

[Rep. Emilie Kornheiser (Chair)]: No, you finish your sentence.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: I was

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: just going

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: to say this one hits a lot of industries, anyone borrowing, particularly though this hits the real estate industry pretty heavily as it's a high level finance industry to begin with. The complexities arising from this and how people build and develop real estate products in the state hinge a lot on how these calculations pan out from a cash flow perspective.

[Rep. Emilie Kornheiser (Chair)]: Representative Branagan? Can you help me understand the lingo? Ebit, EBITDA and tell

[Amy Spear (President, Vermont Chamber of Commerce)]: me more about January.

[Rep. Emilie Kornheiser (Chair)]: You gave me a clue, real estate, okay. But I don't know what else you're talking about.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yeah, so when a business borrows money and has interest incurs interest expense, normally that's a deductible expense against their income because they're paying their lender. If, under this rule, there are limitations of how much you could deduct. So right now, the rule is, earnings before interest and taxes. The 163 3J limitation says that's Yep. Sorry. I should have a warning on the presentation about the accounting and tax lingo.

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

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: That number is multiplied by 30%, and that provides the ceiling for how much interest you can deduct. So if you're a wildly profitable business, that ceiling doesn't mean anything for you. You can borrow money, and you can deduct your interest expense. If you're a business that's struggling, not doing well, producing a loss, and you go to borrow money, you're going to be limited by this provision to be able to deduct your interest expense. You don't lose it forever. You get to carry it forward for a day when you do have income to offset against. But as you can imagine, there's a lot of different outcomes that come from that and it produces sort of odd results along the way.

[Rep. Emilie Kornheiser (Chair)]: How is that good for government? So I'm assuming this came from Washington, right? This

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: came about in 2017, TCJA, it is a revenue raiser on its face because it limits some people deducting interests. So in theory, it's raising taxable income a bit. How it's been calculated has bounced around a bit since 2017. And it's now at its least taxpayer favorable peak in EBIT. So under HR1, it ratcheted down just a little bit to become less unfavorable, I guess I'll say. Does that make sense? Yes. Okay.

[Unidentified Committee Member]: Yeah, helps. So 2017, you said, so the CPAs

[Rep. Emilie Kornheiser (Chair)]: in our world already know about this. Okay.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yeah. Yes, the law generally, and then it's moved a little bit throughout the years. Many things in TCJA had varying expirations and varying thresholds. And so now under what I'll call old law, conformed Vermont to this every step of the way. And then HR1 made a change to it that I suspect CPAs are expecting would conform again because that's what Vermont's done since 2017.

[Rep. Emilie Kornheiser (Chair)]: Thank you.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: I hope that helps. Okay.

[Unidentified Committee Member]: Yes, very much.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Any other?

[Rep. Emilie Kornheiser (Chair)]: Not yet.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Not going to spend a lot of time on the foreign tax revisions, truly. I'm trying to be practical about this. I put some things in here just to give context and have it in writing, and anyone could go back to it if they wanted to read it. But essentially, HR one is tweaking these provisions, in disparate ways. Some are favorable, taxpayer favorable, some are taxpayer unfavorable. And depending on the facts and circumstances, it's really difficult to say which way they actually go. Vermont already conforms in these areas. So I added at an end decoupling adds significant complexity. This is already a highly complex area of tax. To be fair, tacking back to a question you asked earlier, because of our size, we deal a good amount with this. We still sometimes have to reach out to other experts nationally on these topics. Less likely to hit smaller firms and smaller taxpayers in Vermont, but for the ones that are already in it, decoupling would create more complexity with very unclear results of which way it would actually send their tax or benefit under these, just because of how disparate the changes are.

[Rep. Emilie Kornheiser (Chair)]: And what types of businesses are eligible for this provision?

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: So I actually pack a lot on this slide. GILTI is a punitive provision. GILTI is a tax provision. If you fall into it, you pay extra tax. All taxpayers are subject to that. FDII is a tax benefit. It's an enhanced deduction if you do certain things. That is only available to C corporations. So I breezed through a lot.

[Rep. Emilie Kornheiser (Chair)]: We've spent a lot of time with JFO, our joint fiscal office, on this over And the one of the things that's interesting about it is when they have been able to come to numbers on it, it's often very different from what other states' numbers turn out to be, just because of the particular composition of our tax filers here.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: I'm not surprised because it's just wildly complex. It'd be hard for me to even make a guess at how it scattershot affects our business climate. It adds a lot of complexity, but to the actual tax bill, I'm not quite sure. So I save what I think is the best for last. And certainly the most, I guess, jarring change under tacking back to that twenty seventeen TCJA tax law that happened at the federal level. Section 174, research and development or R and D expense capitalization, was a completely new element brought along with the TCJA of 2017. It was a revenue raiser back then because it mandated that businesses no longer could deduct their research and development costs in the current year. They had to capitalize it as if it were a fixed asset and amortize it or depreciate it over a period of many years, over five years for domestic fifteen years for foreign R and

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: D.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: So I can say that our client base in particular has struggled quite a bit with this provision, complying with it and the tax impact of it along the way, and we've seen a lot of real negative consequences of it. HR one essentially reverses this section 174 capitalization and says that we're allowed to go back to the rules for federal purposes that, allow immediate expensing of R and D expenditure. And when I say R and D expenditures, that's primarily wage costs of people being paid to perform research and development. It can include supplies. When people say R and D, they think of white lab coats and things like that. But in our state, it's actually probably not that. It's more manufacturing based, software based, given our pretty burgeoning scene in that space.

[Rep. Emilie Kornheiser (Chair)]: It could be just a person sitting alone at their computer creating a new intellectual product.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: So in software business that you just said, so if somebody wanted to launch a new version of their software program and they just are investing hundreds of thousands of dollars in payroll, then that's an R and D cost. Correct. Because they can't expense it. If they couldn't do that, then they'd have to capitalize that expense and amortize it over five Correct.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yeah. Have what I hope to be as a really simple example just to show what that looks like before and after, and maybe it makes sense to

[Rep. Emilie Kornheiser (Chair)]: Can you also remind

[Rep. Bridget Burkhardt (Clerk)]: us what types of businesses this like what business structures this applies to? Paul. Thank you.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yep. Good. Thanks for clarifying. Including if you're not a registered business, if you're just a sole proprietor just doing things on your Why don't I nobody likes it at Gallery of Flem and I improvise, but I will. I'll go right to this slide. I didn't thought it'd be helpful.

[Rep. Emilie Kornheiser (Chair)]: You could be more flexible than accounting firms.

[Unidentified Committee Member (pre–Tax Department segment)]: I'm not sure.

[Rep. Emilie Kornheiser (Chair)]: I'm really not sure. Depends on the day.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Hopefully, simple example of what this does to a business' taxable income. Under pre TCJA, and I mean, let's just pre section 174, if a business had a million dollars of revenue, dollars 700,000 of other expenses, and they spent, to your point, maybe they spent $500,000 of R and D related expenses. And for simplicity's sake, we could just say all these expenses are wages. They're just people performing services. That business intentionally ran a loss. Maybe they're a startup or whatever. They're choosing to invest in their business, so they ran a loss. So in 2021, they would have no tax bill for federal and Vermont purposes because they didn't turn a profit. When section 174 came into play, they were let's assume they were the same business and they had the same year, a million dollars of revenue, dollars 700,000 of non R and D expenses. They wouldn't get to deduct that $500,000 of wages they paid out. That would be classified as research and development of wages. They would have to amortize it according to that schedule that I put on the bottom of the screen. So in year one, under 01/1974, you get a half year in the first year, so it's $50,000 not $100,000 And so that same business who has the same economic setup now has taxable income of $250,000 and they would pay federal and Vermont tax on that $250,000 Nothing about the business has changed. They've spent all their revenue. They've actually spent more than their revenue, assuming they either raised equity or borrowed money to spend that extra $200,000 that they didn't get from customers. And so that's kind of the example of how it plays out in one year. It obviously gets more complex when you start stacking many of these years on top of each other, because they have amortization from old years, they have new capitalization from new investments, and starts kind of going on and off from there. So what's happening now is for federal purposes, we basically get to, in varying ways depending on the size of business you are, pretend like that rule never existed and unwind at all. That's what HR1 has done to change. So my second bullet, I think I've sort of covered. We did conform pre 01/1974. We did conform to 01/1974 as it happened. So if we didn't conform, that would be the first time that we're not as it pertains to this kind of topic. And we've seen it cause significant distortion between kind of an economic reality of the taxpayer and what their tax return winds up looking like and what their tax bill winds up looking like. And we've seen it impact a wide variety of businesses, manufacturing software, it's hit brewers, many of which we work with engineering firms, it's hit quite hard. It's surprising to know that much of what engineering firms do because it's so custom to each project, is actually considered partially research and development. And so some engineering firms have actually been hit quite hard by this and had to go borrow money or find new financing facilities to pay tax bills along the way for some of these things. Same thing with construction, since engineering is oftentimes a component of various construction projects. The one that it's hit hardest for sure in our state and across the country is research grant recipients. So I know I can speak for even me personally. I don't work with every client at Gallagher Flynn, but I personally have a few clients that their business model is formed on them getting various research grants, usually NIH or Department of Defense, and that funds research and development they're doing according to whatever the grant is mandating that they research. And the way they make money on that is by usually getting a cost plus markup. So if the NIH grant is worth for a million dollars and it's a 10% markup, they'll be mandated to spend that million dollars on the research, again probably hiring people to perform that research, and then the business retains $100,000 as profit, the 10% markup on that. Sometimes they're able to keep the intellectual property, sometimes not, sometimes they're able to make products based on it, but that's very fact specific. But we have clients that live on that cost plus markup. And so their real profit every year is that 10% in my example. I'm sorry I didn't lay this out the visual, it probably would have been easier, but hopefully you could follow along. Under these rules, all of the work they do for that research grant is considered R and D. So their taxable income just went from $100,000 which is their true profit, to something far more than that because they can only deduct a fraction of what they spent. The particular challenge for those businesses is that the grant requires them to use every dollar they get for grant purposes. So they can't use grant money to pay their tax bill. So many of our clients that are in that position have to go to the bank and borrow money just to pay their tax bill. And some weren't able to do that, they don't have lendable assets, they are just a service company, they have any borrowing power to begin with, and it's put in question whether or not they could be a viable business. So it's been a tough few years for businesses in that sector, not relevant to taxation, but doubly hard now due to the fact that now they're not getting grants as much. So it's just been a big hit to that point of the industry, which may not, you know, like I said in the beginning, we think of R and D as white lab coats, and I'm just trying to paint a picture of how it affects our everyday businesses.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: If you go back to that example, the $100,000,000, 100,000, so under the old, they'd have to amortize what $900,000 is that? Whereas under the new laws they can write off the million dollars.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Right, and arrive at their kind of true profit, which was the $100,000 because they've spent all the grant money they've received. Those businesses are supposed to be a conduit for that money, they're not supposed to keep the million, they're supposed to make just the markup of the service they provide.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: The tax liability goes down significantly if they could write off the sale of

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: the tax It matches their true economic outcome for that year. When we make them capitalize the money they spent, it distorts that picture of their tax return into something that didn't really happen. Guess it could be similar to this example. It's just much more pronounced in that circumstances because all of their expenses are considered R and D.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: Yeah, because I can see the logic for the business. I'm just thinking from a revenue standpoint for the states. Yeah.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yeah. You're thinking about it correctly. I have one slide left. It's related to 01/1974. I can either hold if anyone has questions or just. This one is a I wrestled with how to kind of write about it because it can be a bit of a rabbit hole, but this is a Vermont particular issue that we're walking our clients through the options of what to do now based on just where we are in time with Vermont not conforming and businesses having to take action. So I said earlier, the federal law under HR1 now is basically pretending like 01/1974 went away completely, and there are multiple avenues to do that. There's a special avenue for small taxpayers. Federal government defines small taxpayers as anyone with $31,000,000 or less in gross receipts, which is, I would say for us, that's sort of a bread and butter Vermont company, probably 100 to 200 employees, somewhere in the $15,000,000 to $30,000,000 revenue range. So it hits quite a bit of our client base. They were able to amend twenty twenty two to twenty twenty four tax returns for federal purposes to erase that 01/1974 impact and get their taxes returned back to the way it would have been if that law didn't exist. Since Vermont doesn't conform as of today, they can't do that for Vermont purposes, which would be okay if there was a different way to do that. But right now, there is no way for them to do that. So when they go to file their 2025 Vermont tax return, which we're starting now for them, that tax return starts with a federal number that assumes that that 174 impact has already been accounted for. So as we go through the Vermont tax return as it stands now, and the department could probably comment on this better, but I think it's our understanding that there is no mechanism in the 2025 Vermont tax return to reflect the fact that that taxpayer needs to be made whole if Vermont was to conform to 174. And so without any legislative action, that taxpayer might lose those deductions for Vermont purposes permanently based on how the forms kind of just talk to each other. Because again, the 2025 tax return is starting with a federal number that assumes you've already taken care of removing this 174 in a prior year, which they're not allowed to do right now. I know this is a little tricky, but

[Rep. Bridget Burkhardt (Clerk)]: No, and we're gonna hear more about this from the tax department. Go ahead. Please permanently add something. They can't amend.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Right now, yeah.

[Rep. Bridget Burkhardt (Clerk)]: When would they need this change to be enacted before April 15?

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Selfishly, as soon as possible.

[Rep. Bridget Burkhardt (Clerk)]: I'm asking April 15, is that it? Can they all just extend their filing if they know something's happening here? I should file later?

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: That's a possibility, yeah.

[Rep. Bridget Burkhardt (Clerk)]: They amend the term, they amend it?

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yes, if law allowed for that, yes.

[Rep. Bridget Burkhardt (Clerk)]: So we have to say that?

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yeah. But

[Rep. Emilie Kornheiser (Chair)]: it's not so good because they have

[Rep. Bridget Burkhardt (Clerk)]: to figure out how they're going pay their taxes first.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Right, they would have to send in a check to Vermont knowing that hopefully some of it comes back. And sorry, I'm not being kid you. I'm trying to play out all the scenarios in my head to make sure I'm covering all the bases of the scenarios that we

[Rep. Emilie Kornheiser (Chair)]: I'm sure someone might correct you next if they

[Rep. Bridget Burkhardt (Clerk)]: catch something because we have lots

[Rep. Emilie Kornheiser (Chair)]: of other professionals coming up. Please do. You don't have to be perfect. I

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: wish more people would tell me.

[Unidentified Committee Member (pre–Tax Department segment)]: Educational research.

[Rep. Emilie Kornheiser (Chair)]: Yeah. I'm going to encourage you to go on to the next slide.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: That is it. My next slide. Thank you. Oh, perfect. So I'm trying to live up I didn't live up to it too much, but we did have some questions. In the meantime, I just wanted to make sure we leave space

[Bruce Fort (Multistate Tax Commission)]: for everybody.

[Rep. Emilie Kornheiser (Chair)]: Thank you. Are there any further questions? And are you able to hang out through the testimony?

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yeah.

[Rep. Emilie Kornheiser (Chair)]: Thank you so much. Really appreciate you both.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Thanks for having me.

[Rep. Emilie Kornheiser (Chair)]: That was very good.

[Rep. Bridget Burkhardt (Clerk)]: And is Bruce inside the

[Rep. Emilie Kornheiser (Chair)]: computer? Yes. Mr. Forit?

[Bruce Fort (Multistate Tax Commission)]: Hi, everyone. Thank you so much for inviting me to talk to your committee today. I really appreciate it. And first of all, let me start off by saying, I am speaking on my own behalf and on behalf of the Multistate Tax Commission. I have lots of opinions. The Multistate Tax Commission has fewer, and, we, we, we don't generally speak, through our attorneys, but, so anyway, I greatly appreciate, the opportunity to, to speak here today. Really enjoyed Mr. Hackett's presentation. I learned a lot. I am not a CPA and the devil is in the details as, and he did a wonderful job of explaining sort of what goes on. I want to start off by saying that there's a report in state tax notes that corporate income tax revenues at the federal level are down 32% for the 2025. That's a pretty remarkable number. And a fair number fair amount of that are retroactive claims, if you will, for R and D expenses, what you just heard, section 174. It is a complicated area, but, it may be that Vermont is just going to have to say, well, we're we, you know, as you as you do, conformity to the next tax year, just be aware of that, that, to the extent you are conforming and including the 174, which I think is the bulk of that reduction. There will be there will be, you know, a tax loss. It's not the end of the world. And Mr. Hackett talked about the importance of maintaining some sort of uniformity and maintaining some sort of ability for taxpayer to comply. I totally agree with what he said there. And so when you're balancing whether to conform or not to conform to particular provisions, you have to keep that in mind. I really want to talk today mostly about the foreign international tax aspects that Mr. Hackett touched on very briefly. I don't think he quite presented it the way I would have presented it. So let me try to clarify that. Beginning in 2017, the federal government really enacted a new system for taxing the income of multinational corporations and they did that through something called guilty and something called FITI And GILTI provides basically that global intangible low tax income will be included in the tax base of the domestic US corporations.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: Then

[Bruce Fort (Multistate Tax Commission)]: in order to work an effective tax rate, they wanted to get something close to a proposed minimum 15% tax rate that is going on at the international scene. They did a deduction section two fifty of basically cutting that number in half. So it's kind of an awkward thing. They could have just said we're going to bring in guilty at a lower percentage, but instead they brought it in at a higher percentage and then cut it in half through the IRC two fifty deduction that that, Vermont does currently conform to. Now, FITI is a slightly different issue. It is a it is a deduction also in two fifty, but a separate section. A deduction for income that is earned through foreign sales and sales of property and and and services to a non related party internationally. And so that has turned out to be a pretty expensive deduction. Both of them are expensive. Guilty for 2021 was $6.00 $7,000,000,000 out of a total tax base of about $457,000,000,000 So it's a big chunk. I was just on the IRS's website called Office Statistics. And 96 of companies with over two GILTI is paid for by companies with over $2,500,000,000 in assets. 96% of GILTI comes in through these large multinational corporations. The FDII deductions are again two deductions. One is for GILTI, one is for FDII itself, and they total about $400,000,000,000 These are twenty twenty one numbers. That's the newest thing they have on the IRS website. So just wanted to be aware of that. What Vermont currently does is tax 50% of GILTI. You tax the GILTI after that two fifty deduction, and then you allow what's called apportionment. You you allow the factors of those foreign CFCs, we call them, foreign subsidiaries, into the apportionment formula, that reduces the Vermont taxable percentage. And we think that's very appropriate, we being the MTC, and I think tax nerds like myself generally, the idea is to keep your base as wide as possible and then use the apportionment formula to make sure that Vermont isn't taxing extraterritorial income. What I would propose in my own name and not on behalf of the MTC is that you consider eliminating the IRC two fifty deduction entirely and bringing in 100% of it's now called NCTI. It is no longer called guilty. It's actually about 10% broader than the old guilty number. And bringing that in and allowing factor representation which you already allow for the 50% you do tax. Allow that for the entire amount. And we think that, you know, to us, that is a conformity to the federal system to bring in this, to bring in 100% of this income. I describe NCTI as essentially an attribution of income, just like you would have a partnership owned by a corporation. You attribute the income of that partnership to the corporation and you also bring in the apportionment factors of that partnership into the corporation. If that partnership is doing business out of state, Vermont taxes a smaller amount. So, speaking for myself and not for the MTC, that is the one reform I would suggest that you really look at as something that would actually bring in increase, conformity to the federal system and basically recognize that we now have a new federal system where this foreign assets are now foreign income, excuse me, is now being attributed to The US company. And we overtax. Want We don't want to tax a multinational corporation on its income earned abroad and use the apportionment formula, the apportionment system to change that, to reflect that. I have very little to add to what we already heard about the various deductions and how they're going to affect Vermont. Think Mike did an excellent job of of setting that out. I I really don't have anything to add. I really just wanted to focus on that one issue, which is that you consider including 100% of NCTI, which used to be called guilty. It is slightly broader number that you include consider including 100% of it in the tax base that you consider eliminating the IRC two fifty deduction for foreign derived intangible income. And that that deduction number is going to be higher now. It's going to be, even more generous to taxpayers. You know, it's really a policy decision in terms of is this encouraging, you know, Vermont manufacturers to export? Is that an appropriate policy choice on your behalf? The states in terms of conformity generally to the OBVA, the states unfortunately are all over the map. I I totally understand the concerns with the the concerns with with complexity. Unfortunately, it's just going to be it's just going to be a a feature of our tax world going forward because states are doing things. Massachusetts, the governor today just proposed, a partial conformity that's going to look at one seventy four and and maybe allow a a different, allowance of depreciation expenses. It's going to be complicated for businesses that do business in Vermont and Massachusetts should that become law. I don't know how much you all can avoid all that, those considerations, but, I do know that Vermont, generally speaking, has chosen to conform as best they can with the federal tax code. And I understand that, especially given the number of smaller businesses you have operating in Vermont. And so I I understand your concern there. In New Mexico, there's a bill being considered later on this afternoon that will include 100% of guilty in the tax base, full apportionment decoupled from the 163 J extension of the interest expense. And I think, I explained it very well. It will affect, real estate firms in particular who tend to borrow a lot. So we will decouple from that what I would call a a higher allowance of interest rate expense. It would also decouple from bonus depreciation, but the legislature is not considering any other decoupling even though there's significant aspects to that. Just wanted you to be aware of that bill. I'll be testifying about that in a few hours. But in general, I don't have much to add to the presentation you just heard. I thought it was excellent. I thought it really laid out your policy choices for you very well And again, I would urge you speaking personally, I would urge you to focus on why not include 100% of this NCTI formerly called guilty in the tax base, use the apportionment formula to make sure Vermont is not overtaxing corporations and, and look again at section two fifty, the section two fifty deduction for, income generated from overseas sales and see if that's appropriate for Vermont. The office of, again, the office of statistical information that the IRS notes that both Pitti and GILTI are basically only affect the very largest corporations, doing business in Vermont. They did it's it's just not something which your smaller businesses are affected by one way or the other. Again, ninety six percent is paid by companies with at least $2,500,000,000 in assets. And yes, you will. I think as you conform to the 2025, thing, you will see a reduction in revenue, and I think you have to balance that reduction in revenue versus the added, compliance burdens on on your smaller and mid midsize businesses. And I thought you heard a pretty good discussion of those pros and cons already. I don't have anything to add to that. So that's my presentation, and I'm happy to answer any questions, if you have.

[Rep. Emilie Kornheiser (Chair)]: Oh, my first question, Bruce, is do you have written testimony that you could send to us?

[Bruce Fort (Multistate Tax Commission)]: I'd be happy to put something in writing. Thank you. I'm happy to do so.

[Rep. Emilie Kornheiser (Chair)]: Thank you. I appreciate that very much. You can send it to Sorcha who's been in touch with you about scheduling. And my second question is, do you have any thoughts on the small business stock offering section? I'm not using the right technical term because I should have scheduled this testimony in the morning, not the afternoon. Qualified small business. Oh, it's close. Okay. Do you have any thoughts on that?

[Bruce Fort (Multistate Tax Commission)]: I don't have any thoughts on that. The, you heard earlier this month from Carl Davis, of the, Institute for Tax Policy. And, his organization introduced a, wrote a paper saying that that small business thing is a it's overly generous, I'll put it that way, but I don't have any thoughts on it. I have not studied the issue.

[Rep. Bridget Burkhardt (Clerk)]: Okay, thank you.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: First, it's Charlie Kimbell here. Wondering, the governor of Massachusetts suggested a decoupling with $1.74. Did he say why? Was it a revenue question?

[Bruce Fort (Multistate Tax Commission)]: I haven't actually studied his his I actually haven't studied his his Her pronouncement. It just came out today, and it I can send that to you. It's it's in state tax notes. I can send it to, send it to the committee. But I just wanted you to be aware of that, that Massachusetts is looking at some decoupling right now. They're going their own way. And and whatever you do, I think you have to be aware of what Massachusetts is doing. You know, you it it may be you want to coordinate with what they're doing in terms of lessening the burden on your own businesses. I know you have a a lot of your businesses operate in Massachusetts, operate in in Vermont, and vice versa. But I will send you his, his the governor's statement.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: That'd be great. Thank you.

[Rep. Bridget Burkhardt (Clerk)]: Any other questions?

[Rep. Emilie Kornheiser (Chair)]: Thank you so much for your time. Tell New Mexico we said hello.

[Bruce Fort (Multistate Tax Commission)]: All right. Thank you.

[Rep. Emilie Kornheiser (Chair)]: Keep up

[Rep. Bridget Burkhardt (Clerk)]: with the good work.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: All right.

[Rep. Bridget Burkhardt (Clerk)]: Thank you.

[Rep. Mark Higley (Member)]: They have

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: great slack.

[Rep. Bridget Burkhardt (Clerk)]: We've talked about the flags. This is now the second election of the flag for that election to come

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: off. Too many.

[Unidentified Committee Member (pre–Tax Department segment)]: Many. Exactly.

[Rep. Emilie Kornheiser (Chair)]: Rebecca and Will, do you wanna

[Rep. Bridget Burkhardt (Clerk)]: Oh, I'm sorry, Representative Ode. He thinks that Michael Hackett could talk about the qualified small business stuff. Would Michael Hackett talk about qualified small business stuff? Okay, come on back to the chair.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: I'll have the safety net of my slideshow. I'm

[Rep. Emilie Kornheiser (Chair)]: worried about you and Teddy's coffee.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: My son has already spilled on these pants once

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

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: what specifically, I don't think you want me rambling on.

[Rep. Emilie Kornheiser (Chair)]: Conformity, not conformity. What I've read so far from ITEP and

[Rep. Bridget Burkhardt (Clerk)]: then I think a Treasury report from the spring

[Rep. Emilie Kornheiser (Chair)]: was that it was just significantly more expensive for the beds in The States than anyone anticipated. That would be the extent of my knowledge.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: I do see it quite a bit. So is it worthwhile going over the general construct? Or this is a provision that only applies to investors in C corporations. So all other business types do not produce this benefit for its investors. What it basically says is if you invest money in a business that has less than now $75,000,000 in gross assets at the time that you invest and you meet other certain requirements, including how long you hold that investment for, which is now I think five years with some staggering along the way. If you kind of make it to the end zone, I'll say, after you've covered all those hurdles, upon selling the stock in that business and exiting your equity position, don't pay tax on that gate. So we see a fair amount. Don't have the statistics and maybe somebody else would. C corps are not the predominant type of entity in Vermont.

[Amy Spear (President, Vermont Chamber of Commerce)]: Very much so.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: But of the ones that are here, many of them probably do have less than $50,000,000 in gross assets. Many of them have more than that. Do

[Rep. Emilie Kornheiser (Chair)]: they actually have tax liability?

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: So this is a liability on the

[Rep. Emilie Kornheiser (Chair)]: On the individual who Yeah, owns sorry.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Where you see this most in practical application is startup companies, of which we have a fairly burgeoning scene. And businesses will take a lot of care become a seat that have this vision of growing fast and scaling and getting a lot of investor dollars. They'll take a lot of care to make sure that they set themselves up so that investors can obtain this benefit. Because investors will often ask, are you QSVS eligible if I invest my money in your business versus these other businesses I'm looking at? And businesses will work with us to make sure that, yes, we want to have these benefits so that we can go raise money and fuel our growth. So the fact that the investor pays no tax is sort of irrelevant to the actual business itself, other than the fact that it makes them more attractive to get investment. Does that make sense? Does that make sense?

[Rep. Bridget Burkhardt (Clerk)]: So if you have to say does it kind of help businesses in Vermont startups, is it good for the economy to help startups start up in Vermont, do you have any pitch for this at all? I mean it's a big risk, that's what I would think if you're an investor, I don't know, maybe there's a company and it's already doing well and then it has other startups and this is just really not backing up as a startup point of view.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Probably broadly, yes, given what I see. We have a pretty healthy venture capital sort of micro community here. Certainly probably more than what people who don't live in Vermont would think is here. And the amount of conversations and questions that I get from clients and prospective investors about this topic tells me that people pay attention to it and weigh it in their investment criteria. I don't pretend to know exactly what that investment criteria is. I don't make them myself, but it definitely plays a role in that whole kind of scene. People pay attention to it and it dictates who they invest in, for sure.

[Amy Spear (President, Vermont Chamber of Commerce)]: Would I be right to think if a

[Rep. Bridget Burkhardt (Clerk)]: startup then is doing well, it would be paying other taxes?

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yes. Some startups, they're all over the map. Mean, some of them are profitable right away and they're just trying to scale and grow, and some are losing money and investing for years and years and years until a big payoff or something big comes down the line. But those businesses employ a lot of people.

[Rep. Emilie Kornheiser (Chair)]: Some of them. Some of them don't. There are lots of AI startups that employ very few people.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yes. I don't know enough to comment on that side of the business, that type of business in Vermont, but what I'm thinking of, there are some tech startups in Vermont, but there's more interesting consumer products, I think a seventh generation, things like that, types of businesses that we've worked with through the years that are more focused on that kind of stuff. Services and products that kind of reflect the Vermont ethos. Yeah. Thanks. That's my opinion.

[Rep. Bridget Burkhardt (Clerk)]: I appreciate it. Thanks.

[Rep. Emilie Kornheiser (Chair)]: Thanks for coming back to the church. After a quick delay, tax department, you are up. Made the mistake of opening a flood.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Up record, Rebecca Samaroff, deputy commissioner of the tax department.

[Will Baker (Legal Director, Vermont Department of Taxes)]: And Will Baker, legal director at the tax department.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: And I'm just going to share a document that should look really familiar because I totally lifted it from Pat, but just to kind of guide the discussion once I remembered how to share.

[Rep. Bridget Burkhardt (Clerk)]: It should be a really big button. Oh, there it is. Okay,

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: that looks like a thing. All right, so this is just the fiscal impact chart that I believe this committee saw in late January. I conflate the IRC section numbers all the time, so I thought this would be helpful for all of us. And I did actually just have a quote from Governor Healy in my speaking notes for today. And also to correct the record, she described the research and experimentation deduction as tax relief that's particularly important to Massachusetts' innovation economy. FYI.

[Amy Spear (President, Vermont Chamber of Commerce)]: So thanks for taking time

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: to hear from us today. I learned a lot today so far, too. So thanks for everyone else that's here. I just wanted to rewind a little bit and speak to this topic from our seat as tax administrators. Just reminding that from where we said, conformity is really strategic. It might feel like inaction, especially when the policy aims or quality at the national level aren't really resonating with us. But it's very proactive at our department. It's what our processes are built around. The strategy of conformity in these processes are not set in stone, of course, but they're really doing a lot of work for Vermont Coffers every day. And I appreciate the chair's foresight of having Will and I in last week to talk about some of those processes and what our compliance division is up to all the time. It was smart to separate these testimonies. Wasn't my idea, but it was the right idea. Yeah, so just like in the realm of administrative efficiency, I, you know, just wanna, like, say clearly on the record that the easiest path forward for us administratively and, you know, when I say us administratively, I also mean for taxpayers or, you know, professionals that bridge the gap is to link up to all federal changes. It's our starting point for income taxes, federal AGI or federal taxable income, depending on if you're doing corporate or personal. So linking up means that tax payers don't have to navigate additional additions, subtractions, complexity, longer forms when they're filing in Vermont at the federal level. Everyone has to do both. But there are some exceptions to federal treatment in our law today. And each one really does add a lot of complexity and length to the form. It increases the time it takes taxpayers to do their taxes, anecdotally increases frustration with taxpayers doing their taxes, and definitely adds to complexity on our end and kind of builds on compliance issues that comes from that decoupling. So with that, I'll just take a quick detour to the green box above me, special depreciation for qualified should actually look at one. Production property. Yeah, production property. Thanks. I was like, oh, there's peas in there. So there is one this is a new federal provision that actually is very, like, commingled in statute with the one area of one area that we're already decoupled from bonus depreciation. We currently decoupled from 168 ks bonus depreciation, and this is the new 168 n special depreciation. These are very married in statute. So, like, I want the main rub of my testimony to be conformed on everything except because we are already decoupled from this one provision. It makes a lot more administrative sense for us to also decouple from this 168 N. We can talk a little bit more about what these are. I can talk a little bit. Will can talk more if there's follow-up questions. But basically, the 168N provision allows businesses to immediately deduct 100% of the cost of new domestic manufacturing facilities, like a factory or something here in The United States. The intention is to encourage folks who do that activity elsewhere to do it on US soil. So the eligibility is pretty tight for this. To be eligible, work on a new production facility has to have begun no earlier than January. It has to be completed by the 2028 and operational by 2030. So it's a pretty tight and targeted piece of the bill. But it is built into the same IRC section as bonus depreciation. Depreciation. It just kind of effectively expands what's eligible for immediate depreciation. Which means, like, for Vermont filers today, in this decoupled section, they just take this tax benefit over time. They don't take it all in year one. So our decoupling from bonus depreciation certainly adds some complexity to our forms and our filers' lives. They have make a little adjustment every year to kind of true up what they did at the federal level in year one versus a slower depreciation schedule in Vermont. But at least if we decouple from this provision as well, all bonus depreciation will be treated the same for these filers. They're used to doing it for bonus depreciation now. We certainly wouldn't want them trying to split these costs that are all grouped on the same line on the federal form into two different depreciation schedules. That would be kind of a worst case scenario, I think, for everyone. So that'll be my one plug for decoupling. It's in the green box. Back on track. Conformity for administrative purposes, that's the main rub. So I mean, want to acknowledge, of course, that there's other considerations besides administrative ones. And yeah, I guess just really imploring the group as policymakers to at least balance those with some of the administrative considerations as well. Because on our end, the implementation end there, similarly to the policy end, there's real equity impacts. There's fairness impacts just based on our ability to actually do our jobs of administering this fairly. So that's kind of the

[Rep. Emilie Kornheiser (Chair)]: It's not equity impacts to your staff, but equity affects to taxpayers.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Yeah. Yeah. Yes, that's what I meant. But I was trying to see if I could spin it a level further. But yeah, no, that is what I mean. And that's because, yeah, so many of these provisions, regardless of their policy merits, they kind of nibble at the edges of policy that we're already linked up to. And that's part of the reason why JFO and tax analysts you see many of these numbers are fairly small. It's like small changes to an entity's tax liability across many, many, many tax returns that will add up to $1,000,000 or part of $1,000,000 So just thinking about each of one of these individually, lift of decoupling from these provisions is pretty much like a bear for the department, especially these ones that just nibble around the edges, like take a policy that already exists and then just changes it a little bit, because then we would be carrying a pre HR1 reality and a post HR1 reality of a provision. And that's kind of the difference that tax payers would be navigating. So this makes filing correctly we call it voluntary compliance, which is really our bread and butter. It makes that really complicated, which can just be because it's confusing. Taxpayers think they're doing it right, they're really doing it wrong. It can also be voluntary compliance gets a little shady over the course of years. This is so much work. I'm just going to toss in the federal number because I know no one's really going be able to tell what my real number was. I worry about creating a real tax gap, which one of our goals as an organization is reducing the tax gap. Conformity is a huge, huge assist in that goal for us. So that's just like in the voluntary compliance space, when you think about the proactive auditing of these deviations from federal corporate taxable income, for example, it's just challenging to justify based on ROI, dedicating staff time to learning about the minutiae here and then going to track them down when it's just a couple might be a couple bucks or a couple $100 of a change of taxable income across many, many returns. And it's not something that we can automate in the discrepancy program like the programs we were describing to you last week, because these are not always clean lines on our federal form that you can really build into our discovery programs. So there's two examples up behind me that are in red. These are the two examples of decoupling that would be the worst case scenario for us, the business interest deduction in IRC 163 j and the expensing of small business assets, IRC 179. These are examples of where the difference between pre and post HR1 are just very minute differences that aren't captured on federal forms. These would all be challenging, but those two would be really the most challenging. And just like I learned a lot from that last testimony and imagining our staff having to learn and that's what we're talking about here. I appreciated those questions because that's more complexity than we have to know for better or worse. We rely on conformity for a lot of these minutiae of tax administration in these corporate business income tax spaces.

[Rep. Emilie Kornheiser (Chair)]: Yeah. So I guess I'll know the difference between

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: those two things. Oh, yeah. Is it Is it an NIBDA? No problem. No, we really don't.

[Will Baker (Legal Director, Vermont Department of Taxes)]: But when you look at the red, the revenue impact across all filers here is actually, if you consider that's all filers, it's quite small, and so that means we would be looking for differences in the pre HR one one hundred sixty three J and the HR one one and sixty three J, and it would be a little amount for a lot of taxpayers, which for an auditor is the worst place. Far as return on investment for our audit programs, that's the worst place to be.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Rather Yeah. Have them working with Bruce Ford on our multistate audit program through FTC.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: Yeah, that's one thing. Chair, so if we were to decouple from 168, what would those figures look like? They're going to be in the negative

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Right, right. So that would avoid decoupling on that would avoid an estimated $3,510,000 decrease in expected revenue from conformity. So convenient that that one also is one of the bigger numbers.

[Rep. Emilie Kornheiser (Chair)]: It's convenient. It is. So just to finish that thought, it wouldn't increase RA, it would just prevent that loss of

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: the margin. Right.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Yeah, and in designing the forecast for this year, our state economists were aware of the conformity impacts, aware that this is going to be an active discussion and characterized dollar figures, this amount, as decimal vests, I think. But had baked in some vests. Good news. Yeah. The

[Rep. Emilie Kornheiser (Chair)]: international tax provisions. My understanding is every state manages that very, very differently. So I'm conformity, not conformity. We weren't conforming before.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: From a revenue preservation angle, it's nice that those are revenue ups, I And the type of further decoupling that Bruce was describing it certainly would a larger That's something that I haven't done a lot of research, I'm not sure, Will, if you can speak to this either about how aggressively that places Us national picture in terms of international income taxation. It's something I'd want to learn more about, and certainly not something I've talked to the administration about or anything.

[Rep. Emilie Kornheiser (Chair)]: I've been surprised at the similar advice I've gotten from a really wide range of tax people on that one. Really, very different philosophical places in the national scheme have gotten very similar advice. And so that's why I'm sort of curious. Yeah.

[Will Baker (Legal Director, Vermont Department of Taxes)]: Since it went in, since this whole scheme went in in 2017, Vermont has taxed guilty was called guilty at the time. And we have been more on the aggressive side, not because of any policy decisions that legislature made, but just because of our existing law at the time in existing law in 2017. And then our link up that year, We were Vermont and New Hampshire were on the more aggressive side just because of our history of toxic foreign dividends and subpart F income, which was another prior iteration of trying to trying to pull some of this income realized in other countries sort of back into The US base. Those are prior kind of attempts at similar thing. There have been other states that have looked at the Section two fifty thing, would be the next sort of, as far as taxation revenue would be the next piece. So we wouldn't be at the forefront. There are other states that are doing the same thing.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: That recommendation was 100% of NCTI and then a portion

[Rep. Bridget Burkhardt (Clerk)]: You call it like tech.

[Will Baker (Legal Director, Vermont Department of Taxes)]: Okay, like tech.

[Rep. Charles “Charlie” Kimbell (Ranking Member)]: A portion, I don't know, in our previous conversations, is a portion of the percentage of sales that are actually in

[Will Baker (Legal Director, Vermont Department of Taxes)]: Yeah, so there are two real things that we're talking about here. There's the HR1 25 changes, went from guilty to necktie or necktie. And we said that slightly kind of generally speaking on average expanded income coming into The US shareholder. So that's one thing. And then what Bruce Ford was talking about was in addition, in a dip further, separately decoupling from the Section two fifty deduction, which was a mechanism at the federal level to reduce the federal corporate tax rate on that income. So there's an effort globally to establish this global minimum tax. And this law was sort of The United States attempt to this. And so the general idea was to tax this income from other countries at a minimum amount, something somewhere between 1015%. But the federal corporate income tax rate is much higher than that in the 30s. And so what the two fifty deduction was, it just cut out half of the income so that it accomplishes the same thing. If you have this much income, this tax rate, you know, so it just cut out the amount of income subject to the 30% federal corporate tax rate to try to get out like a 10 to 15% tax rate federally. Of course, we don't conform to federal tax rates. So pulling in the two fifty was just something that came in with our conformity, a sort of intentional policy decision. And so what Mr. Ford was saying is, if you just do away with that Section two fifty deduction, that is there for federal purposes, and then offer the factor relief for all that income coming in, which we do right now anyway. That was his point. So that's really two different things, conforming to the new changes at 2025 and then the February, removing that, halving of the income. That is really a mechanism at the federal level.

[Rep. Mark Higley (Member)]: I think it goes along with what Charlie said. The Massachusetts governor and her actions, how does that affect the bond? Maybe you were just explaining that? It seemed to me that her actions will in some way affect perhaps our tax issues here.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Don't,

[Will Baker (Legal Director, Vermont Department of Taxes)]: Other than sort of geographic proximity, and there are companies that are operating in New England, in Vermont and Massachusetts, that could be. I think her motivation for that is to encourage the tech and innovation sectors in Massachusetts, those businesses that are located in Massachusetts. And so conforming to these provisions at the federal level assist those in state Massachusetts businesses.

[Rep. Mark Higley (Member)]: Keep from there.

[Will Baker (Legal Director, Vermont Department of Taxes)]: Yeah, sure. Keep them there. Encourage innovation if that company operates, know, has an opportunity to expand in Texas or Massachusetts, maybe it would expand in Massachusetts and that, you know, those sort of considerations.

[Rep. Mark Higley (Member)]: But it really won't have an effect on Vermont.

[Will Baker (Legal Director, Vermont Department of Taxes)]: I'm not sure that it would have an effect on Vermont if Massachusetts had that conformity. It would for those Vermont businesses that are engaged in similar activities.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Right. And that's kind of what comes up for me is the likelihood that regional companies are paying taxes in both our states just adds more variations. The way we do

[Rep. Emilie Kornheiser (Chair)]: it for the feds, way we do

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: it for Massachusetts, the way we do it for Vermont.

[Rep. Mark Higley (Member)]: I have one other question. Maybe this has to do with Mr. Hackett, with the foreign deductions. I did see something about breweries, and I was thinking about agriculture, a logging industry, we've seen a lot of logs in Canada. They also purchase grains from there and import it. Is that, maybe this Mr. Hackingwood addresses, but will that affect the cost of those products maybe coming to The US? I know we have, I know about the tariffs, I'll probably just add it to it.

[Rep. Emilie Kornheiser (Chair)]: Will or Rebecca, do you want

[Rep. Bridget Burkhardt (Clerk)]: to speak to that while you're there?

[Will Baker (Legal Director, Vermont Department of Taxes)]: I suppose, as Mr. Formig mentioned, the larger the business,

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: more

[Will Baker (Legal Director, Vermont Department of Taxes)]: multinational the business, they tend just to pay more of this debt to tax. So I suppose if it's a large business that is providing these kind of business inputs to Vermont businesses, then they're shouldered with that, you know, additional tax, I guess, all else equal. That's a that tax is an additional expense to that large company, and so it's possible that the prices will be higher for those smaller probably smaller Vermont businesses buying those inputs from those larger businesses. But that's, you know, the the Necti treatment is but one of so many considerations for price for those business implants.

[Rep. Bridget Burkhardt (Clerk)]: Do you

[Rep. Emilie Kornheiser (Chair)]: Any other lines you want to talk about?

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Well, I will say that I made these two red because in our internal discussions about how we would roll with various legislative decisions this session, those really jumped out at me and us as like, wow, that would be almost unadministrable, ordering unadministrable. I think there's probably a gradation below that too that I don't have as much detail to speak to. I did promise Will that I was gonna pause and ask him to chime in at various points, and I never did that. So if this is an opportunity that you wanted to add anything, please do. I think my just big takeaway is, and Will said it beautifully, changes that lead to small adjustments across many taxpayers are exactly why we love conformity.

[Will Baker (Legal Director, Vermont Department of Taxes)]: Would also add that the question about the qualified small business stock, it's an interesting consideration from a policy perspective on that because a lot of these changes, what what we're talking about is their their federal taxable income. So if it's a large business, that is their federal taxable income everywhere, And then the states sort of manipulate and tax their apportioned share of it. This qualified small business stock exclusion is benefit to that typically individual taxpayer who invests in a business. So, you know, entrepreneur, founder, investor type. Generally, that is gonna be taxed at the domicile of the taxpayer. So when we think about that, it's it's there's one consideration about Vermont businesses that might qualify for investors that has a qualified small business stock investment, but those investors could live all over the place. They can live in California, Florida, New York. And so for their they'll get the benefit federally, of course, but whether you get the benefit at the state level will depend on the state in which they live. So, if we link up to that, the benefit would accrue to the capital gain for Vermont tax purposes. So generally speaking, that is gonna be Vermonters who invest in these companies, no matter where the company is. It's not And there could be exceptions. And please, anyone can correct me if I'm wrong, but generally speaking, that capital gain is going to be taxed to the domicile. So it really matters less where the business is. It matters where the person lives. And so if we decouple from that, the capital gain would be taxed in Vermont, would be those people living in Vermont, in these businesses no matter where they live, no matter where the business is located. Some of them, of course, are probably Vermonters investing in Vermont businesses. Some of them are Vermonters investing in businesses that are located in other states. They would get the benefit if we linked up to the exclusion. If it's a Vermont startup and there was an investor who lived in another state, it wouldn't matter whether we linked up or not. For state capital gain purposes, it would matter in the state where they live. So there's considerations here. Do we wanna, you know, we wanna we, of course, wanna encourage businesses to locate in Vermont. But for this particular issue, the issue is on Vermonters who make these investments. And so that's what That should be the consideration here.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Thank you. Often don't think about, or, you know, like, I think meet with skepticism, you know, weighing down too heavily on, like if someone would move because of tax consequences, but there was like pretty direct guidance for an investor should do as an exit strategy from a Citicl, if you have these type of small business qualified small business stock exclusions. Was not from Gallagher. It was from another organization that was providing some guidance for these investors. And they're talking about, well, start planning twenty four, twelve months in advance of your exit strategy. Make sure you're domiciled in the right state to do it, which is pretty shocking for me to see on this work.

[Rep. Bridget Burkhardt (Clerk)]: I learned a lot through this.

[Will Baker (Legal Director, Vermont Department of Taxes)]: Can you see it more in California? If you've got an investment and you've got a huge game coming and you live in California, moving to Florida in the year that you realize that you exit the business, you realize that gain might help you for state income tax. Federal is what it is, but moving to Florida in the year or years around, exiting that business is that's kind of a no brainer there. We've talked about those kind of issues before.

[Rep. Emilie Kornheiser (Chair)]: I think it's a funny I mean, we are, of course, very focused on state taxes because that's what we all do. But state taxes are such a teeny tiny portion of a business or an individual's total tax responsibility, that it has to be quite an extreme situation to change someone's behavior.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Mean, this policy is designed for extreme situations. Absolutely. Like a $3,000,000 difference between California and Florida, for example.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Anything

[Rep. Bridget Burkhardt (Clerk)]: else you all wanna add? Really appreciate the time. Yeah. Thank you.

[Rep. Emilie Kornheiser (Chair)]: And if you want to unshare oh, there we go. You did. Next up, we have Joe Livingston from NCSL, who recently published a piece on this topic.

[Rep. Bridget Burkhardt (Clerk)]: You so much

[Joe Livingston (Policy Specialist, National Conference of State Legislatures)]: I for having really appreciate being here. I'm also planning on sharing my screen if I have that capability.

[Rep. Emilie Kornheiser (Chair)]: Can you just wait one second? Thank you. Can we turn us the volume slightly on Joe? And can we lower our table bench volume too? Because Joe's

[Rep. Bridget Burkhardt (Clerk)]: a little hard to hear.

[Rep. Emilie Kornheiser (Chair)]: Great. Thanks. Back to you.

[Joe Livingston (Policy Specialist, National Conference of State Legislatures)]: How how is the audio coming through now?

[Rep. Emilie Kornheiser (Chair)]: It's great. Thank you.

[Joe Livingston (Policy Specialist, National Conference of State Legislatures)]: Great. Wonderful. Let me see if I can share my screen. Okay. That should be coming through if I can get a thumbs up on that. Yep. Wonderful. Okay. Let me get one other thing in place and then I will begin. Okay. Well, welcome everyone. Thank you so much for allowing me to be here. Just for the record, I'm Joe Livingston. I'm a policy specialist with the National Conference of State Legislatures. And just to remind everyone, I think all of you, many of you have worked directly with our organization, have seen you at Summit and some of you participate in our state and local tax task force. We are a nonpartisan bipartisan organization serving all 50 state legislatures. That means that we are always available to all of you members to provide analysis. I think our specialty is really giving you the 50 state landscape of what's going on, which can be hopefully helpful as you seek to make connections and ground what you're doing in the bigger framework of what other states are doing. We don't take an advocacy position and work to try to provide a balanced perspective of what's going on across the states. So a lot of what I'm going to cover has been covered, particularly the beginning of my presentation on some of the HR1 changes. So I'm gonna really breeze through those and then try to get us quickly to looking at what's happening in the other states. So as we talked about a little bit about the HR1 impacts, we'll talk about the revenue implications and give a few specific examples of those, and then we'll put Vermont in context there. So again, these are the areas I will not go into great detail on. We've discussed in very good detail with folks who are more expert than I am on some of the major changes that are flowing. This will be here for the record. Do try to spell out all my acronyms and everything else. So hopefully this could be some very basic background on these changes on the corporate side. And on the individual side, I know that the focus here today is not on this section, quite a few changes as well. One thing I do wanna point out because we've studied the issue on the individual taxes. Think when HR1 was initially passed, a lot of the reporting that was coming out, a lot of the media attention said, these are going to be flow through taxes on the individual side and particularly the tips and overtime and the personal car loan interest, which I also caveat here is so many restrictions that I'm not sure this is gonna be a major deal for anyone. But in fact, these are below the line, very specifically, line 11 is the AGI and these come at around, I think line 13 from the schedule one. And as the note says there, these below the line taxes may still impact state revenue depending on what the starting point is. And every state uses a different starting point, not every state uses AGI, states have various amounts of add back. So as we say with everything on these tax impacts, it's very specific and individualized to the state and their policies. The revenue implications for states are often quite significant. Here are a few highlights of what states believe the impacts will be. And again, those impacts are very specific to the degree to which the state conforms to the federal tax code, to the IRC and how much they have previously decoupled or have chosen to decouple. But in DC, can you see an estimated loss of over $593,000,000 is what they came up with which prompted an emergency decoupling action last year in Oregon. They believe, and this may be the heaviest hitter nationally at least from these estimates that they could lose up to 900,000,000. Delaware, $222,000,000 in 'twenty six and another 107 in 'twenty seven. And some states we should preface to have adhered voluntarily to the tips and overtime deductions, which of course would have a revenue impact. But those, I don't think we can assign explicitly to HR1, example would be Michigan deciding to carry the tips and overtime, but because it's below the line, they didn't have to do that. They voluntarily essentially chose to make that a priority. And then this was from the Vermont. We were just looking at a different version of it. I think this version might be slightly outdated based on what the previous speakers showed, but it shows that some of the key areas and special depreciation being one of the biggest ones and the full expensing for research. Another example of where we're seeing that significant loss directly tied to Vermont if it should conform and link up to these changes. So then we get into, here's some just basic definitions of conforming and decoupling. I put at the bottom that these deductions and tax policies on conforming and decoupling are very unique per state and they're often not easily categorizable, we try to do our best. And this is what the map looks like in twenty twenty five states with rolling conformity, static conformity as Vermont. And then yellow, depending on how you look at it or golden over that appears may need to be larger than it looks just because there are so many nuanced decoupling actions and adherences. But this in a broad scope gives you a sense, a flavor of what the landscape is. Perhaps more interesting right now is what states did in 2025. And so does it include some of the things and I'll briefly discuss those in the next slide of what's under discussion right now for 2026. Most states did not do anything in terms of conforming or decoupling. Of course, there are some states without an income tax

[Rep. Emilie Kornheiser (Chair)]: and what did we do?

[Joe Livingston (Policy Specialist, National Conference of State Legislatures)]: I'm sorry? Oh,

[Will Baker (Legal Director, Vermont Department of Taxes)]: that's great.

[Rep. Emilie Kornheiser (Chair)]: Yes, okay, thank you.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Yep. Okay.

[Joe Livingston (Policy Specialist, National Conference of State Legislatures)]: Yeah, and so in some cases we see the green states where there was some type of conformity or decoupling change those were made prior to HR1. So a number of states have sort of looked at their legislative calendar and looked at what was coming down the pike and said, we're gonna back up, we're gonna put that date earlier in time, and then we'll reevaluate once we actually know what it is we might be adhering to. And then a number of states had either special sessions or were still in session and were able to make changes after HR1. Think this map will look different in Go a few ahead.

[Rep. Emilie Kornheiser (Chair)]: Joe, just if you present this map in other states, I just wanna offer that the way you have it colored, it looks like Vermont did something very purposeful related to HR1, and we didn't. We actually just every year go through a conversation about conformity. Sure.

[Joe Livingston (Policy Specialist, National Conference of State Legislatures)]: No, that's a

[Rep. Bridget Burkhardt (Clerk)]: We good way to

[Rep. Emilie Kornheiser (Chair)]: have do technically a static conformity that functions as if it's rolling conformity.

[Rebecca Sameroff (Deputy Commissioner, Vermont Department of Taxes)]: Yeah. I don't know

[Rep. Emilie Kornheiser (Chair)]: if you like wanna make us purple or whatever color you want, but the green feels like we like we're explicitly preparing, but we're just sort of always doing that.

[Joe Livingston (Policy Specialist, National Conference of State Legislatures)]: Yeah. And that's a good point that you could see Alabama down there and did something, its change was related to a decoupling action related to TCGA that had nothing at all to do with HR1. So yes, we can certainly do a better job of contextualizing whether this was in relation to or not to HR1 or preparation for it. So I appreciate that point. And then pulled some additional notes as I talk through this. There were a lot of state actions in 2025, as we just discussed. In many cases, it was holding fixed IRC dates often to 12/31/2024. Pausing broad conformity until their fiscal projection could stabilize so that they could kind of do additional analysis. Then where we saw targeted decoupling, most of that was around these areas of research expenses, bonus depreciation, the earnings before interest, etcetera. Those were the big areas that we saw. You can see a few examples where California, where they updated the conformity, Colorado put QBI as an add back and decoupled from FDDI after they identified the HR1 revenue gap. Delaware limited bonus depreciation decoupled and DC had a number of emergency decoupling efforts as we saw their revenue loss was pretty high, Hawaii did the updated conformity. And right now, and we'll look at this a little bit more on the next slide, but I do wanna note that in addition, we talked about Massachusetts, there are a number of states that even in the last few weeks, last month have been actively considering additional efforts. Arizona, their HB 2,785, if it moves forward, they wanna go toward more alignment, including aligning with the income tax, the overtime and tips compensation similar to Michigan. So voluntarily adding that in, even though it wouldn't automatically flow to the state, creating new deductions for seniors aged 65 and older, they want that to flow through, as well as several others. In Virginia, they're looking through HB nine seventy seven at reverting to fixed date conformity, their date to 12/31/2024. So essentially not passing through most of the items from HR1, that's still in deliberation and Oregon is discussing a wide range of measures, particularly given how at least their fiscal analysis, how dire it looks on their end, the impacts to their state. Most of those would be on corporate side. And looking at the next slide, just kind of categorizing what different states have done. And, you know, again, I hope you're comfortable, but if not, I'm happy to change it on what we do with Vermont with the static conformity dates updated. We tried to put that into the most factual way of the date was updated, but But this is a good here you get a kind of flavor of what states have done in each of these categories and where your company might be should you decide to take certain decoupling actions. I'm not gonna go through these each individually. You can see that a lot of the actions are around bonus depreciation, which makes sense given that seems to be where a lot of the loss comes from. And then certainly on the research and development side, those are sort of the two big ones. And then when the static states are changing conformity, they're typically changing it to the 2025, 2024, and then deciding having these further discussions like you're having about what you want to do with individual provisions. And then as we saw most of the revenue loss in Vermont is related not to the individual side, you'd be in very similar company should you move forward with any changes related to research expenses, the 100% bonus and the additional corporate measures, these are the areas where we're seeing most of the action, which makes sense. I mean, areas, I think there's been reticence by states to accept for a few Michigan and Arizona so far to adopt the individual measures if they don't need to because they don't immediately flow through. I think we're seeing many states sort of take a, well, we're gonna not do anything here action. And that way they don't have to get into the politics of aligning or not aligning from HR1 directly, but in some cases, depending on the individual needs and the capacity of state governments, they may look at actions like Michigan and Arizona's potential of voluntarily aligning. So that's kind of the 50 state picture. These slides are available for you. And as always, we are available to support any of you. We are gonna continue some of these discussions at our future meetings, including our summit in Chicago, and we are always available for questions and I'll take any that you have now.

[Rep. Emilie Kornheiser (Chair)]: Thanks. Do you wanna, oh, great. Do you wanna make your face

[Amy Spear (President, Vermont Chamber of Commerce)]: a little bigger?

[Rep. Emilie Kornheiser (Chair)]: Hi, Any questions from anyone?

[Rep. Mark Higley (Member)]: Not at the

[Rep. Emilie Kornheiser (Chair)]: moment. Okay. I think we have a lot of digesting to do and might reach out to any of the many witnesses we've had today to ask some more specific questions as we dive into more details. Thank you very much for your time, Doug. Really

[Rep. Bridget Burkhardt (Clerk)]: appreciate Of course, anytime.

[Rep. Emilie Kornheiser (Chair)]: I'm sorry I didn't pick your presentation.

[Joe Livingston (Policy Specialist, National Conference of State Legislatures)]: No, no, no, please. That helps us improve.

[Rep. Emilie Kornheiser (Chair)]: Folks, I think maybe it's best that we all just sit with this on our own a little bit and digest, and then we come back to the table to talk about what direction we're all imagining? Okay, great. So then I'm going to end our time together for the day. We're on the floor at 03:30. Please do take a minute to write down notes to yourself before all of our brains move on to whatever the next topic is.

[Mike Hackett (Tax Partner, Gallagher Flynn & Co.)]: Again,