Vermont Legislature SmartTranscripts:

[Emilie Kornheiser (Chair)]: Hello. We are still the Ways and Means Committee, and it is tax day, 04/15/1015, and we are continuing our work on an act relating to income tax brackets and investment income with Patrick Chittenden from the Joint Fiscal Office. The floor is yours.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Pat Chittenden, Joint Fiscal Office. Madam chair, before I start, have a quick question. To continue the thread, so my slides, I start talking about the income tax bracket.

[Emilie Kornheiser (Chair)]: Oh yeah.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: And then with both proceeds-

[Emilie Kornheiser (Chair)]: Let's go backwards.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Let's go backwards, okay.

[Emilie Kornheiser (Chair)]: Or not backwards, but halfway and then back.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Just to continue everyone's threaded thoughts. All right, so you'll notice that a lot of the words on my slides are gonna be pretty familiar from what you just saw from Kirby. I did hear a few questions as we were going through and hopefully can give you my perspective on some of those as well. So as Kirby mentioned, at the federal level, so we'll talk just like Kirby talked about at the federal level first, we're gonna do that again. The federal level, the net investment income tax was enacted effective 01/01/2013. And as mentioned, it was intended to impart fund the Affordable Care Act. Federally, this money does go into the general fund, so it's not dedicated, but it was sort of conceptually meant to pay for some of those costs. It is a surtax. And just when we're going through this and thinking about that concept, I've been thinking about, and I think it's accurate to say that really personal income taxes and this net investment income tax are two different So tax while you're looking at a lot of the same types of income, you shouldn't sort of blend them together too much conceptually. So yeah, as a surtax, the Vermont Investment Proceeds Tax would be additive and not in lieu of personal income taxes. That's where the surtax concept comes from with that. Yeah, and so federally, the tax rate is 3.8%. And I have a couple other examples showing how that sort of lesser of investment income or MAGI, but the MAGI thresholds that an individual needs to be over are 200,000 per single, $2.50 for married filing jointly, and then half that for married filing separately. And so really these are just the thresholds of all the types of income that you have that determine if we're then going to do the math to figure out how much tax you might owe on that investment income. I appreciate that sort of

[Emilie Kornheiser (Chair)]: process map kind of.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Yeah. Yeah, it's a two step process. First, figuring out if you're required, second one, doing that lesser of math to figure out what's owed. And so this first example is the same one Kirby showed you. So in one instance, you have a single filer who has 50,000 in that net investment income.

[Emilie Kornheiser (Chair)]: I'm so sorry, but can you say that thing about threshold to get to the threshold? Think it will be helpful. We

[Patrick (Pat) Chittenden, Joint Fiscal Office]: were just looking at the income thresholds, so those MAGI thresholds that, on the federal level and in this bill determine whether you are subject to the investment income tax. And so what I was saying is that this is sort of the first determination of whether we then need to do the math to figure out how much you may owe for this tax. So this is really These numbers represent all of your income. So regular AGI, everything that goes into that, wages, tips, salaries, capital gains, so that it's just everything and that's just the threshold to determine whether we take that next step of determining how much you may owe for this tax. So if you're below these levels, considering all of the income you might have, you would not be subject to this tax in any way. Okay, so the two examples. So the first one is identical to the ones Kirby shared. It's an instance where a single taxpayer has $50,000 in net investment income. So that's the dividends, interests, all those things. But they're MAGI, so their total income is 300,000 which is $100,000 over that threshold, remember? So per single filer, it's $200,000 At $300,000 they're $100,000 over the threshold. So the next question or next step in the math is what's smaller? Being a 100,000 over the threshold or the 50,000 in investment income? Obviously, in this instance, it's the 50,000. So that is the dollar figure that you're gonna apply that tax rate to figure out what the taxes owed are. Another instance, sort of the inverse situation, a single taxpayer, again, 50,000 in investment income, but their bad guy is $2.25, which puts them $25,000 over the threshold. So since $25,000 over the threshold is less than their total investment income, that's what the tax rate is going to apply to. So two different situations here, both with the same amount of investment income, but you can see that the individual with the lower income has the tax rate applied differently.

[Woodman Page (Member)]: This works whether or not they withdraw that 50,000 and use it to go to Vegas or whatever. If they leave it in

[Emilie Kornheiser (Chair)]: the bank or leave it

[Woodman Page (Member)]: in the stocks or leave it They

[Emilie Kornheiser (Chair)]: will feature different things.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Yeah, so there's a difference here between, I think maybe you're getting a little bit at realized versus unrealized gains, right? So if you own a stock and you never sell it, then it's not gonna be subject to this. I mean, it might have dividends if it's paying out over time, but whether the value of the stock ends up getting incorporated into the calculation of your investment income, that would require capital gains, which would require a selling event. Once you sell it, yes, you can go to Vegas with it if you want. But the state is going to say, or at this point, the federal government's going to say, well, actually both are going to say that was income that you realized. So the triggering event there is the actual sale of the stock so to have that income.

[Woodman Page (Member)]: But if you don't sell it and you just leave it, accumulating more, then you don't own anything? It's unrealized gains.

[Emilie Kornheiser (Chair)]: Okay.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: It's the same as you bought a home. Maybe I'm going down a bad path, but let's go on anyway. You bought a home you live in it for thirty years and then you go to sell it, you're going to have capital gains on that home, even though you had it for thirty years and weren't paying income taxes on that, the ownership of that asset.

[Carol Ode (Member)]: Unless you got it over and

[Patrick (Pat) Chittenden, Joint Fiscal Office]: That's why I was thinking maybe I was going down a dangerous path.

[Emilie Kornheiser (Chair)]: Representative Ode was able to join you on the dangerous path. He's like that.

[Carol Ode (Member)]: I put him on the edge. An adventure seeker.

[Emilie Kornheiser (Chair)]: I hope you'll come the edge.

[Woodman Page (Member)]: It gets more fun

[Kirby (Legislative Counsel)]: is the

[Woodman Page (Member)]: older you get.

[Rebecca Holcombe (Member)]: Do you have clarity from what you were asking?

[Woodman Page (Member)]: Yes. Okay. If the house you buy is a building you end up using for business, say you have a building across the street from where you live, you buy it and turn it into a pottery place where you sort of do that and it grows into a big successful business. You sell that business or something happens and you liquidate all that money that you, so you, how does that work? That's all taxable, right?

[Kirby (Legislative Counsel)]: Well if you sell it for more

[Patrick (Pat) Chittenden, Joint Fiscal Office]: than you purchased it for, then you're going to have capital gains you're realizing at the

[Woodman Page (Member)]: point of sale. Still talking about capital gains.

[Emilie Kornheiser (Chair)]: Yeah. Okay, okay. And then there are other things with capital gains related to travel bank purchases that are Yeah. Yes, but we're not going to

[Mark Higley (Member)]: get into that. Higley? I was just going to say too, even though capital gains is calculated after you can take out certain deductions fairly quickly, sort of like you do over those years, right?

[Emilie Kornheiser (Chair)]: And there's even more that you give us,

[Mark Higley (Member)]: it's getting what you bought it for and what you put.

[Emilie Kornheiser (Chair)]: There are piles of exemptions related to capital gains and houses specifically that make it quite unusual when a capital gain is realized when we pay off the house.

[Rebecca Holcombe (Member)]: Would you bear just to

[Carol Ode (Member)]: say, you have to actually get cash in your hands in that taxable year to start to have any of this kick in. I think so. Yeah.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: That's right. So the triggering event there for the capital gains is the sale of the property. Other instances, there's other types of investment income too. You could hold stock that's issuing dividends on an annual or quarterly basis, and that counts towards investment income, right? But if you're just talking about capital gains, you need to have the sale as the triggering event for that to be considered income.

[Woodman Page (Member)]: So I'm thinking the people in my district are, a lot of them that are not wealthy, most of them are not wealthy. They would not belong to this, but they might have one year where they qualified for all this. And are we, boom, zapping away their money that they counted on for retirement? You know, the lady who's running the pottery shed.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: So, I mean, that's a phenomenon we do see in the personal income tax world, where people will show on paper a large amount of income in a given year. And for a lot of people, that can really just be kind of a one year blip because they had a triggering event like selling their business, which they had built up over time, that's sort of their retirement, but they did end up selling it, which is gonna show a lot of income for them in that year that they sold it. But the year after, their income might be much lower again.

[Woodman Page (Member)]: How can we protect that from

[Emilie Kornheiser (Chair)]: that one year? So I think we can figure that out more, but there are, in the language that Kirby went through, there's a bunch of retirement investment mechanisms that are not included in them. So IRAs, for instance. So your average retiree or not cost effective. But that doesn't cover the business, so this speech itself. It depends on what you do with money. Let's go to PET. To some degree, I think it's really helpful to think about hypotheticals, and I worry we're entering into flashcard hypothetical territory. And so just wanna make sure we're understanding the underlying concept before we start testing it too much.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Sure. So just a reminder of things that are included in the federal version of the investment income tax. This is the capital gains, dividends, taxable interest, rent and royalty income, that passive income from investments, and then again, business income from trading financial instruments or commodities, and then the taxable portion of non qualified annuity payments.

[Edward "Teddy" Waszazak (Member)]: The financial instrument, commodities, is cryptocurrency included in that area? I believe it would. And is there anything that is not included could be Financial?

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Yes. Not included financial instruments. I'm not interested. That question might be too broad to answer, really. I'm not sure. Or we covered pretty much everything. I mean, there's a lot of different types of financial instruments, unless there are certain preemptive exemptions at federal level that means that we can't, because of could be some situations in there where things are not included. I'm actually not sure if there is a fleshed out legal definition of financial instrument, but we can check on that for clarity if needed. Equally important, so all these things on this list are going to go into the MAGI calculation, which, again, is what determines if you're subject to this tax in the first place. But these are all those different types of income that are not included in the federal version of the investment income tax. So again, wages, social security benefits, unemployment pay. I know a question did come up about military retirement pay, whether it's included. So military retirement pay is going to be included in an individual's AGI. On the Vermont level, what we do, so our starting point is AGI in our tax code, right? So on the personal income tax side, we do have that exemption, which comes in below that line. So it is excluded from taxable income on the personal income tax side. When we're talking about this particular tax, that income is going be included in just figuring out whether you can meet the threshold to be subject to the tax, but that income in and of itself is not going to be considered investment income. So it does play a factor in determining whether you're subject to the tax, but it does not play a factor in terms of being directly taxed itself, if that makes sense. K. So the Vermont investment proceeds tax largely piggybacks on this federal version. It's similar in the sense that it's a surtax on this investment tax. It has a similar base, but as Kirby walked you through with some of the add backs that are proposed in the language, it is a little bit more extensive in terms of the types of income that it pulls in compared to the federal version. And again, it maintains that structure of taxing the lesser of how much you're over your MAGI or the amount of investment income you have. So those parts are all similar and the thresholds in the language are the same as they are federally. And it's also drafting the way that it does not inflate time like the federal thresholds do not inflate over time. But there are some differences. The tax rate's 4% instead of 3.8%. Actually, guess I'll take a quick step back and I'll say, ITIP did write a report on It was called in their report, the wealth proceeds tax, and then they did their own estimates for all 50 states if they were to implement it. I think it might have gone up to 8% or something like that. Just different iterations. So the language of this bill is largely, I think, fair to say structured on what they had put forth in that report. So the add backs that you see here are things that you can also look to in that report to help wealth proceeds taxed by them and not the net or the VIP. So some of those things that we're adding back, so it includes all the income types that the federal investment tax includes, but it also adds income from state and local obligations outside Vermont. So this is that Massachusetts local bond. We do the same thing in Vermont. We add back interest earned from bonds from states outside of Vermont to personal income taxes. There is some consistency there in terms of adding that back. So it also includes gains from qualified small business stock excluded under federal law. I'm sure you all remember from the miscellaneous tax bill, which was just in here, those capital gains are exempt from taxation at the federal level. And so that, again, one of the reasons that this committee took up language on that particular provision, that's something that was flowing through on the personal income tax side. But just a reminder that this income is fully not taxed at the federal level if you meet the holding period requirements of five years or more. So the language is proposing to include those capital gains in the calculation of investment income. It also includes adding back investments for opportunity zones, the disposition of property, other trades of business, not subject to the NIT. I took this to read the active business sale, or being involved in active business, which under federal NIT, if you're not actively involved, would be passive and therefore included.

[Rebecca Holcombe (Member)]: Back to opportunity zones. Has there ever been any evaluation in Vermont of the impact at the state level on total revenues of the Opportunity Zone?

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Not to my knowledge. Actually They're

[Rebecca Holcombe (Member)]: mixed at the federal level.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Yeah. And actually, federally, when these were first implemented, there was no reporting requirement. So I to my knowledge, there hasn't even been a report done on this at the federal level. I do know with the recent expansion, they are gonna start requiring some reporting at the federal level. But to my knowledge, I don't think that it has been done, and I don't know if there's a lot of publicly available information even on that.

[Rebecca Holcombe (Member)]: You you couldn't even evaluate the net impact in Vermont because we don't collect data?

[Patrick (Pat) Chittenden, Joint Fiscal Office]: We don't collect the data, and I don't know if it's comprehensively collected elsewhere. But I do know that the eight by one included some reporting requirements going forward for it. So the net unrealized appreciation in securities of an employer corporation in certain retirement accounts. This gets at the questions that were being asked about ESOPs. So I actually used to work at an ESOP for a little while. And basically how it gets set up is the company will establish a trust, which will purchase the shares from the company and sit in the trust. The plans are set up, or for me it was anyway, don't know if there are some instances where it's different, but the plans for the employees were set up as defined contribution plans. So similar to what you'd see for like a four zero one ks or deferred compensation. So the way it works, where I was anyway, each month the employer would take some of my paycheck and put it into this account, which would then be invested in the stocks for that company. They also had the option of contributing on a quarterly or annual basis. And there's also, I think they were called purchasing periods where if you had the wherewithal, you could deposit more money and buy more of the company's stock. But so every year the company would, where I was working, I have an actuary establish what the fair market value of that stock was. And so you had your cost basis on all the stock being issued and either when you end your term of service there or retire, what the trust then does is buys that stock back from you. So then it rolls over into a traditional IRA. But the tax advantage status that is currently there for plans like that is that similar to an IRA, as you're investing in that company's stock over time, you're gonna have those unrealized gains. And when you go to sell them because it's a tax advantaged account, those gains are not taxed like they are similar to an IRA. You can have as much capital gains in IRAs you want. The only point of taxation is when you start taking withdrawals. So if you remember withdrawals from 401ks, IRAs, which Kirby was showing you earlier, those are not considered investment income. But what this is saying is those capital gains that were sheltered in this defined contribution plan would be included in your investment income tax calculation. Does that make sense? Okay. And that was how where I was working was structured. I don't know it might be a little different in other places.

[Carol Ode (Member)]: Representative Ode, this will Okay. Written this down, I've been processing it, if, does that put you at a, are you on par with people who don't have, well, first of all, are you required to buy, to put money in that defined contribution plan and buy stock in that?

[Patrick (Pat) Chittenden, Joint Fiscal Office]: So, the enrollment process is like any employer who offers a four zero one ks. Typically, can enroll or opt in. And so where I was working, I would put some of my paycheck in, and I had the option of doing your regular Vanguard targeted retirement date mutual funding Yeah. Type So I could put the money towards that. So within the retirement account, I could have the option of putting the money towards regular retirement investments that you might have in a four zero one ks or IRA or to put it towards purchasing more of the employer's stock. So there is some flexibility for employees in that way. I don't know if that's true at every company that has these types of plans up. I'm trying to get at

[Carol Ode (Member)]: if you were an employee and the only thing you could do would be to purchase the stock in the company that you're working at. Just want to, I don't want them to have to be disadvantaged vis a vis others who aren't required to put all their money in.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: And I guess my knowledge goes as far, I don't know if there are situations where you're only allowed to buy the employer's stock.

[Carol Ode (Member)]: Okay, so I mean, we could write something that said if you were only could invest in that way, that you wouldn't be harmed.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: I just don't know if that situation does exist.

[Rebecca Holcombe (Member)]: Yeah. Or could be legal either. Yeah.

[Emilie Kornheiser (Chair)]: It's Yeah. But let's wait to problem solve until we actually fully understand the bill. Well,

[Carol Ode (Member)]: I may forget.

[Emilie Kornheiser (Chair)]: That's why we have paper and pens and- Oh,

[Carol Ode (Member)]: my written is down. Great. Okay. And I appreciate you flagging

[Emilie Kornheiser (Chair)]: it so that we will all remember it as a problem.

[James (Jim) Masland (Member)]: Good. Yes.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: The other piece was just the non grantor trust that Kirby had talked to you about was the last thing in there that's added that on. Looking at other states, there is one other state that has a specific investment income tax. Minnesota has a net investment income tax. It is not structured quite so similarly as the federal version. It's 1%. It includes everything that's in the federal base, so the capital gains, dividends. Investment income types are the base of this, but there's none of the calculation on lesser of investment income or bad guy exceeding the threshold. Their version is structured as investment income over $1,000,000 is taxed at 1%. So there's no lesser of, and the threshold is specifically only in investment income. So that's the only other state that has one. It's still very new there. I don't know if they've actually I think they will soon have reported results because again, it's very new there. So it will be interesting to see how that sort of rolls out, but that's apparently the only other state that has this genre, I guess, of tax, this surtax on the investment income. So thinking about Vermonters who might be subject to this tax, this is from an IRS report from 2022, I think it was. Yeah, tax year 2022. This is showing for Vermont taxpayers who are paying the federal NIIT. How many are in these AGI buckets? So, yeah, so there's roughly 100, 180 in that 100,000 to 200,000 bucket, all the way up to nine seventy in a million plus. Overall, Vermont in that year, about 12,000 Vermonters were subject to this federal tax. Because this bill is contemplating using the same income thresholds, the MAGI thresholds to determine whether this tax is applicable to you or not, this would probably be a good sort of benchmark to thinking about how many people might be subject to this tax and what the income distribution of the taxpayers are. Obviously, you can see here the biggest sort of count of taxpayers falls in that 200,000 to 500,000 range. That kind of makes sense to me, right? Because there's just gonna be more taxpayers in general in that bucket than in the million plus. And also similar to what we see in personal income tax code, actually when we talk about the new bracket, we'll see in some other slides, the majority, so 56% of the federal investment income tax was being paid by those individuals earning over $1,000,000

[Emilie Kornheiser (Chair)]: And if

[Patrick (Pat) Chittenden, Joint Fiscal Office]: you combine that with $500,000 plus, that increases to about 78%, 80% of the tax payments coming from those individuals earning $500,000 and up.

[Emilie Kornheiser (Chair)]: Can I

[Edward "Teddy" Waszazak (Member)]: ask another question about Minnesota? How long has Minnesota been doing this and why aren't other states jumping on bandwagons to do what we're possibly going to be looking at?

[Patrick (Pat) Chittenden, Joint Fiscal Office]: I think Minnesota is either in their first, maybe second year of having this tax.

[Rebecca Holcombe (Member)]: I think they passed it the

[Emilie Kornheiser (Chair)]: first year of last biennium. They're just They might have had a delayed Yeah. Transportation

[Patrick (Pat) Chittenden, Joint Fiscal Office]: I am not currently aware if other states are currently contemplating this tax type. That's not to say that they're not. I'm just not aware.

[Emilie Kornheiser (Chair)]: So I go to a lot of tax conferences with other tax chairs, both fully nonpartisan ones and more partisan ones. And I think this is a super niche tax. I hadn't ever heard about it until this year. It's deep in federal IRS code, the fact that it can be so easily applicable to state code. It's interesting. Don't yeah.

[Rebecca Holcombe (Member)]: I'm just trying to make sure I understand a very basic thing about So is there a situation where you have to pay the federal tax and you have to pay the Vermont tax. So is there potentially a bucket of income that someone has that is taxed as regular income because it's within their AGI, then it's taxed again at the federal level of 3.8%. And then there's another 4% at the Vermont level on that same bucket of income. It's basically eligible for all three of those taxes. Well, and the personal income tax in Vermont.

[Emilie Kornheiser (Chair)]: That's what I mean.

[Rebecca Holcombe (Member)]: So, it's taxes, personal income tax because it's part of the AGI.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: It's a surtax, so it's going to be additive. The taxes paid is going to be additive to the personal income tax code.

[Rebecca Holcombe (Member)]: So potentially it's whatever your personal income tax, wherever that falls and your effective income tax rate for your personal income tax, plus potentially 7.8% if it qualifies for both the federal one and the VIP tax.

[Woodman Page (Member)]: I appreciate your view.

[Mark Higley (Member)]: Yes, yes.

[Emilie Kornheiser (Chair)]: Yeah, it's a surtax. Other thing I would say on Representative Page is that I think there's sort of a growing interest around the country and taxing unearned income at a higher level than earned income, as the wealth gap has grown so much in the last few years, and earned income has grown much less quickly than unearned income to make sure that our tax code is keeping up. And this is one fairly straightforward way to do that without having to state level tax departments to try to create new mechanisms. This is a way of doing something that is sort of understandable to taxpayers of that kind of part.

[Edward "Teddy" Waszazak (Member)]: I guess if I was in these categories, I would look differently about residing at Vermont, or I would go elsewhere, where I wouldn't be taxed. And we're gonna

[Emilie Kornheiser (Chair)]: take some testimony about that very question tomorrow.

[Mark Higley (Member)]: I was just gonna say, I think to your point, it's sort of like a modernization of tax code, because how folks are bringing money into their own household is changing over the years. Fifty years ago, you get a good union job, that's enough to support a family with two kids on one income, and folks are just using money and financial tools a lot differently than they used to. I think that in order to have long term financial sustainability for the state, we have to modernize how we're looking at all kinds of different things and how we're looking at burning taxes.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: So our estimate for this is just shy of $60,000,000 on an annual basis. Obviously, as investment income grows over time, we would expect this dollar figure to grow over time, the revenue figure, I mean. And just noting that the implementation or the effective date for this tax is a year out, so for tax year '27, so what that figure represents is fiscal year twenty eight revenue. And as we were just looking at the other table, looking at roughly 12,000 individuals who would like Or taxpayers or tax returns. That can obviously be more than one person. But roughly 12,000 tax returns likely would be subject to this tax in that amount.

[Edward "Teddy" Waszazak (Member)]: And that's everything I'm And again, where would these funds go? Would they go in our general fund? Yes, the language is written as for the general fund.

[Emilie Kornheiser (Chair)]: And right now that's how it's written, that is something we can absolutely work on. As long as it's a tax credit. If it was appropriation, that would be the appropriation. Representative Ode. So, like, thousand how

[Carol Ode (Member)]: many can you just put that into context, Kim? So, there's how many tax returns filed in Vermont?

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Over 300,000. 300,000. 300,000.

[Emilie Kornheiser (Chair)]: We're going to wait, sorry, Representative Ode. I have had a sneak peek of Pat's presentation. And I think we're going to get a better sense of the spread of income taxpayers. And that might be helpful. In fact, we've jumped right to that slide. So

[Patrick (Pat) Chittenden, Joint Fiscal Office]: about 330,000 tax returns were filed in 2024. And this is specifically These are just personal income type work. This is part I have another section of this presentation that's all about personal income tax. So remember when I started trying to keep these two tax types separate in your mind, but this table is referring to personal income taxes. I guess I'll pause. That was what I had for my investment proceeds tax.

[Emilie Kornheiser (Chair)]: We're gonna go let's go to representative Holcombe's question, and then let's do mean,

[Rebecca Holcombe (Member)]: the language on the Lincoln text.

[Emilie Kornheiser (Chair)]: Right? So let's then let's then do the rest of your presentation and then go to language. Okay. But first, Rockford's Honolcombe's question.

[Woodman Page (Member)]: I'm sorry, the broken

[Rebecca Holcombe (Member)]: record, but there's some places where the number of returns shrinks, which holds again, and has anyone ever run this against things like eligibility for subsidies on the exchange, things The benefits work, the

[Patrick (Pat) Chittenden, Joint Fiscal Office]: last conversation? The last analysis that was done on that was done by Debright, so it's been a number of years, although we think it's something we are maybe contemplating looking at as part of the ten year tax study, which we'll be doing this summer. But it is very complicated analysis, so I will add. I totally hear you.

[Rebecca Holcombe (Member)]: I've just heard from so many people who've declined income to retain eligibility for various healthcare providers.

[Kirby (Legislative Counsel)]: Can't

[Emilie Kornheiser (Chair)]: wait to get that tech study.

[Mark Higley (Member)]: That'd be great. But if

[Carol Ode (Member)]: you say anything, you have point of that in the back study?

[Patrick (Pat) Chittenden, Joint Fiscal Office]: It's something we're going to be looking at.

[Carol Ode (Member)]: That means you're looking at it to be in the study or even think about what Let's

[Emilie Kornheiser (Chair)]: not get too deep into the study right now. I really want us to finish looking at this whole thing by noon. Representative Holcombe, do you wanna talk more about the healthcare cliff that you were just talking about?

[Rebecca Holcombe (Member)]: I just know that there's several places where there are very significant clips where your $100 increase in salary could give you an additional $40,000 of expenditure on healthcare. And so people are choosing healthcare over compensation in ways that may actually be playing out in some of those numbers right there. That's all. I mean, and there's other clips as well. I'm hearing it now about childcare.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Okay, so we are going to fully transition into talking about personal income tax in the other language that's also included in this bill. I'll have the full bracket earlier, but for reference, what the language is doing is establishing a new top marginal rate at $586,000 of income at the married filing jointly rate filing status. It's all different for a single head of household and other one, but just as sort of the reference point, it's setting that 13.3% new marginal rate at that income level. Where did that number come from? The tax department does publish tables very similar to this, but instead of breaking it into API income brackets where it's sort of just like a 100,000 step here, 100,000 step there, they actually do it by percentiles. And what that five eighty six refers to is what the first percent of one percentile was for tax year 2024. So in a sense, this level is representing the top 1% income earners amount in the state of Vermont. That effective date on there is not correct because just like that we saw with the investment tax, it is effective for January, so effective fiscal year twenty eighth. It's not retroactive to tax rate deficits. I apologize for that. So in Vermont, the top 1% of returns at that AGLA level represents about 3,300 tax returns and about 8,500 individuals. Naturally, the amount of returns above that level are 1% total returns. They represent about 17% of all Vermont AGI, and they also represent about 30% of all Vermont personal income taxes paid. So the 1% of the returns making up about 17% of all income in the state, making up about 30% of net Vermont taxes paid. Unfortunately, the department changed their format. Well, they changed it to something more useful to me right now, but prior to 2018, they had the table of deciles, so I wasn't able to get more historical percentiles, I know. But this is just showing you a few different iterations of what the first percentile has looked like in Vermont in the past. So you can see starting in 2018, about 400,000 and above would have made you consider in the first percentile of Vermont taxpayers. But by 2024, the income or the AGI would have needed to be considered in that top 1% was about 586,000.

[Carol Ode (Member)]: There was nobody here. I'd say, we'll find out tomorrow, but I'm hoping that we would find out what do we know about this 1%, what age they are, are they retiring, are they running a business and the business is really here,

[Rebecca Holcombe (Member)]: it can't be moved, that kind of thing.

[Emilie Kornheiser (Chair)]: There's a great brief from Joyce Manchester, financial website about age, end up, and income. It's on the state, yeah? She read it last year. About that? Or was that two years ago? What's that year? What about the population issue brief? No, the income wealth issue brief. Two years ago. Two years ago. And that had a lot of age stuff in it though. The age brief was older, right? Anyway, who who those people are is something that you can certainly ask people tomorrow.

[Woodman Page (Member)]: And that's what it's called, the age of all important to know.

[Carol Ode (Member)]: I'll send it around.

[Emilie Kornheiser (Chair)]: Marsha's gonna find that issue brief. It's a brief, brief. Quick read. So

[Patrick (Pat) Chittenden, Joint Fiscal Office]: you can see that over time, the income required to be considered in the top 1% has been increasing. But as a share of total Vermont AGI, the percent that they've made up had been relatively constant, somewhere between 15% to 17% of Vermont AGI has sort of been the norm for the amount of total income that this group represents. And then the same is also true with the percent of overall taxes paid on personal income by Vermont residents. So in 2018, they represented about 27% of total receipts. And then by 'twenty four, they're around 30% of total receipts. That's gone up and down, as you can see in this table a little bit from year to year. One thing that did sort of jump out to me in looking at this, and maybe some of you have already noticed, is what was going on during this little period of COVID? There's clearly a very significant run up in the amount of income that you needed to be considered in a top 1% of income for Vermont taxpayers.

[Emilie Kornheiser (Chair)]: That's what happened, Pat.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: A lot of fiscal stimulus, a lot of increase in income at this There was a general increase in income across the board, but clearly, to be considered in that 1%, the jump was pretty significant. And you can actually see in the years following that, that base shift has durable. At the time, we weren't sure if it's just the general run up in personal income tax and sort of income in general and personal income taxes paid in the state of Vermont was being sort of skewed by this really strange economic environment we were in during COVID. But you can see here that and then if you look at some of the other historical tables, a lot of that increase in the income has been relatively durable at the time.

[Carol Ode (Member)]: Would it be fair to say that people, it's because people are making more who are making under that top 1%, and that's why they have to be making I

[Patrick (Pat) Chittenden, Joint Fiscal Office]: wouldn't say that your take wouldn't say your take take away should not be that it's just the income for this cohort that's increasing. There were income increases across the board. But just to be considered in this 3,300 cohort of tax returns, that was the dollar figure, the cutoff.

[Carol Ode (Member)]: All right, so let me ask it again because I definitely apologize. So I was thinking that you said there's federal stimulus that comes in that brings everybody up, not necessarily people up, the top income may or may not be getting stimulus, I don't know how that stimulus works. I used to know, I'm forgetting how it worked. If that pushed everybody up and for it to still be at so high, at $5.86, does that mean there are, that people who's beneath that number are making more? And then where I don't understand what distribution is beneath that number.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: So maybe if we come back here, I think if we were to look at several years of this table, a couple of things you'd probably notice is that the state total amount and the amounts in all of the buckets below, you would see that over time, those have also been increasing. And you would also see if we were to go from looking at the 2020 tax year, 2021 tax year, twenty twenty two tax year, you would see a similar run up in total income being reported across Vermont. It's not to say that the only increase you're seeing is in this 1%. One thing that did jump out at me is that to be considered in that top 1% during that time period, we did have to start making a lot more to be considered part of that cohort. And there could be numerous sort of explanations for that. During an initial dip when COVID started in the stock market, it had a really great two years. So a lot of people could have been benefiting from a run up in asset prices during that time. Another thing is during COVID, we did have a lot of people coming from different states, moving out of New York, Boston, who could work remotely and could themselves be high earners and who are then becoming domiciled in the state of Vermont becoming Vermont residents for tax purposes. So there could be It's probably not one single explanation. There's probably several contributors.

[Emilie Kornheiser (Chair)]: So that's not the report, but I'm trying to find the report. Oh. Yeah. Sorry. There was a hand on it. Thank you, Rebecca.

[Rebecca Holcombe (Member)]: I guess, could you direct us to any other reports that look at the texture of this a little bit more? I mean, I know our Gini index is increasing, which is a measure of income inequality, and so I understand that this is, I think, to go to Representative Waszazak's point, I think part of it is knowing if the increases are consistent with all levels, or if we're seeing polarization or what, and you cannot tell this from that, and this number of people is so small that we don't even know who these people are. If 500 people moved in from New York City and declared residency in Vermont during the pandemic and now they're moving out, we wouldn't even capture that.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: So I don't know if we have a report, but that's obviously material I could prepare for you. That wouldn't be mean, if we just want to look at sort of The simple sort of thing we could just look at is comparing how this table, which includes the entire spectrum, looks over time and focusing on some of the specific income cohorts and what their income is looking like over time. That's something I If we don't have a report, I could just do that for you.

[Emilie Kornheiser (Chair)]: And we're going to have a bunch of folks in tomorrow for testimony who might not have that at the Vermont level, but have a lot of information about the federal picture. Representative Masland, and then we're going to finish this presentation and go to the Yep.

[James (Jim) Masland (Member)]: Yeah, thank you. One of the things that we heard a number of years ago when there was questions about wealthy people moving into Vermont to pay taxes, and I don't know whether this changed or not, that a number of people moved into Vermont with high income, but then retired, so that their income did not continue as high. And it just it's relevant in our discussion, and I don't think that there's an update. What you presented is is good for now. Thank you. But

[Patrick (Pat) Chittenden, Joint Fiscal Office]: There there were certainly people of all walks of life who who moved to the state during that time. And some retired. Some retired, some are still working.

[Emilie Kornheiser (Chair)]: What I see in this data, which I think is different than the last time we had this conversation, is that the bump in revenues and income, like higher income tax thresholds that we experienced during the pandemic seems to be lasting. And at the time, we weren't sure if it was or not. So that's an interesting piece of information that I see in this.

[Carol Ode (Member)]: Let's

[Emilie Kornheiser (Chair)]: try to finish the presentation.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Okay, so the next few slides, we can probably get through relatively quick. It's just

[Emilie Kornheiser (Chair)]: I'm going interrupt one more time. I heard a rumor in the hallway that this is warrant for a vote on Friday. It's not. There's no vote warrant on this. Okay.

[Mark Higley (Member)]: Thank you. It was helpful

[Emilie Kornheiser (Chair)]: to have a framing.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Yeah, so again, there are just some line charts that are really just depicting what we saw in the previous table, just for reference for you all showing just the number of returns that 1% represents slowly growing over time. The income required to be considered in the top 1% as it grows over time. Again, we see here that more significant run up during COVID to be considered part of this cohort. There is a chart in here showing how the total AGI and sort of what that share of AGI is in this context of the whole state, that's changed over time. Again, this is one that has been relatively stable in percentage terms. But obviously, when you look at total AGI, the overall income being represented by that 1% has had a bit of a run up, particularly starting around COVID. And similar type pattern when you think about the amount, the percent and amount of tax fees that were paid by this cohort. In percentage terms, that's this relatively flatter line that's been a little more stable over time. But again, when you look at it in pure dollar terms, that COVID spike in terms of taxes paid from this cohort happened around that time.

[Rebecca Holcombe (Member)]: So just to clarify, the people who are now captured in the 1% could potentially be the individuals who weren't in Vermont previously.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Yeah, there's movement in and out of the state.

[Rebecca Holcombe (Member)]: We have no idea who they are.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: And so the next couple of things I just wanted to talk about, which kind of got it, some of the I forget who asked the question about, or I guess, Representative Holcombe, think it might have been you. Just thinking about who are these people, who are these high earners. I have a few slides about the age of some of these taxpayers. So if you're thinking about the cutoffs here based on the reports don't line up exactly with the 586,000 cut off, but $500,000 and up in income represents about 4,400 tax returns. That's about 1.3% of total returns, 19% of AGI, and 33% of total taxes paid. That's similar to what we saw on that previous table. But specifically, I want to look at next here, individuals that are 65 plus, those tax returns that are 65 plus. 500,000 and up for this cohort represents about 1,400 tax returns. That's about 0.4% of total tax returns, but it does make up about 7.5% of total tax returns, and they're contributing about 13% of total income taxes paid to the state. Now, why is that important? These are individuals who are entering retirement years of their life and that is a cohort in Vermont that's on, it has been growing and it's about to grow quite a bit. I just wanna give a very quick plug to Ted Barnett, who you all know. He published the Democrat issue brief yesterday, which was great timing because I was able to yank out a couple of charts from his report and put them in here because I thought they might be relevant to the discussion.

[Emilie Kornheiser (Chair)]: And folks, we can maybe have him in to go through that next week, if that's all.

[Patrick (Pat) Chittenden, Joint Fiscal Office]: So what we're looking at here, so the blue line represents twenty twenty and the green line is representing 2024. And what I everyone to sort of look at here is this little bubble that you see moving through the ages 55 to 64. And what that's telling you is there are a large cohort of Vermonters who are approaching that traditionally considered retirement age. And so when you're thinking about how much income these individuals have and what portion of state revenue collections they have. As an aging population, you start to think about, well, we're relying, well, a lot of these people are approaching retirement age. What does that say about sort of the consistency or how broad is the base of taxation we're talking about here? Because if a lot of the high income earners are concentrated in those older individuals, there needs to be a sort of cohort coming in behind them to sort of make that income consistently relied on when talking about stable tax, the stability of personal income taxes, right? And again, here's another representation from that report of how this has changed over time. You look at, so that '65 to 79 bucket in 2000, about sixteen percent of Vermonters were in that age cohort. Now in 2024, that's increased by almost 2%. It's now representing about 18% of Vermonters. And then, yeah, likewise, the amount of individuals who are 80 plus another age cohort you see increasing. And conversely, that 55 to 64 cohort, you see that decreasing from 15.2 to 13.8, That's what's driving the big run up in the age cohort that is traditionally considered a retirement paycheck. So I'm really just showing you all these to give you a sense of thinking about who in Vermont is paying income taxes and what our demographics look like now and going forward when you think about the base that you're relying on for a lot of these income taxes.

[Rebecca Holcombe (Member)]: No, she's just listening. I understand substantive reasons why you would break the cohorts this way. Did you also break the cohorts into equal bands ever in that report? I haven't had a chance to look at it yet.

[Emilie Kornheiser (Chair)]: It's Ted's report, so he can

[Carol Ode (Member)]: And go

[Patrick (Pat) Chittenden, Joint Fiscal Office]: this last one, again, from the report, it's just comparing how Vermont's population distribution compares nationally. So again, so nationally, about 13.9% of the populations, those aged 65 to 79, here in Vermont were close to 18%. I thought more was just sort of an interesting context really than anything else. And obviously, you have Ted, I'm sure he'll have some more expansive thoughts. Thanks. Okay. Next, I was gonna just talk about some other states. This is a table that shows the top marginal rate in every state. We've said this before, but remember, the top marginal rate doesn't tell you the whole picture of the state's kingdom tax code. Very little. But I knew that I would get a question of how does 13.3% compare nationally? And you can see from this table that is equal to what in California is their top marginal rate of 13.3%. I will note their top marginal bracket for married filing jointly starts at about 1,400,000. So a little bit different base there. And then this next chart is a reiteration of something I have used before, but it's comparing the income tax brackets of New England and New York put together. And this green dotted line is what the new top bracket would be in context of other states in our region. But in some cases, you see it's higher here. It's a little squished down here towards the bottom, but in a lot of those income levels, those lower levels, there are certain tax credits and deductions that are available that maybe not every other state has. So again, it tells you the top rate is gonna tell you very little about the overall structure of a state's income tax policy. Okay, so here's what all four of the different brackets would be updated to be. You can see that married filing jointly here. That was the number I keep referring to as representative of the top 1%. And then the other filing statuses have been sort of proportionally increased their top marginal bracket based on what the increase in the married filing jointly bracket would be. Yeah, estimating about $114,000,000 additional revenue starting in fiscal year twenty eight, because this is effective for tax year twenty seven. And I guess I will pause with that because that was where it before we jumped into my investment proceeds test.

[Emilie Kornheiser (Chair)]: Whoever wants to go first. Jim. Right.

[James (Jim) Masland (Member)]: You asked the question which is pretty obvious on your charts that I appreciate. Looking at the 55, 65 percentage of taxpayers, US, where is the cohort that's coming along behind? And this is message we've heard in this state consistently is where are the middle income, I guess we could call them, workers who are gonna, we would hope, build the tax break going or the tax brackets going forward. We hear this frequently from the governor and other people, and I'm just reminding myself that I just heard him say what we hear from various parts of the administration and other people through this is a big question. Don't

[Patrick (Pat) Chittenden, Joint Fiscal Office]: mean to, if I said something that maybe implied like policy feeling about something that wasn't intentional.

[James (Jim) Masland (Member)]: You didn't say that. Okay. Thank you.

[Mark Higley (Member)]: Pat, can you just on that side of the road, just on with the four brackets. Yes. Can you just remind me about head of household and what that means?

[Patrick (Pat) Chittenden, Joint Fiscal Office]: Yes. So single, generally, you're not gonna have any independence. Kind of households, could be like a single parent, for example.

[Carol Ode (Member)]: Thank you.

[Emilie Kornheiser (Chair)]: Folks, have thirty minutes left in our morning with Kirby to look through the language. After lunch, Jake is coming in from tax to talk about this, but then we can have Kirby come back after Jake if we still have more molest with Kirby.

[Kirby (Legislative Counsel)]: Sounds great. One of my colleagues likes to say, I am still Curt Bieden, legislative counsel. Say that about you?

[Emilie Kornheiser (Chair)]: No, he says something about himself that he is Curt Bieden. I

[Kirby (Legislative Counsel)]: thought about saying I am I'm still John Gray or something like that, but people wouldn't get it. The right document.

[Emilie Kornheiser (Chair)]: Yes. I think we read it bigger.

[Kirby (Legislative Counsel)]: Okay. So, yeah, I don't think we'll hopefully, we won't need the entire thirty minutes that we have left here. There's two major sections to the bill. Both are as drafted effective for 2027. So not a rec not retroactive changes, unlike some of the income tax stuff we look at. As Pat was just saying, you can just see these changes to statutes. Before I show you that, I want to remind you, you'll see numbers that are crossed out and replaced. That is because whenever we change the income tax brackets in statute, Those do not get changed frequently. Think 2003 was the last time, so most of these number changes are based off inflation. They do reflect the tax code as it applies in Vermont today. We update it.

[Emilie Kornheiser (Chair)]: So to confirm, are not policy changes.

[Kirby (Legislative Counsel)]: These are not changes. These changes reflect current law until you get to the bottom for the new highest rate. So the current highest marginal rate is here. This is just background info for you to know, it's 8.75% on income over $312,000 is current law. The new proposed rate that would be this part. This is we're looking at married filing jointly at the moment. The new part is what I have highlighted right now, which would be for taxable income over 586,625 thousand. The marginal 3.3% rate is charged applied. Page two. Line check. So those are the things to know about the rate changes when it comes to the words on the page and statute. Again, looking at head of household which is the second category in statute, change is at the bottom, everything above that reflects current law. And these are the same numbers, hopefully, that you just saw in Pat's presentation. So for single, it would be taxable income of $4.81, 8.5. Marginal rate would start at 3.3% per income above the debt. And then for are you calling separately? It's half of the married jointly, so it's two ninety three, three twenty five is the threshold at which the marginal rate starts.

[Mark Higley (Member)]: Kirby, our top marginal rate currently is the 8.75. Right? Okay. Thanks.

[Kirby (Legislative Counsel)]: To keep things balanced for the there's a fifth number here. We don't talk about it much, but there's the estates and trust brackets. I would just note check. That's also included here for a 3.3% rate to keep it even with the other categories. The threshold for that is just double the next lowest. In this case, it's not Pat had mentioned that for the other filing statuses, it is based off of more or less 1% income earners. In this case, it's just doubling it to have that new bracket. And those are the income tax changes for such a

[Mark Higley (Member)]: And you said 2003 was the last time they

[Patrick (Pat) Chittenden, Joint Fiscal Office]: were updating you exactly?

[Kirby (Legislative Counsel)]: Yeah, I keep saying that number, but can double check. Certain. That's it. That's the date. And

[Emilie Kornheiser (Chair)]: then the investment proceeds tax.

[Kirby (Legislative Counsel)]: Investment proceeds tax. So for this language, we're starting on page six. It would add a new chapter that would come It's placed right before chapter 151, which is the income tax. It's not in with the income tax because as we've said a few times now, this is a different new surtax. It is not an extension of the income tax, but uses some of the same concepts and definitions, especially when it comes to federal definitions for income tax. So the first part are the definitions. So the definition for federal modified adjusted gross income, It uses the same definition as the net investment income tax at the federal level. We have a definition for investment income. That is also same definition as the net investment income tax except adjusted under this language with those additions and subtractions that we talked about in the presentation earlier. And then there's a definition for threshold amount. In this case threshold amount means those MAG I thresholds that we talked about they for this version of this tax, Vermont tax, we're again using the federal definitions for and what those MAGI thresholds are. The next section is the imposition of attacks. As you see, the language lays out the thresholds like we talked about. 200,000 for individuals, 250,000 on Magi for and 125 for data travel separately. We haven't talked about it much, but the VIP tax would also apply to states of trusts. And in this case we're following the federal law and treatment about how it applies to states of trust. Subsection B on line eight is the imposition of the 4% rate on the lesser of investment income for the taxable year or federal modified adjusted gross income for the taxable year and then reduced by the threshold amount. Threshold amount being those 200,000, 250,000, 125,000.

[Emilie Kornheiser (Chair)]: So all that's included in the bucket that's subject to this surcharge is surtax is what's above the threshold.

[Kirby (Legislative Counsel)]: The amount exceeding those thresholds. So this is the legal phrasing to say

[Emilie Kornheiser (Chair)]: So it's sort of like a marginal inclusion to some degree. I motioned, but you weren't looking at my motion, sorry to not use words.

[Mark Higley (Member)]: Just for curiosity, so for the brackets, we have it separated single filing jointly, head of household filing single. In this, the single and head of are both, that's the same threshold of 200,000. I'm just curious as to put that like a conscious thing or was that just mirroring what

[Kirby (Legislative Counsel)]: the It's to mirror the federal. Subdivision B2 is a different way of stating the calculation about thresholds for states and trusts. That has to be done a little differently. In that case, it is the lesser, it's 4% on the lesser of undistributed investment income. So in this case, investment income that's been made by the trust, at the moment sitting in the trust because it hasn't been taken out of it yet. So as that investment income accrues within the trust each year, it would be like the trust is making the income for that year. That makes sense? Or the dollar amount at which the highest tax bracket begins for the taxable year. So the highest estates and trusts federal tax bracket. The threshold amount, in other words, the amount that you take off for a threshold would be the amount that the highest federal tax bracket is for a sense of trust.

[James (Jim) Masland (Member)]: So as I understand it from earlier today, this provision would have a big impact potentially on basis. Money is put into a trust or something with a certain balance. Mhmm. And it increases over time. So the fact that it's increased over time, but it hasn't been taken out of the trust.

[Kirby (Legislative Counsel)]: Still it's still getting at realized gains. Like, so I don't I don't want there to be any confusion about that. It's only about income.

[Emilie Kornheiser (Chair)]: In

[Kirby (Legislative Counsel)]: this case, have to say undistributed because that's kind of the trust's income. Once it gets distributed, that's someone else's income.

[James (Jim) Masland (Member)]: Does that That seems Does

[Patrick (Pat) Chittenden, Joint Fiscal Office]: that make sense? I'll calculate on it. Thank you.

[Kirby (Legislative Counsel)]: Yeah. I know. I know. So we have the provision in subsea that makes very clear this is a surcharge or a surtax. And we have a provision for allocating for Part D and non resident individuals in sub D. So you can think of it as when it comes to allocation, you have to allocate income when a person has income outside of Vermont and inside Vermont. The concepts that we use for personal income tax are what's going to be used in business. So under the personal income tax, if something's considered income outside of Vermont and Vermont living tax, That's how it would be done here also. But if you're a Vermont resident, a lot of things become taxable being resident, just so you're aware.

[Carol Ode (Member)]: I think I don't understand this. If it's a non resident individual, a state

[Patrick (Pat) Chittenden, Joint Fiscal Office]: or test, but a natural individual,

[Carol Ode (Member)]: I didn't think they were paint.

[Kirby (Legislative Counsel)]: If a person's a resident of Nana State, California, they own property in Vermont, they own a house in Vermont and they sell it, that's Vermont.

[Emilie Kornheiser (Chair)]: And then also, if someone is a resident of another state and in the state of Vermont for large periods of time, they would also owe income taxes in Vermont.

[Carol Ode (Member)]: I think I really want

[Emilie Kornheiser (Chair)]: to spend just a moment on this, because the broader perspective outside of this room is that folks who are not full time residents don't pay any income taxes in Vermont, and that's not true. And I so just wanna make sure that we, like, pause on that. Wait for a minute. It's easy to forget, but it's I forgot. Partial tax responsibility is, like, a very normal part of taxes from state to state, unless you're in New York state, in which case you hoard all the money. Onwards, Kirby.

[Kirby (Legislative Counsel)]: Onwards. So this is determination. This is we have a section determining Vermont and investment income. This matches the tracks of the slides about how to calculate what that means. You start with the federal definition as we said in the presentation and all the things that we talked about in the presentation that is part of the tax base at the federal level, that's captured by this part of it, by the reference to federal law. And then we have the increased by, which are all of those bullet points we walked through about these policy choices for you to determine those separate pieces. So I walked through those separate pieces in the slides and described what they were. This is a less understandable version of that. Like sub B for instance, this is the reference to the qualified small business side. So if you want to add that back, that's the language that subdivision B is covering. Subdivision C is the opportunity zones and on and off. But these are the things we talked about.

[Emilie Kornheiser (Chair)]: Yes Teddy. So increased to the

[Mark Higley (Member)]: extent that they are excluded. It's just a fancy new one.

[Kirby (Legislative Counsel)]: Increased by you're to take what's considered net investment income at the federal level and then you're going to add to it these things. So this increases the tax base for the Vermont tax. So another way to say it

[Mark Higley (Member)]: in plain English would be despite the fact that they're included, we are adding. Nope. Okay.

[Kirby (Legislative Counsel)]: These are not included federally, but we want to include them.

[Emilie Kornheiser (Chair)]: Which thing

[Carol Ode (Member)]: it relates to like which one is the which one is the

[Kirby (Legislative Counsel)]: I'll try my best. The first one is like bonds in other states income from bonds in other states things like that. The second one is what I just said, qualified small business stock exclusion at the federal level. And it's excluded from the federal investment income tax, but we're saying no, we're gonna attack, we're gonna apply that those gains here. Opportunity zones is the third one. The fourth is the disposition of property held or trade and business that's not described under federal. So federally we considered active income, but it's when you're selling property from business.

[Carol Ode (Member)]: Maybe by concern before it's not a concern there because if you're actively running a business and then you sell it and hope that that will be

[Woodman Page (Member)]: money you can

[Carol Ode (Member)]: count on in retirement, then because you're actively managing it then it's excluded, it's going to be subject to the

[Kirby (Legislative Counsel)]: Under the federal version of the net, that's one income tax. If you're running a business and sell, that would put into active and you sell property from your business. So you own five buildings, you sell one of them. That could end up in asterisk here with like this subject, very complicated. And so I'm just trying to tell you for purposes of understanding. You could sell property and it ends up at the federal level under the bucket of active business income which so the federal net investment income tax would not apply. This subdivision is meant to say actually we do want to consider those things investment income for the Vermont tax. So that's the fourth one. The fifth is

[Rebecca Holcombe (Member)]: Harv, will you give us

[Emilie Kornheiser (Chair)]: an annotated version of this at some point? Thanks.

[Kirby (Legislative Counsel)]: An annotated version of the whole thing? Just the

[Emilie Kornheiser (Chair)]: All the craft differences, just like a little The

[Kirby (Legislative Counsel)]: annotated version is what we went over earlier. Great. And I am currently I can share all those bullets that we went over. I'm pulling those up right now for my own sake. The next bullet would be the amount of gain that's not subject to the net investment income tax from the disposition of a partnership interest or S corporation stock. Okay that's E. That's E. Yes. So the reference there is to those federal exemption for disposition of partnership interests or S corporations saw. That's what that reference is.

[Emilie Kornheiser (Chair)]: And then F

[Kirby (Legislative Counsel)]: is the net unrealized appreciation in securities of an employer corporation in certain retirement accounts. Which if I'm following today's discussion is the ESOP stuff that Hab is talking about.

[Emilie Kornheiser (Chair)]: Do you believe you are following today's discussion? Yes.

[Kirby (Legislative Counsel)]: And then the last one speaks for itself. There's no reference there. That's the incomplete gift non grantor trust situations where federally it might be considered not your income because you've given up rights over control of it using this trust. But Vermont was saying we think that that's still your income because you have some control over that money.

[Carol Ode (Member)]: Talk a little bit

[Rebecca Holcombe (Member)]: about the impact of that. I guess what I'm wondering, I mean, we do is incentivizing a behavioral response. And I'm thinking, going back to the case of a person with an adult child with a disability, if this has, how would that affect how they chose to provide for an adult child with disability?

[Kirby (Legislative Counsel)]: If they're trying to use a trust to do that? It has to do with specifics in setting up the trust. And if you set it up where you are clearly giving up more control so then technically legally it would not be considered an incomplete gift non grantor trust. It could be a complete

[Rebecca Holcombe (Member)]: Okay, so if you completed the gift and there was a trustee that managed it, then this would not apply.

[Kirby (Legislative Counsel)]: If you're giving up full control and it didn't be considered a different type of trust.

[Rebecca Holcombe (Member)]: And you could do that by saying this trust can only benefit Joe Smith.

[Kirby (Legislative Counsel)]: Answer. Yeah, and I think that if you're interested in this topic, it would be something for us to do a deeper dive on. I have not done a deep enough dive yet myself, but it could be worth taking a deeper dive and seeing how that plays out. Because I don't know all the ways, but I do know there's a point at which you've given up enough control where it would not be considered an incomplete gift of directorial trust. It would be a different trust.

[Emilie Kornheiser (Chair)]: And we just somewhat coincidentally have a trust bill on Friday, and so we took a bunch of trust testimony yesterday, and we can take more on Friday. Then as they put together, we can get more testimony, just let me know.

[Kirby (Legislative Counsel)]: And it's possible to see your witnesses on this. We're still talking about for the Vermont tax base, the additions and subtractions to the federal base. So this last part under Sub two on page nine are saying Vermont will not apply this to things that Vermont can't tax.

[Emilie Kornheiser (Chair)]: For

[Kirby (Legislative Counsel)]: instance, in the federal tax base for this, for the federal version, investment income from federal bonds could be included in that. But Vermont would not consider that investment income when we're calculating. Do you meet the thresholds and what do we apply tax to? We would not be including that because we can't. Federal law says you can't.

[Woodman Page (Member)]: We're repeating federal law.

[Kirby (Legislative Counsel)]: We're saying we're going to follow federal law. For tax administration there's just a quick provision that references the income tax. So when it comes to deficiencies, assessments, refunds, appeals, unfortunate, all of the many things that could come up, the provisions income on that will be followed. And that's it. It's a case of the thing itself being probably way more complex than the drafting side of it.

[Emilie Kornheiser (Chair)]: I feel like that's been happening.

[Kirby (Legislative Counsel)]: I feel

[Emilie Kornheiser (Chair)]: like all of our bills are either very far in one direction or very far in the other direction these days. So thank you. Representative Higley and then Ode.

[Mark Higley (Member)]: This may be a question for Patrick, so the effective date I'm looking at, but on page four of Patrick's page

[Kirby (Legislative Counsel)]: think he addressed that. I think he was adapting his presentation from other proposals that have been made, and some of the other proposals would have had it affected sooner, but the language you're looking at has it affected like this.

[Emilie Kornheiser (Chair)]: So Ode, do you still have a question?

[Carol Ode (Member)]: No, I'm going to wait.

[Emilie Kornheiser (Chair)]: Okay, perfect timing. We are done for the morning. We are back here after the floor. We'll hear from Jake. Kirby will not be here because he'll be in Senate Finance. And