Vermont Legislature SmartTranscripts:

[Emilie Kornheiser (Chair)]: Good morning. It's Ways and Means, February. Today, we are going to take some more testimony on corporate link up. We have a lot more information available than we did last time that Pat and Kirby will take us through, as well as proposal I'm making to the committee. And then we have testimony at 10:45 on age eight eighty six from two national experts. And then after lunch, we're doing a first walk through of a bill from the general and housing committee that we're going to need to spend a great deal of time on over the next two weeks. And then we're going to take up H750. And I think we have a couple bills on the floor today. Representative Masland and Waszazak.

[Representative Rebecca Holcombe (Member)]: T. B. Field.

[Representative Carol Ode (Member)]: Hold on. Okay.

[Emilie Kornheiser (Chair)]: With that, it says Kirby's not fat on the agenda, but we're going fat than Kirby. Fun times. Really mixing it up, team.

[Representative Edward "Teddy" Waszazak (Member)]: It's so zany. It's all zany. We're plunging.

[Emilie Kornheiser (Chair)]: Oh, may I take your eyes here?

[Representative Carolyn Branagan (Member)]: No. No. My bill. Oh.

[Patrick Chittenden (Joint Fiscal Office)]: Good morning, committee. Am Patrick Chittenden with the Joint Fiscal Office. I love you. Represent. There should be a document under my name on the committee's website, but I'm also going to share on the screen. Okay, so what I'm going to talk about today is, as the chair mentioned, we've had a chance to review the estimates that you all saw back in January about things that are flowing through. Things have changed. I don't want to sort of maybe contextualize the numbers that we'll be looking at so you can understand sort of some of the decision points you're going to have coming up. And then, yeah, from there, I'll remind you what some of those provisions are doing. We'll look at some numbers associated with the language that Kirby's got. I'll let him go into a little more detail, but I'll list out what those things are. So thinking about HR one, remember there was a lot of discussion about whether something is above the line or below the line because Vermont does couple up to federal definition of

[Emilie Kornheiser (Chair)]: I'm just gonna jump for one second. I I know we've gone through this before, folks, but this is actually, like, new news that we're about to get. So Yes.

[Patrick Chittenden (Joint Fiscal Office)]: So remember all that with the stuff that flows through, with stuff that doesn't flow through. We don't always have great visibility into things that are done on the federal form, but ultimately end up as our starting point in Vermont. So that's an area where we've gotten a little bit more information. But here, I've listed, and we'll go through all these again, but list out all the things in the business corporate world they're expected to flow through, and then the one provision for personal income taxes. So I just want to let you know why we're updating these numbers. Back in January, like I said, we had very limited information, a lot of federal data, very difficult to get. We have been working together with the tax department to roll these new numbers out. It's really three elements as to why we felt it appropriate to update these numbers. We have additional information, including federal updates on receipts. We've been monitoring other states and what their revenues, pictures are looking like as HR1 has started to flow through the system. Also looked back at a few of the estimates and updated some of the methodology to using some assumptions we think are more appropriate. And so we'll dwell on this table for a few minutes. This is all the same provisions that we saw prior. I guess it does require some context as to how do you think about what these numbers are showing. So under current law, we've talked a lot about conformity and how that works for static, but we update traditionally every year to move back to X State Forward. Currently, our static date is three hour one. So really the decision whether to link up or not is an active decision that you as legislators will need to make. And what this table is showing here is if you just move up the conformity date so that you're pulling in all those provisions for HR1, this is what the revenue impact would be. This would be not accounted for in the forecast because those are based on current law. And I think that your colleagues over in the appropriations committee will be very interested to see what you decide to do because if this all flows through, we're estimating that that's $21,000,000 here that you would need to account for in the budget.

[Representative James Masland (Member)]: That $18,900,000 loss in domestic R and E is a big change from our previous discussions. Can talk about where why is that? I know you said updated information from other places, but that's a shocking number.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, so there's a couple of things going on. We did try to use the state's credit as sort of a proxy to get at some of the behavioral change. What the problem ended up being was that there was a scale of magnitude. So we were maybe appropriately capturing behavioral change, but at the same time, not capturing just how much or how significant this deduction is. What we've seen in a lot of states really is that those who are not conformed or static to previous years and therefore not going HR1, they're actually seeing not much of a big change in their corporate income tax revenues, but of the states that are conformed, they're seeing larger decreases than they maybe were expecting otherwise. And so some of that information as well is leading us to believe that this is more significant than we'd initially anticipated.

[Representative Rebecca Holcombe (Member)]: I don't know if

[Emilie Kornheiser (Chair)]: folks remember the last quarter of last year, there was a big drop in corporate revenues, and we weren't sure what it was attributable to.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah. And that and that exact thing is something we've seen happen in other states, particularly the ones that are conformed.

[Representative James Masland (Member)]: You're saying last quarter of the

[Patrick Chittenden (Joint Fiscal Office)]: Right. Okay. Yes.

[Emilie Kornheiser (Chair)]: Can you talk more about our colleagues and appropriations? And what you said about there being a $21,000,000 loss for this and how

[Patrick Chittenden (Joint Fiscal Office)]: So basically, basis for the budget ties back to the consensus forecast. Tom and Jeff go through, create the consensus forecast. Those figures are the basis point for developing the budget and making sure that the dollars you're spending fit within what the consensus revenue is forecasting. We're actually going to bring it. We need the money coming in for it to go out. Really what that means, and I mentioned this, the forecast is done based on current law, which for conformity usually doesn't really matter. It's not a huge deal in most years. Year, the active decision to link up will create a revenue loss, which is not accounted for in the consensus forecast and therefore needs to be considered by the appropriations committee in building the bucket.

[Emilie Kornheiser (Chair)]: And one sort of piece that we are gonna need to grapple with and that the tax department will come in on is the governor's budget, proposed budget, was based on not this loss. Governor's budget did not account for this loss of $21,000,000 of revenue, but the tax department has But the governor's policy proposal has been working towards conformity Because they were working with sort of the same numbers that we were at the beginning of the session of it just being like, know, a million dollars matters, but is also a very different conversation. So I think, so we're gonna have tax in once they're sort of, they've come to terms with this and they're ready to come in on it.

[Representative Charles Kimbell (Ranking Member)]: Sure. Could you give us a framework on when HR1 actually takes effect, and are we going to fix the war as of the April deadline as well, instead of how it's affecting states per month?

[Patrick Chittenden (Joint Fiscal Office)]: So HR1 was applicable to tax year '25. So that stuff that's coming through this April. So, yes, we will know more, definitely. But I think more so the comment message I'm trying to convey is if you do, let's say, just link up this revenue loss is not accounted for in the budget process. So yes, we will know more. The more time that it goes by, the better information we get. I mean, you can already see based on what I first shared with you all to today, we've already gotten a lot more information, a lot better information. But yes, it's true. The more time we have, the better information we get as things roll in. And those filing deadlines will, of course, be very valuable.

[Representative Bridget Burkhardt (Clerk)]: So that 21 mill goes somewhere. It goes back out into the economy and circulates around the business world and some of it is invested. Maybe most of it is invested, I don't know. Does anyone know? And can we estimate the value of those changes, if there is any, in that circulation of the 21,000,000?

[Patrick Chittenden (Joint Fiscal Office)]: So there's a couple of different things, I guess, that can be said about that. One thing that I would remind the committee of is the single sales factor apportionment. So a lot for a lot of these corporate related taxes we have here, the parent company, the unitary filing group, yes, they'll be saving some money on their taxes, but they could be located in Texas or Delaware or So it's where is the money going back into the economy and circulating? It could be somewhat in Vermont, especially if they're Vermont based, but it could not necessarily stay within Vermont. But yeah, when corporations have higher profits, there's several different things they can do, dividends, stock buybacks, capital investment, research and development type stuff. The money doesn't just stay in their pockets, I guess. Think we're agreeing, maybe. But I would remember this, the single sales factor portion or piece of it.

[Representative Carolyn Branagan (Member)]: Okay, good. I had not pointed

[Patrick Chittenden (Joint Fiscal Office)]: out, so

[Representative James Masland (Member)]: In your previous testimony, you had talked about, was it a joint council on taxations that tries to estimate what revenues, what committee? I think it's joint, Yeah. JCT. JCT. Okay. JCT. About what the potential impact would be in terms of revenue growth from some of these tax activities. And I think there was estimates in there about what behaviors might be.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah. When we were looking at some of the estimates, it became kind of evident to us that they were using some kind of underlying growth metric. It wasn't necessarily spelled out what they were doing exactly in their methodology section of the report. But there there are some assumptions and and their their their estimates go over a much longer time period. I think it's maybe ten years. In a one or two year snapshot, I don't know if you necessarily see that starkly as you would over a broader time horizon, but there is some accounting for that, what they've done, yes.

[Emilie Kornheiser (Chair)]: And so I guess to say sort of, like, long story short, from my end, this is a very different conversation than it was before. And I believe the tax department's gonna be treating it that way as well. So just wanted to

[Patrick Chittenden (Joint Fiscal Office)]: The tax department has been very valuable partners in a lot of these updates.

[Representative Rebecca Holcombe (Member)]: Okay. Before,

[Representative Charles Kimbell (Ranking Member)]: I was like,

[Representative James Masland (Member)]: I asked $3,000,000 why change everything? $21,000,000 changes the perspective.

[Emilie Kornheiser (Chair)]: And $34,000,000 in a year that we're expecting Lowing of revenue, is it?

[Representative Rebecca Holcombe (Member)]: Your shield, yeah.

[Representative Carolyn Branagan (Member)]: So if I understand it, if we were to decouple from HR1, how much more how much money would we actually give people from

[Patrick Chittenden (Joint Fiscal Office)]: the state of

[Representative Carolyn Branagan (Member)]: the art?

[Emilie Kornheiser (Chair)]: That's a great question. Should we go to the next slide?

[Patrick Chittenden (Joint Fiscal Office)]: That's not quite the next slide. I can just quickly So there's two parts to that question. There's decoupling from HR1, which would essentially be being worth treating or acting like it never happened and not conforming, not moving forward. If we were to do that, essentially all these numbers would become zero, because we're just sticking with previous law. Decoupling from the sections and the U. Code entirely, in many cases, would actually have revenue increases to the state, which we will see in a look around.

[Emilie Kornheiser (Chair)]: One of the pieces There are administrative concerns with just attaching ourselves to a date certain rather than decoupling and creating new definitions. And we heard testimony about maybe how California had done that and how confusing it was for them to catch up from it a bunch of years later. And when we did this previously with personal income, we didn't do a date certain. We sort of revised some of our definitions in order to have our tax policy to be working consistently.

[Representative Rebecca Holcombe (Member)]: Sorry, I've gotten a little bit slow this morning. Can you just say another few words about the assumptions behind the $18,900,000 How did that arise? So, are all assumptions based on folks that are paying taxes in Vermont right now? I'm just trying to understand the balance between assumptions that are Vermont specific and assumptions that are based on other states and how those come together to get to that AT and funding.

[Patrick Chittenden (Joint Fiscal Office)]: So there's a few different parts. Part of it is we're actually We've been keeping our eyes on what other states are reporting in terms of their monthly collections. We've been looking at some of their estimates that other states have been doing, and with particular interest for those who are rolling conformity for corporate income taxes, meaning that they don't have to do anything to link up. It's just automatically it's an automatic trigger. But and and also, I think that some of our assumptions around the magnitude were a little bit too conservative back at the time, and part of that is informed by what we're seeing in other states, and also the federal government has been publishing some information on receipts. We do, each quarter, get a little bit more information. It's incremental, but each quarter, because that's the basis that a lot of corporations do their estimated taxes on, which is a reflection of their anticipation of tax liability. So, there's a few different things informing our decision to adopt it. I think that it's a little bit more consistent with what we're seeing in our revenue data in the corporate world, and also what we're seeing happening in other states, particularly those that are rolling in corporate. Is that kind of

[Representative Rebecca Holcombe (Member)]: Yeah. I guess. I I'm still just yeah.

[Patrick Chittenden (Joint Fiscal Office)]: And and I guess one methodology change that we did explore a little bit was our how we're scaling. You know, because scaling is always not the best. It's not what we prefer to do. And in this case, you know, when we shifted to a a scaling approach rather than, looking at some Vermont specific data. That also is something that contributed to the number increase quite a bit. Scaling is not always our preferred, but the Vermont specific information we had at the time was, we think, maybe not as appropriate as it could have been.

[Representative James Masland (Member)]: Just to be clear, so scaling means you're looking at the total potential impact across the country and then scaling back to what Vermont's percentage may be based on that?

[Patrick Chittenden (Joint Fiscal Office)]: Yeah. Not our preferred method in most cases.

[Representative Charles Kimbell (Ranking Member)]: So you talked about rolling conformity in other states, we must be doing the same thing too, I mean our state is conformed, last quarter has conformed to HR1, correct?

[Patrick Chittenden (Joint Fiscal Office)]: No, so in statute right now, and Kirby might be able to talk on the specifics a little bit more, but in statute right now, we are linked up to a date that is prior to HR1. We are linked up to federal definitions and codes that reflect pre HR1 treatment of all these different provisions. But the other thing also is that, so Vermont is technically a static state, which means that every year when you conform and link up to federal tax law, it's active decision that you're making. How it usually ends up working out is that Vermont links up each year. So it's almost kind of like we're on a rolling basis, but you are actively doing it each year through legislation. It's typically in the miscellaneous tax bill, the link up language. The last year, there wasn't one. I think it may end up in the budget, that language. Yes. Yes. Okay. But it is So we've In current law, current statute, we are linked up to a prior a date prior to HR.

[Representative Charles Kimbell (Ranking Member)]: And when we as a legislature do our whatever we're going to do, what what date does that go into effect?

[Patrick Chittenden (Joint Fiscal Office)]: What is would you sorry, may I ask Kirby a question?

[Emilie Kornheiser (Chair)]: Yeah, of course. And I also we're going hear from Kirby after Pat, but yeah, Kirby, do you want to speak to it all?

[Kirby Gaitlin (Legislative Counsel)]: Kirby Gaitlin, legislative council. That link up, so last year's link up was to 2024. And so that's where we are right now as far as helping the different state of overall laws. Linked up to the federal conducts of 2024. H. One passed in the 2025, so it's not part of our link up right now. Was part of the budget last year, the budget became effective July 1, but that's typical. So that's when we would have linked up. We would have linked up to 2024 on July 1, So now that's where we are. And so if we do a link up this year, I'll go into this later, but you can selectively decouple but then link up to the whole thing of, right? So if you link up this year for all the things you don't decouple from, then it would be to 2025.

[Representative Charles Kimbell (Ranking Member)]: Thank you, and I guess the reason I'm bringing it up is I just wanted to have some idea as to where corporations stand with their decision making. I don't want to have them assuming and waiting for something, and then us throw a wrench in the works quarter through the process.

[Emilie Kornheiser (Chair)]: I think it's a particularly confusing thing that doesn't come up all that often. So, because we have static conformity, but we have a pattern of conforming every year, I think some corporations assume we'll just do that every year, but we do need to pass statute on it every year. And there certainly are years where we haven't or we had very stern conversations with the tax department about how they need to be careful about how they're communicating about it. Maybe four years ago, we had that Stern conversation. That And there was a really good article in the New York Times about how sort of nonpartisan decoupling and coupling seems to be around the country right now as each state grapples with this. And I think NCSL had an article about it as well. But because of sort of the way that the federal bill passed, I think corporations are on uncertain footing in every single state right now, because states that have had rolling conformity or decoupling, which is sort of a bigger deal than us who do actually make the decision every year.

[Representative Rebecca Holcombe (Member)]: Exactly. Yeah.

[Emilie Kornheiser (Chair)]: It's super uncomfortable, though.

[Patrick Chittenden (Joint Fiscal Office)]: Shall we go onward? So next section's if you are interested. These are all sites you've seen before, but it was just them. It's just to remind you or refresh you on what each of these provisions is actually doing, the ones that are flowing through. So the big one, the one with the largest increase, the domestic research and experimental expenses. What HR1 does was change how corporations calculate what their deduction amount is. And so just as quick history, starting in 2022, CJA, these expenses were required to be awarded over five years, which meant the benefit from the deduction was realized incrementally over that five year period prior to TCJA. And that starting in 2022, I should say 2018. So prior to TCJA, incurred R and D expenses could be deducted immediately. So didn't have to spread it out over five years. The way the HR1 is doing is it's going back to prior TCJA treatment. You can deduct all of these expenses from your net income right away. And so in effect, what this does And it's also retroactively allowing you to deduct expenses going back to 2022. What in effect that's doing is it's piling a whole bunch of R and D expenses. It's front loading it. Over time, sort of in the longer view, you would expect this number, sort of the loss revenue or decrease in revenue to decrease over time because you're really front loading a lot of those expenses when you're allowing them to take it right away. And so, you all decide to link this provision up, this is something that will float through, as you saw at the table, and have a large early year impact for the state.

[Representative Rebecca Holcombe (Member)]: Representative Ode?

[Representative Carol Ode (Member)]: Thank

[Representative Rebecca Holcombe (Member)]: you. If I look

[Representative Carol Ode (Member)]: at the slide before then, right now

[Representative Rebecca Holcombe (Member)]: it's a big revenue loss

[Representative Carol Ode (Member)]: And then in 'twenty seven, it's a big revenue loss. Won't that start

[Patrick Chittenden (Joint Fiscal Office)]: pointing If we had maybe even three more years, would start seeing in 'twenty eight, it would start decreasing over time. So, it's really those first two years for a lot of those costs. Would expect to be front front

[Representative Carol Ode (Member)]: load this year, and then I can't take a deduction now for four more years. I would think it would go down a lot faster.

[Patrick Chittenden (Joint Fiscal Office)]: If you have more, if you keep spending money on research and development, then yes, it's kind of how it works now in the sense of you have these expenses in 2022 on R and D, you've been amortizing that over five years, but let's say, so in 2022, you also had some in 2023, that's another five years you spread out four, so every year when you have these expenses, you can't take it.

[Representative Carol Ode (Member)]: You know, does the tax department know which corporations are taking advantage of this and kind of growing their companies in Vermont? I mean, this is a big help for Vermont companies.

[Patrick Chittenden (Joint Fiscal Office)]: We we don't have great visibility. I actually have inquired, and it seems to not really be available, the federal forms that are attached to the state forms that we get here. So there's not very much visibility in terms of what companies or what type of companies are doing it. But I will also, again, kind of coming back to the single sales factor portion that remind everyone that this doesn't have to be R and E expenses in Vermont. Just R and yeah. The activity could be happening anywhere else, really.

[Representative Rebecca Holcombe (Member)]: Do we have any And we

[Representative Carol Ode (Member)]: still don't We don't know that either.

[Emilie Kornheiser (Chair)]: No, but we did ask the chamber that very explicit question, and they also had no idea. Okay. But the majority

[Representative Rebecca Holcombe (Member)]: like competitiveness, and I speak I'm concerned about that.

[Emilie Kornheiser (Chair)]: So let's I think more will come.

[Representative Rebecca Holcombe (Member)]: It'll be exciting. Happy, exciting.

[Emilie Kornheiser (Chair)]: I think so. I think you'll like it. I don't know.

[Patrick Chittenden (Joint Fiscal Office)]: So yeah, we're gonna go through just reviewing or refreshing on what was in HR one, and then I'll also talk about some other provisions which might speak to your interests. So there's the amended limitation on business interest deduction. HR1 expanded that limit of which corporations can deduct interest paid on loan for business purposes. There are three limitations that cap how much of this you can take. But what HR1 did was it increased the percent or the portion of the business interest that you can deduct from 30 to 50%. So previously that interest that you were paying, deduct you 30% of it, now you can deduct 50. Again, we're not coupled to this provision, so if we link up, that will flow through. There is a limitation on expensing for depreciable business assets. This is specifically geared towards small businesses. So increases the maximum amount that a taxpayer may expense the cost of a qualified depreciable asset in lieu of recovering those costs through depreciation. In many instances, I think the depreciation window is usually like thirty nine years for something like a building, factories, other types of durable assets. So previous to HR1, these businesses could take sorry, they could expense 1,000,000 of that rather than depreciating it over a long window right away. What h one is it expands that from 1,000,000 that you can expense to 2.5. Again, this is an area where we are coupled linking up would cause it to flow through. And I guess, actually, so Rebecca, Deputy Commissioner Sam was in here a few weeks ago. They had a table with some of their thoughts on coupling and decoupling. If you remember from their table, this provision, the business interest deduction, and this provision, the depreciable business assets, they had highlighted as read as very difficult for them to administer if we were to decouple. But that's not What do you mean, Darn? I'm just letting the chairs know I have a question.

[Representative Rebecca Holcombe (Member)]: But

[Patrick Chittenden (Joint Fiscal Office)]: that's not the case for the special depreciation for qualified production property. This is in a sense like a bonus depreciation, and that is something that is already decoupled from. So that was one where they had a I think it was a red box around it or green box around it, actually, saying that that was something the department was asking for consistency purposes because we already add back bonus depreciation to decouple from. And so what this one is specifically is it allows a deduction for qualified production property of a 100% of its cost adjusted basis. So you can basically claim all the depreciation right up front for a qualified production property. Has to be used for qualified non residential. There has to be qualified non residential properties in manufacturing or production of tangible personal products, and it's further limited to agriculture, refining, and chemical production. And it's it does have a specific time window. So the change applies to properties built or bought after 01/19/2025 and before 01/01/2029. So yeah, this is another one where you need to make a just active decision whether to decouple or not.

[Representative Rebecca Holcombe (Member)]: Representative Masland on the level?

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, a couple of slides back. Floorplan financial interest. Okay. So I didn't know. Is one that seems to be specific to car dealerships. Oh, okay. Because they will typically get their inventory on credit from the manufacturer. And it makes sense now why they're always pushing so hard to get cars off the lot, because the longer they're sitting there, the longer that they're incurring interest that the dealership hopefully gets paid back.

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

[Patrick Chittenden (Joint Fiscal Office)]: I learned things sometimes when looking through this stuff. For a week.

[Emilie Kornheiser (Chair)]: I went to a really good podcast about the business model of car dealerships and I'm

[Representative Rebecca Holcombe (Member)]: happy share if you're interested in representing Lumsac. Me too. I'm sure we're be

[Representative Edward "Teddy" Waszazak (Member)]: as well. More out curiosity, January 19,

[Representative Carol Ode (Member)]: what happened on the youth group?

[Patrick Chittenden (Joint Fiscal Office)]: I don't know.

[Emilie Kornheiser (Chair)]: And

[Patrick Chittenden (Joint Fiscal Office)]: so for the foreign derived intangible income and global intangible low taxed income, FDII or GILTI, so each one increased the basis for both fees. These are essentially foreign derived intangible It's foreign derived income. So HRO1 is changing how it's calculated and also changing what the deduction amount is for this. So I'm going to try and be simple because I think we've said in the past, if you want a full breakdown of these provisions, we could spend an entire afternoon together. But basically, what was done is that the federal government has, through HR1, changed the base. So they've increased the base of these provisions and at the same time, increased the deductible amount for these provisions. On one end, it's increasing, on the other end, it's decreasing. There's the changes to pro rata share rules. So HR one changes the treatment of controlled foreign corporations or CFCs. Like a foreign corporation just looks definite in business. It it is a CFC if at least 50% of the voting power or value of the stock are held by US shareholders. And so what this does is each US shareholder must include in their gross income their prorated share of the CFC's passive income in that tax year. Taxpayers that hold stock and CFCs will have to report more gross income than they would have previously, essentially with the short term. Again, we're coupled here, so linking up would cause this to flow through. This might be the last one. Or there's two more. So charitable deductions for corporations.

[Representative Rebecca Holcombe (Member)]: Representative Ode, could you say, can you give an example? I almost am surprised to see this. On charitable deductions or the slide before it? Changes to pro rata share. Sorry, that's why. You did that one.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, but we can come back to it.

[Representative Carol Ode (Member)]: So a foreign corporation, as a CFC, at least 50% of the voting power are held by US shareholders. So it seems like you're trying to make The US shareholders and a CFC pay more income tax. It's interesting that the federal government want to do that. Yes.

[Patrick Chittenden (Joint Fiscal Office)]: I can't speak to their intentions.

[Representative Rebecca Holcombe (Member)]: Bridget Burkhardt? So I'm thinking about that same

[Representative Bridget Burkhardt (Clerk)]: thing Carol and I wonder, Patrick, the only example I can think of is maple sugar manufacturing equipment created in Quebec, brought over across the border to Vermont and there are little dealerships dealerships here that sell the equipment. So is that the kind of hoofens we're talking about? The guys that own the dealership have to absorb some of the fraud that's created in Quebec? Is that

[Emilie Kornheiser (Chair)]: I would encourage you to think about like a global corporation.

[Representative Carolyn Branagan (Member)]: Could you give me an

[Representative Bridget Burkhardt (Clerk)]: example of what? Ben and Jerry's?

[Representative Edward "Teddy" Waszazak (Member)]: Exxon or something.

[Representative Carolyn Branagan (Member)]: Exxon too for example.

[Emilie Kornheiser (Chair)]: Do you have a better I'm just like Well,

[Representative Carolyn Branagan (Member)]: are foreign oil companies besides Exxon.

[Emilie Kornheiser (Chair)]: Yeah, I was just

[Representative Carolyn Branagan (Member)]: Like British Petroleum.

[Emilie Kornheiser (Chair)]: Yes, British Petroleum. Also another good, but not Ben and Jerry's.

[Representative Rebecca Holcombe (Member)]: Ben and

[Representative Carol Ode (Member)]: Jerry's is Unilever. So if more of the value of that stock in Unilever, for example, is held by US shareholders, then they have to

[Representative Rebecca Holcombe (Member)]: include that as passive income.

[Representative Edward "Teddy" Waszazak (Member)]: And

[Patrick Chittenden (Joint Fiscal Office)]: I'll just add, you think about shareholders, I think people usually think about a personal IRA or brokerage account or something like that. The taxpayers here, the stockholders can also be businesses, LLC, C corps, S corps, all those kinds of different incorporation levels. When we're talking about owning 50% of a foreign controlled corporation, you could also be thinking about that as it could be a joint venture between two corporations, It could be just a subsidiary that's not wholly owned by the parent company. So it's not necessarily just investing in one sugaring operation in Quebec. And I will also just reiterate, this is specific to the CFC's passive income, so that's gonna include things like interests, rents, royalties, those kinds of income. So it's specifically about passive income, and there are different, there's certainly all different kinds of ownership structures and entities that could be involved in owning one of these CFCs.

[Representative Carolyn Branagan (Member)]: And you could own one of these CFCs through your four zero one ks, would that be correct?

[Patrick Chittenden (Joint Fiscal Office)]: Whatever company's administering the four zero one ks, and if that's a product that they have access to, I guess in theory, possibly. But you're more saying that companies are We would we would more usually expect this to be corporations and businesses. Yeah. Okay. Charitable deductions for corporations. This is probably one of the simplest changes that was done in HR1. Previously, corporations could deduct charitable contributions equal to up to 10% of their taxable income. What this is saying is you can, this is instituting a floor. So you have to, The cap is not inclusive of the first 1%, but you still have to donate that amount to get this deduction. So, but you can only then deduct between 110%. So it's instead of being able to deduct up to 10%, it's 9% with a floor. So it's just it's all it's you have to get above the floor before you can deduct anything. Again, because from a couple to this provision, linking up would cause it to flow through to the state. K. So I believe this is the last one. There's the expand exclusion on gains from qualified small business stock. HR one, a lot of stock for corporations issued after 07/05/2025 with aggregate gross assets of below 75,000,000 to qualify as a to qualify small business stock. So this is an increase from the previous threshold of 50,000,000 in aggregate gross assets or below. And another change that they're making here is that they're saying that investors who buy these shares can exclude 50% of the capital gains if they hold them for at least three years, 75% at four years, and 100% if held for five years. InterOne also increased the first year exclusion cap from 10,000,000 to 15,000,000. And again, because Vermont is coupled to this provision, looking up would allow the expanded aggregate gross assets threshold to increase and also the changes to the holding period requirements. I think previously, it did not have the step up basis. So just had after five years, you can exempt or exclude those capital gains. Oh, and then we I just have a quick slide. This is not corporate, but it's something that's in the bill that's flowing through. It's the federal changes to child and parent care credit. Really, what this is doing is it's just increasing the percentage of expenses on dependent care, child independent care, from 35% to 50% and expanding the phase down. This is one credit that never phases out, it phases down. And so Vermont, sort of our nexus with this credit, that Vermont has a similar credit. We use all the federal definitions and treatments, but instead of But we say, okay, you got the federal credit, they did all the math and calculations for it. You can get 72% of that on your state income taxes. From the previous slide, you saw that this is a million dollars starting in fiscal year twenty seven. Just to remind you what the existing value is. This is usually about $4,800,000 in foreground revenue. So the additional millions would be bringing it up to about 5.8. And this is just to sort of illustrate what the changes in the reimbursement rates look like. This is previous law. You can see that at the very low incomes up to 15,000, you can claim 50% of those expenses, but that decreases until about 47,000 where it's at a rate of 35%. That's orange? Let's see. So orange is for unmarried.

[Representative Carol Ode (Member)]: Oh, okay.

[Patrick Chittenden (Joint Fiscal Office)]: For unmarried.

[Emilie Kornheiser (Chair)]: I'm sorry, it says it right at

[Representative Carolyn Branagan (Member)]: the bottom.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, blue is for married. Previously, they didn't make a distinction. So that's a reminder, refresh of all the things, if you link up, they're gonna flow through.

[Emilie Kornheiser (Chair)]: Is it married and unmarried rather than single and file It's like your actual marriage status?

[Patrick Chittenden (Joint Fiscal Office)]: It's how it's written.

[Emilie Kornheiser (Chair)]: I missed that the other 12 times we've

[Representative Rebecca Holcombe (Member)]: talked about this. Thank you. It's kind of breathtaking. You.

[Patrick Chittenden (Joint Fiscal Office)]: So Kirby is going to share all this language. So I'm just going to list the provisions that are in the language and then show you how that changes compared to the first table we looked at. So the language is going to show linking up to the child and Medicare expansion, the amended limitation on business interest deduction, the more generous expensing of appreciable assets, pro rata share rules, the charitable deductions, and then there are also some other miscellaneous business and corporate provisions that are in there, smaller. The language is going to propose decoupling. So decoupling entirely, not decoupling from HR one treatment. The deduction for research and experimental expenses, expect the specialty Sorry. The qualified production property special depreciation, the QSVS exclusion, and then section two fifty deduction, which is the foreign income provisions that we talked about. Additionally, it has language that increases the annual cap on the downtown of Village Center tax credits that can be awarded in a given year by 2,000,000, bringing it from 3,000,000 up to 5,000,000. It also includes language that increases the research and development credit from 27% to 75 of the federal credit allowed for R and D expenditures within the state of Bramad. So that credit is only specific to R and D activity that occurs within Vermont.

[Emilie Kornheiser (Chair)]: So it's an existing piece of state law, but it's set at 27%, And it's essentially saying, We're gonna decouple from this federal thing that might not be Vermont businesses, and we're going to use those resources to put towards a Vermont business specific credit. Do you wanna go to the next slide that we can sit with while you take some more water and cough? Because it seems This like

[Representative Rebecca Holcombe (Member)]: was very fast.

[Emilie Kornheiser (Chair)]: I mean, Yep. We're gonna just really fast.

[Patrick Chittenden (Joint Fiscal Office)]: Yep. I was intentionally brief on this section because Kirby's gonna do the full walk through of the language. So

[Emilie Kornheiser (Chair)]: we're let's just leave that up there, and you do what you need to do with your body. We're not gonna vote on this today. We're gonna hear from we're gonna finish hearing from Pat. This is all very new news for everyone. It's new news for the tax department. New news for the whole administration. It's new news for Pat. It's new for me. It's new for all of us. We're going to work through it. And then after we hear from Pat, we're going to take a break. Then we're going to look at Kirby's language so our brains can digest into the ether. And then we'll all get to sleep. And then Paxil maybe could try to come in on Friday. And then we have a whole week next week to just think deep thoughts by ourselves. I'm so excited about it. Yes. Rebecca

[Patrick Chittenden (Joint Fiscal Office)]: Definitely need to study before the quiz.

[Emilie Kornheiser (Chair)]: Yep. Mhmm. And that's why I'm Can

[Representative Rebecca Holcombe (Member)]: we ask questions about some of the language? Thank you. Can I ask a question about the child tax credit?

[Emilie Kornheiser (Chair)]: Yeah, it's Yes, and are you all done with your thinking of your body?

[Representative Rebecca Holcombe (Member)]: Go ahead. I just wondered an example. Two people are married, one parent is killed in a terrible accident, the remaining parent has two children, they're no longer married because there's only one parent. And this is going to phase out that tax credit faster. I guess my question is, in terms of coupling or decoupling, can we also modify who benefits from these credits? That's okay.

[Patrick Chittenden (Joint Fiscal Office)]: You would have to set up a independent Vermont CDCC, but technically you could. It just, it would be much, it would require a lot more administrative work from the tax department to do, but

[Representative Rebecca Holcombe (Member)]: Fair enough. Can I ask you a second? Of course. And I guess the other question I have about this is when you look at the impact of H1, generally, I mean, the tax cuts for working Vermonters are trivial. The tax cuts at the top are really quite significant. And when we look at some of these credits, typically historically we've taken a universal approach, but what we're seeing is just, you know, really quite significant escalation of wealth and growing costs at the bottom. And I just am going back to the fact that you don't know where all of these things are gonna hit on the cliffs. And I really am just, I'm just registering my concern that I'm very worried about the impact on working Vermonters, especially coupled with some of the things in here

[Representative Carolyn Branagan (Member)]: as Yep,

[Representative Rebecca Holcombe (Member)]: absolutely.

[Emilie Kornheiser (Chair)]: Representative Ode, we will have time to think about this. It's just the first, we don't need

[Representative Rebecca Holcombe (Member)]: to all understand it right at this moment. Yes, no one's asked to make a decision. Do

[Emilie Kornheiser (Chair)]: you have your hand?

[Representative Rebecca Holcombe (Member)]: My question for this was, this is versus current law, this chart. So this is the change versus current law, not the change versus what we should have done.

[Patrick Chittenden (Joint Fiscal Office)]: So just as the first table represented technically an active decision you all would be making, Each one of these pieces here represent an active decision in our sort of net revenue change relative to the consensus forecast.

[Representative Rebecca Holcombe (Member)]: Can you ask another question? I don't, I'm not a specialist in tax law, but this qualified small business stock gain exclusion feels a lot like the new rock to me. And do we know if the rules have, I mean, there's a finite universe of people

[Representative Bridget Burkhardt (Clerk)]: who can take advantage of that.

[Emilie Kornheiser (Chair)]: We can hear more from Kirby about that. And I came forward There was a really great study from the Treasury.

[Patrick Chittenden (Joint Fiscal Office)]: Treasury? I forget which one. One of those two.

[Emilie Kornheiser (Chair)]: Last spring that I'll send you. It's really interesting because frankly, from my quick read of it, no one had any And we took a little bit of testimony about this maybe from the ITEP folks. No one really had any idea This has been in law for a little bit, and no one had any idea that it really cost any money. Then all of

[Representative Rebecca Holcombe (Member)]: a sudden, was like one's gonna blow. Because there's a finite number of people who can participate. They also get to determine the value of that stock. I'll forward you in the article. This feels like a new Roth. In Roth IRA. Yeah, but if you can set your stock at point zero zero one, put it in, and then your tax free for the Roth, and it becomes Google, you're completely going tax on anything there. So we can ask Kirby more questions about how it's structuring.

[Representative Edward "Teddy" Waszazak (Member)]: Yes. Might be a Kirby question. I

[Emilie Kornheiser (Chair)]: mean, here.

[Representative Edward "Teddy" Waszazak (Member)]: It's a Kirby question, just telling me to wait. The increasing the state R and D credit from 27 to 75, is that just R and D that happens in Vermont regardless of where the company is based, or is it a Vermont based company due to R and D?

[Patrick Chittenden (Joint Fiscal Office)]: It's for R and D activity within the state of Vermont. And you'll see that in the language that Kirby has

[Representative Rebecca Holcombe (Member)]: as well.

[Emilie Kornheiser (Chair)]: And there's this I do not know who was in this room when the R and D credit passed for the first time, But interestingly, they put in statute that the tax department needs to publicize every single company that takes this credit. And so you can look at everyone who took the credit when it was at '25.

[Representative Rebecca Holcombe (Member)]: That is interesting. It is very interesting.

[Representative Charles Kimbell (Ranking Member)]: Could you go over

[Representative James Masland (Member)]: what $2.50 is?

[Patrick Chittenden (Joint Fiscal Office)]: That's the foreign That's the foreign income. That's the foreign income provisions, yeah.

[Representative James Masland (Member)]: That was a much smaller number before as well.

[Patrick Chittenden (Joint Fiscal Office)]: So this is a little different. So the first table shows you a slight increase of, I think it said about $2,000,000 for linking up. What the language Kirby will show you is proposing is to decouple from the deduction available for this type of income entirely. So, it's a little different. That's where the larger revenue increase comes from.

[Representative Carol Ode (Member)]: Yes.

[Representative James Masland (Member)]: Are you confident in that number? Do you feel

[Patrick Chittenden (Joint Fiscal Office)]: much better about that number? There was a lot of sifting through forms, and we actually do have some better data available to get to this compared to some of the other provisions.

[Representative Rebecca Holcombe (Member)]: I don't know that this influences our decision, but has there been any good modeling people have seen? I mean, some of these things are each day before Inauguration Day and ending right before Inauguration Day in twenty eighteen-twenty nineteen. Is anyone looking at the broader economic impact of juicing things as well?

[Emilie Kornheiser (Chair)]: I think any of the national partners are, and we've looked at that. Pew has done studies on it. I've seen stuff from Center for Budget and Policy. I think the tax, is it the Taxpayers Federation, what are they called?

[Patrick Chittenden (Joint Fiscal Office)]: Don't know. I

[Representative Rebecca Holcombe (Member)]: guess what I'm trying to back into is whether or not something is good policy is one question, but I have serious concerns with naked politicization of policy because it affects us long term.

[Emilie Kornheiser (Chair)]: But yeah, any of your reputable sources on economic, any And probably some of your non Whatever the other word is. Basically, anyone who talks about economics has done exactly what you're describing, there's an article for you from whatever's first one.

[Representative Rebecca Holcombe (Member)]: I know. Okay? It's just kind of strange to have some take it. Yes, it is.

[Emilie Kornheiser (Chair)]: Is this your final slide?

[Representative Carolyn Branagan (Member)]: Stop.

[Representative Rebecca Holcombe (Member)]: Well played.

[Emilie Kornheiser (Chair)]: Okay. I don't see any more questions for Pat. So one of our witnesses in our 10:45 slot has canceled. And so what we're gonna do is take a fifteen minute break now and then come back and get a chartie. And so let's be back there at 10:20. And then we'll have almost an hour with Kirby.