Vermont Legislature SmartTranscripts:

[Rep. Emilie Kornheiser (Chair)]: Good morning. This is the House Ways and Means Committee. It is April 16, 9AM. We are picking back up and actually relating to income tax brackets and investment income. We have a lovely range of witnesses to join us today to share their thoughts. Then we are gonna pick up one amendment to H nine fifty five that represent Kimbell and I are offering. Then we will have lunch, and then they're going to the floor, and that will be it for the though we might have amendments that we'll need to gather for. So with that, Steph, thank you for joining us. It's been a while. Glad to see you.

[Steph Yu (Executive Director, Public Assets Institute)]: Thanks for having me.

[Rep. Emilie Kornheiser (Chair)]: Floor is yours.

[Steph Yu (Executive Director, Public Assets Institute)]: Okay. Hopefully everybody can see this.

[Unidentified Committee Member]: We can.

[Steph Yu (Executive Director, Public Assets Institute)]: Great. So thank again, thank you for having me. It has been a while. I know you all have been busy, but I am Steph Yu, the executive director of Public Assets Institute. And we work on state tax and budget policy with the goal of ensuring that everyone who lives in Vermont can thrive. So I appreciate the opportunity to talk about the policy you're discussing. I think I'm trying to keep it relatively short here, but happy as always, happy to take questions. So I think there are two big main policy arguments for moving to a more progressive tax system that have been true for a long time in Vermont. The first of which is that Vermont's tax system, while it's better than many other states, is still regressive at the top, so that high income Vermonters are paying a smaller share of taxes than many Vermonters in the middle. You can see that sort of tailing off at the top there. The second main, I think, sort of policy argument for more progressive revenue is that income inequality has been increasing in Vermont for decades. So meaning that a smaller group of people owns more of the income and that's been getting worse over time. Tax rates on the the top marginal tax rate on the richest Vermonters have been decreasing over that same period, right? So about half of where they were sixty years ago, the peak was around 20%, and now we're at 8.75 as the top marginal rate. And that really follows the trajectory of what's been happening at the federal level, right? Sixty years ago, the top marginal rate at the federal level was 70%. It's been as high as 90%. But since 2018, it's been 37%. So just a little more than sort of half where it was about sixty years ago. And that leads to both a state and a country sort of writ large, where the riches are pulling away from everyone else. Meanwhile, most Vermont families are being squeezed by increasing costs and stagnant wages. So I think you all maybe have seen this before. We do an analysis of the JFO's basic needs budget by family type, what share of families have enough income to meet their basic needs. And what we've been seeing is increasingly there's more and more families who aren't hitting that threshold. And I think in the last, I don't know, four to six years or so, as that report comes out every other year, we're seeing increases even among adults without children, also among two earner families, that fewer of them have enough income to meet their basic needs. So those are sort of that's sort of the backdrop of the two kind of main policy arguments that have been true for a long time. But I think there's also a really strong argument for why moving our tax system in a more progressive direction makes sense at this particular moment. And that is that the federal actions of the last year have really disproportionately benefited the wealthy and harmed low and moderate income Vermonters. Again, I think you all know this, federal funding supports much of what we do as a state. This is sort of looking at the main categories of the state budget and where there's federal funding and there's kind of fingers everywhere, right? That from housing supports, food, healthcare, especially everything we do as a state, this is just the federal dollars flowing through the state budget, not even accounting for the federal dollars that are flowing directly to individuals or to nonprofit organizations or other means. But just in the state budget, it's sort of across every category. We lean on federal dollars. And the federal government is pulling back on many of these critical programs that it supported for decades, and also creating uncertainty and disruption in many others and many other programs. And so I think Vermont and a number of other states are considering these ideas as well, which is sort of taking matters into our own hands to protect and invest the things that we care about as a state. So I wanted to take a minute and kind of go through the quick rundown of the big cuts we've been face we're facing at the federal level. Again, lot of this stuff isn't necessarily hitting yet in FY '27, but is coming. HR1, which was the big reconciliation bill from last summer, had big cuts to Medicaid, and we know roughly 160,000 Vermonters rely on Medicaid for healthcare. That includes 60,000 children. As many as 10% of that group could lose eligibility based on the new requirements. And we're looking at a loss of federal funding for the state of 2,700,000,000.0 over the next decade or so, eight to ten years. And of course, we've already seen some threats, cuts to SNAP are coming, eligibility as well. In any given month, one in 10 Vermonters rely on Three Squares Vermont for food assistance, and up to 60% of them could lose some or all of their benefits. So 30,000 to 40,000 Vermonters could have less money for food. And then one of the cuts, so a lot of those things are coming up in the next few years and going to hit in FY '28 and beyond, but one of the cuts that we already know about that we've seen that this isn't necessarily something that flows through this, this isn't something that flows through the state budget, but the elimination of the enhanced premium tax credits for health care on the exchange. You know about 30,000 Vermonters prior to this, about 30,000 Vermonters got health care on the exchange, and the loss of these enhanced tax credits adds up to about 75,000,000 for Vermonters or would have been in 2026. And we've seen, I think the latest report is that about 4,000 Vermonters dropped healthcare coverage on the exchange, and then thousands more paying more or potentially getting worse coverage. So those are sort of, I think those are a lot of the kind of big cuts that we've been hearing about and talking about that we know are happening at the federal level. But there's just also a lot of sort of uncertainty and disruption and chaos being created there. We have the longest federal government shutdown in history in the fall, but we've just beaten that now with this partial shutdown of DHS that just entered its third month. 2,600 Vermonters work for DHS. Many have seen disruptions in pay, job security, all of those kind of things. But we are also talking about, you know, just a whole lot of pockets of uncertainty and disruption. So some loss of some grants, cancellation of grants entirely, cancellation of programs, lots of delays, funding freezes, the suspension and disruption of student visas, making them harder to get, which is affecting our higher ed sector, just making a lot of government services harder to access and more and you know, fewer people eligible for them, some depending on immigration status, some just more generally targeted attacks on states in terms of withholding federal dollars and increasing demands for data from states. And all of this is happening so that the federal government can give tax cuts to the rich. A total of 700,000,000 per year for the top 20% of Vermonters, with about 200,000,000 of that going to the top 1%. I'm going to this kind of flips the chart on you a little bit, but that adds up to an average tax cut for the top 1% of about $57,000 per year in Vermont. So that's sort of the big picture of the kind of shift cuts to critical services in order to fund these tax cuts. But also the other piece that they're sort of reprioritizing at the federal level is doubling down on immigration enforcement. Adding about $140,000,000,000 over the next decade to ICE and CBP, and potentially big increases in the military budget as well. So all these changes, I think the real cuts that we know about and the disruption and all of this harm alongside the sort of capriciousness of many of these actions, I think, you know, some of which have been sort of started then reversed, challenged in court, kind of just adds up to a lot of uncertainty. And really, I think for states, adds up to the fact that the federal government is no longer a reliable partner in a lot of this. So with that in mind, I think it makes sense for the state to take ownership of some of the programs we want to support, kind of figure out what our priorities are and where we want to be a backstop as a state. I think last fall was a great example of that. When the federal shutdown disrupted Three Squares benefits, the state stepped in to ensure that Vermonters didn't go hungry. I think, you know, unfortunately we're facing many more choices like that. So we can endorse the direction of the federal government in defunding critical services to give tax breaks to the rich, or we can ask those who can most afford it to essentially maintain their contribution to the public good and actually still end up with a net tax break. Again, our state tax system is still regressive at the top end, income inequality is increasing, and the federal government is walking away from its obligations. So it seems like this is the right time to make our tax system more progressive and chart our own course as a state.

[Rep. Emilie Kornheiser (Chair)]: Oh, thanks. I think I'm so programmed for seeing the final slide that says questions on it. Good. I'll without that. Even though everyone likes to speak Sorry about about that. No. It's just a lot harder than thought. I'll leave that. Great. Okay. There we

[Amy Speer (President, Vermont Chamber of Commerce)]: go. So thank you.

[Rep. Emilie Kornheiser (Chair)]: Any thoughts, questions for Steph? Yeah, representative.

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: Thank you for your presentation. Can you go back to the healthcare slide, please?

[Steph Yu (Executive Director, Public Assets Institute)]: The Medicaid or

[Rep. Emilie Kornheiser (Chair)]: This one. Sorry,

[Rep. Carol Ode (Member)]: this one.

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: I mean, one of the questions I have for you, because I'm hearing from this, particularly from small businesses, sole proprietors, employees who've lost the enhanced subsidies, but what I'm also hearing is increasingly people reducing work or work compensation in order to still be eligible for those health care benefits that are available to low income Vermonters. Have you ever at Public assets looked at the long term implications of this for things like social security and savings for retirement if people are reducing compensation in the present in order to access health care? And what is that when you gain that out over ten, twenty years, what does that look like for the state?

[Steph Yu (Executive Director, Public Assets Institute)]: Yeah, it's a great question. We haven't done a lot of detailed analysis on this, but I think it's a really good question. I think there's all kinds of creative ways, to your point, where people are trying to get around this, right, coming just under the threshold of where you'd still be eligible for the subsidies. But yeah, there's long term consequences for that, and I think the social security piece is a good note, especially for something, you know, Vermont obviously we have a lot of small businesses, small non profits where there's under 10 people. We know that wages tend to be low in Vermont, so that's sort of compounding an already existing problem if we're holding back wages even further, because in order to protect employees, right, sometimes employees choices, sometimes the employer trying to work with folks so that they're not worse off, but yeah, just a lot of tough choices. But we haven't done anything more specific, it'd definitely be an interesting question to look into.

[Rep. Emilie Kornheiser (Chair)]: Representative Waszazak.

[Rep. Edward "Teddy" Waszazak (Member)]: Thank you, Steph. On the slide about the basic needs budget, which has always been one of my favorite state tools, The question, Heather, is like, why are we pursuing this? And we're not pursuing this to villainize anybody or to tax the rich for the sake of taxing the rich. It's we're good Vermonters, we're good neighbors, we wanna support each other. So on this slide in particular, all of those folks that aren't meeting their basic needs, are there patterns, are there similarities? Are there any through lines for what is causing these folks who aren't meeting their basic needs? What is causing that? Is it low wages? Is it healthcare expenses? Is it property taxes? Have you done any analysis around that?

[Steph Yu (Executive Director, Public Assets Institute)]: Yeah, and so I I think you all know a lot of these big answers. You just nailed a lot of them. The cost of housing, the cost of healthcare, and relatively stagnant wages. Vermont has had low wages over time. That continues to be true. There's been a little bit of growth in the last few years, but still not keeping up with the cost. But housing is the biggest one. I think that's housing and healthcare are the two biggest things that are growing in terms of folks' costs. And like I say, I think, you know, obviously there's regional differences across the state, but especially when you look at sort of the families without children, the housing piece is the biggest growth point and the biggest, the harshest point, and the wages piece not keeping up with that. So yeah, I think it's all of the above, but the biggest costs in any budget are your housing and increasingly your healthcare costs.

[Rep. Edward "Teddy" Waszazak (Member)]: Thank you.

[Rep. Charles Kimbell (Ranking Member)]: Stephanie, on one of the slides, I think it's from ITEP, it shows the tax break for people by income. There we go, that one. And we had testimony yesterday from the Department of Taxes that was talking about how it's not really a tax break from last year to this year, but really recognizing as if the tax breaks that were in the original Tax Cuts and Jobs Act of 2018 had been repealed and then renewed, and that would be the effect. So would you agree with that assessment that that's what that $57,000 average amount of a tax break represents there?

[Steph Yu (Executive Director, Public Assets Institute)]: So yes and no. So I think, I think ITEP, I believe you have ITEP coming, they can speak to sort of more of the detail of the methodology. But you're right in the sense that some of the tax breaks are renewals of what was happening in 2018, and they're sort of a question of, yeah, what's your base line, right, depending on what you're looking at. But they're also increasing, right, because incomes keep going up. So, it's the baseline, the pre TCJA baseline, you know, a lot of these cuts are relative to a non TCJA baseline, but we're also seeing these increasing incomes. I think both are playing a role in terms of the actual dollar amount of the tax cut.

[Rep. Charles Kimbell (Ranking Member)]: Yeah, it's always interesting to see what the baseline is and what the graphs represent. So thank you for that. Sure.

[Rep. Emilie Kornheiser (Chair)]: It's an interesting thing. So when we get our e board projections, they're always based on what the law is, not what they sort of assume the law will be or what the law was. Right? And so this kind of map would be the kind of map that our state economists would do. And I also think that the tax department's testimony yesterday about people's actually regular everyday experience of paying taxes is that they had this break last year. Right? And so it's not like they've experienced it as like the average taxpayer the average I wouldn't say someone who's in the 1% as the average taxpayer. But a taxpayer who is in the 1% is accustomed to receiving this tax break. So it's not a new tax break for them as an individual experience, though state taxes in the context of that level of well, is certainly not the main thrust of the taxation.

[Rep. Charles Kimbell (Ranking Member)]: Yes, but I would say it's probably disingenuous to say that this is new this year because of the act in August or July, but it's continuing what was passed before it. Both things are true. Yes.

[Steph Yu (Executive Director, Public Assets Institute)]: And if I could add something

[Amy Speer (President, Vermont Chamber of Commerce)]: to that.

[Rep. Emilie Kornheiser (Chair)]: Please do.

[Steph Yu (Executive Director, Public Assets Institute)]: I mean, I think that's part of why we wanted to put some of this historical context into the conversation, right? Looking kind of even further back, sort of where we've been over the long term, there's definitely swings, right? There's pendulum swings in terms of what the whole picture looks like. But relatively speaking, where are we now compared to sort of the long history of all of this seems relevant, and yeah, think right, how does your tax bill change from one year to the next versus what's the set of rules that are in place one year and what's the, you know, it's not all the same taxpayers, it's not all the same base. So there's, you know, there's a lot of moving parts in there, but I think the the long context is helpful too.

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: Thank you. Representative Bridget? Some of

[Amy Speer (President, Vermont Chamber of Commerce)]: the more institutional memory, could Jake alluded to it yesterday from

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: the tax department in his testimony, and I have a recollection that back when this tax break was originally implemented, Vermont made some changes to its income taxes with the thought of potentially recapturing some of that Because in a similar situation that we're in now, where the federal government is asking us to do more at a state level that typically was funded by the federal level. But my recollection is that we made some changes. What were those changes? How much did we change

[Amy Speer (President, Vermont Chamber of Commerce)]: our income by? We testimony can

[Rep. Emilie Kornheiser (Chair)]: about that, specifically from one from JFO and from the tax department. Steph, you're welcome to answer, I think it's important to line up that specific testimony.

[Steph Yu (Executive Director, Public Assets Institute)]: Yeah. I don't I don't need to go into a lot of detail. It's true that we made a number of changes in 2018, some of which were sort of of disconnecting from the federal tax code, but I think, Chair Kornheiser was there and remembered some of these changes probably better than I do, maybe not, but the point is that I think a lot of that was designed to sort of keep it relatively neutral, right? So there were some ins and outs and some ups and downs, and some sort of splitting off from the federal tax code, but I'm sure others can speak to all of the details, all of that in more detail then.

[Rep. Emilie Kornheiser (Chair)]: Thank you. Thanks for being Oh, yep, Representative Masland.

[Rep. James Masland (Member)]: Yeah, hi. Steph, your slides are remarkably helpful, particularly for people who don't normally take any of those things because you're providing some nuts and bolts information that is essential to making decisions. I contrast that with for discussion around the table with the the words tax the rich. Because tax the rich out there for many of my constituents is a great shiny object that we should latch onto without digging into the specifics, and it is not helpful in trying to win the day, the discussion out and around. It I just point that out as we are discussing this. Big, great, shining objects, as as you know, from many fields are sometimes get in play of doing good work here.

[Rep. Charles Kimbell (Ranking Member)]: So I

[Rep. James Masland (Member)]: just throw that out. Thank you.

[Steph Yu (Executive Director, Public Assets Institute)]: Yeah. Appreciate it. I I appreciate that, and I think that is part of why, and and perhaps I think somebody said this earlier too, this is less about punitive and more about the trends that are happening oops, I think I'm going the wrong way here, in tax policy, right? So, still have a regressive system at the top and that income inequality is increasing, So it makes more sense to sort of pursue it that way, and it's less about, yeah, sort of a punitive measure and more about understanding which direction the trends are going and what tax policy can do about that.

[Rep. Emilie Kornheiser (Chair)]: Thank you. Oh, yep, Representative Ode, and then we need to move on to our next.

[Rep. Carol Ode (Member)]: Oh, hi I was thinking about this slide that shows how little people are maybe toward the beginning, I'm thinking also, I'm just wondering how an increase in taxes can help people's salaries increase so that they have enough money to not to be in crisis mode all the time. And when I look at what you presented as the federal cuts, I see that even if the taxes are used because of the Medicaid cuts, the SNAP and healthcare, how do we help people who are not making enough money change that outlook? I mean, how does this move? All we're doing is keeping things maybe more of the same.

[Steph Yu (Executive Director, Public Assets Institute)]: So, I mean, I think government has both sides of the equation, tools on both sides of the equation at their disposal, right? We can do something about costs and we can do something about wages. I think both are important. So how do we beef up wages? Some of that is minimum wage, but I think it's more than that. There's other wage policy that's involved. But also a lot of this is, the problem is the comparison, the disconnect between the costs and the wages. If we can do something about lowering the cost of healthcare, lowering the cost of housing, then we're correcting the other side of the equation. So I think, you know, there's tools on both sides and all of them need to be brought to bear.

[Rep. Woodman Page (Member)]: Representative Page. Yes, a couple of comments and they kind of go along with what Representative Ode, I think, was trying to get at. In your presentation, you talked about wealth income inequality, how it's increasing. I think we would all agree with that. But whether we raise our taxes or not, that still probably it still will occur. And I guess my concern is by raising taxes we're going to affect our economy, which may hurt everybody in the long run, And perhaps you could discuss that a little bit.

[Steph Yu (Executive Director, Public Assets Institute)]: Yeah, and I think probably some of the other witnesses will also have more to say about this, but I think we haven't experienced that, right? That raising taxes hasn't hurt the economy. Think I don't know if you're specifically talking about tax flight or more concerned about consumer spending or all of the above, but I know there's other people speaking more to some of those issues. But when we raise taxes, we have more money to invest for the state. And I think that's, you know, that's sort of the bottom line of where we are. And to your point, right, it doesn't necessarily stop the base income, but I think it helps correct sort of how that income inequality plays out in the sort of application of it. So, you know, this could still be happening. Again, there's things that could be happening at wage policy to kind of increase that, which might be more about bringing up the bottom than decreasing the top, but I think again, it's sort of like looking at all those tools holistically.

[Rep. Carolyn Branagan (Member)]: Thanks.

[Amy Speer (President, Vermont Chamber of Commerce)]: Go for it. And then I want

[Rep. Emilie Kornheiser (Chair)]: to move on. I want to make sure we have time for it.

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: Just an observation on this. I know people don't want to beat you with dead horse on the Benefits Cliffs, but this pattern for the families with children nationally is what we know is associated with breaking families out. And this incentivizes divorce, just like this distribution. You're better off as a single adult with two kids than you are. I mean, if I'm reading this chart right, you're less able to meet your needs. Or maybe I'm reading it inversely.

[Rep. Emilie Kornheiser (Chair)]: Mean, divorce is very complicated. I

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: just would say, people often criticize low income families for lack of family stability. But if you make it difficult for families to stay together and meet the needs of their children, then people make rational decisions to protect their kids, the same.

[Rep. Emilie Kornheiser (Chair)]: There are also a lot

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: of very stable single parent companies. I understand. No, I'm not saying that they aren't. And I'm saying that you could make that be the right rational reasons and many people are very stable. That's not what I'm saying. I'm just saying we are putting pressure and I'm 100% agree with that single family.

[Rep. James Masland (Member)]: Know you want to.

[Rep. Emilie Kornheiser (Chair)]: More. Yes.

[Rep. Carol Ode (Member)]: I'll hold my questions for the next

[Rep. Edward "Teddy" Waszazak (Member)]: one just to

[Rep. James Masland (Member)]: make up

[Rep. Edward "Teddy" Waszazak (Member)]: for Steph, so moving back to representative Masland's point around the messaging of this, I'm sure all 180 legislators have different opinions about messaging, but about the policy of increasing taxes on the wealthiest among us to support those who have the least. I believe a poll came out recently talking about the amount of support that there is in Vermont for this. Could you remind the committee what the results of that poll were in terms of public opinion for the policy of this, separate from the message?

[Steph Yu (Executive Director, Public Assets Institute)]: Yeah, I think it affirmed what polls have been showing for a long time, but sort of an even more robust finding, which is that 80% of Vermonters supported the idea of a more progressive tax system.

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

[Rep. Emilie Kornheiser (Chair)]: Thank you so much for coming in. And folks, if you wanna have Steph back later in our work on this bill, I'm very happy to schedule that. Thank you, Steph.

[Steph Yu (Executive Director, Public Assets Institute)]: Of course. Thank you. Take care.

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: Thank you for putting that out My grandmother was told she didn't get a wage increase because the men needed it, because they had families, and so I agree that it was not enough time to imply that single mothers are trying hard.

[Rep. Emilie Kornheiser (Chair)]: I have Miles Trinidad next on He's moving in. I'm sorry. It's 10:30. Oh, at 10:30? Okay. Great. Cool. Amy, what do you think about going next? That's great. Great. Hi. Nice to see you. Hi. Good morning.

[Amy Speer (President, Vermont Chamber of Commerce)]: It's gonna take me just a moment to share my screen, so it was

[Amy Speer (President, Vermont Chamber of Commerce)]: kinda for a little technical break. We'll dive right in.

[Amy Speer (President, Vermont Chamber of Commerce)]: Me too. Let me see that.

[Rep. Carolyn Branagan (Member)]: Is there

[Rep. Emilie Kornheiser (Chair)]: a place we could see it better? Let's see.

[Amy Speer (President, Vermont Chamber of Commerce)]: This is what happens when I'm not on too frequently, so I apologize. That

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

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: There's just like a weird screen

[Amy Speer (President, Vermont Chamber of Commerce)]: the screen on this bed. You're very top right. It's the pop up's coming. I'm gonna

[Amy Speer (President, Vermont Chamber of Commerce)]: give it just a minute. Steph, you said 10:30.

[Rep. Carolyn Branagan (Member)]: Mean, Sorshi, you said 10:30? Yeah. We go.

[Amy Speer (President, Vermont Chamber of Commerce)]: Bear with me while I deal with technology. Oh, you did it. So here we go. Now the key point is my remarks are

[Rep. Edward "Teddy" Waszazak (Member)]: in front

[Amy Speer (President, Vermont Chamber of Commerce)]: of me. For the record, my name is Amy Speer. I am the president of the Vermont Chamber of Commerce. I appreciate the opportunity to be here today to discuss what we believe are some broader economic impacts of the bill that you have before you, and maybe some that are not immediately apparent based on how the bill is framed as a wealth tax.

[Rep. Emilie Kornheiser (Chair)]: Leading I'm going to just interrupt you to say that

[Rep. Carolyn Branagan (Member)]: it's not a wealth tax.

[Rep. Emilie Kornheiser (Chair)]: Correct. And I have been trying so hard to correct that language all over the land. But this is an income tax.

[Amy Speer (President, Vermont Chamber of Commerce)]: Would love to have it corrected for how

[Rep. Emilie Kornheiser (Chair)]: it is Let's do that together.

[Amy Speer (President, Vermont Chamber of Commerce)]: So I will do my best to reflect that in my remarks as I speak today. So moving on, the bill is presented in one way. But in practice, it reaches much farther, farther. And there are three what I'm calling hidden economic consequences that deserve closer attention. The tax department touched on some of these yesterday. First, it reaches active business income, not just passive wealth that might be apparent. Second, it creates a 3% minimum floor tax base on AGI, which can create liability even when business cash is constrained. Third, it makes family business transfers a lot more expensive. So, consequences are especially important in Vermont because of how our economy is structured and the makeup of our business community. So, looking next, just echoing what was said by the

[Rep. Carol Ode (Member)]: Carol, do you have an example of each of those things? Is Ty

[Amy Speer (President, Vermont Chamber of Commerce)]: I do have some examples a little bit later on that I can get to. And if there are follow-up questions, I know you're short on time, I'm happy to dive into them as well.

[Rep. Emilie Kornheiser (Chair)]: And so let us, as a rule today, do the whole presentation with someone and then do questions. And again, I'm happy for Amy to come back again next week.

[Rep. Carol Ode (Member)]: Yeah, I would be happy to.

[Amy Speer (President, Vermont Chamber of Commerce)]: The tax department confirmed that the analysis is the breadth of this proposal. So under the bill, Vermont's top rate rises to 13.3%, which would be the highest marginal rate in the country. Also showing that the capital gains make up 69% of the taxable investment base. That matters because capital gains are central to business succession transactions, not just to investment portfolios. So, the taxable base also includes rents, royalties, passive income categories broader than just what taxpayers might currently expect or those in the broader public might expect. So, I thought it would be helpful to take just a moment to have a brief visual to show how businesses are taxed, or I should say how small businesses are taxed. So, this is one of the

[Rep. Edward "Teddy" Waszazak (Member)]: most

[Amy Speer (President, Vermont Chamber of Commerce)]: important mechanics in understanding the bill from a business perspective. Many Vermont businesses are structured as pass through entities. That means that the business itself does not pay income tax as a separate corporation. Instead, profits flow directly into the owner's personal tax return. So, when personal income tax rules change, those changes often become small business tax changes. So, that includes what you might know well, inns, your farms, your agritourism, small manufacturers, contractors, specialty food producers. Think of small businesses in communities. And those are generally going to be set up as pass through entities. So, I'm guessing if you took a straw poll of constituents, if you're thinking of the small businesses in your community, many of them would be set up as pass through entities. I do want to take a minute to talk about Vermont's progressivity. And I'm realizing that this is very blurry. So, if you cannot see this, I'm happy to

[Rep. Carol Ode (Member)]: find it on the screen. Okay.

[Amy Speer (President, Vermont Chamber of Commerce)]: Size for the projection, not size for your. Okay. Perfect. So before laying leering on new tax liabilities on the top of the system, I do think it's important to recognize where Vermont already stands. Vermont is already the third most progressive state system in the nation. So, the policy question here is not whether Vermont lacks progressivity. This is an iTemp table that we have here. You know, it's really is whether adding additional layers onto one of the most progressive systems creates unintended economic costs. So, when we're looking at what could those unintended economic costs be, I do want to take a moment just to look at where is Vermont ranked in economic momentum. This is a study that is done by Pomoille and Associates. It's four years of compiled various economic data. I also have a white paper that dovetails with this presentation that takes a little bit of a deeper dive into this. So I won't spend a lot of time talking about this here. But I do think it's important to note that this is where the tension becomes very important. So, Vermont is already a highly progressive in taxation, and at the same time, ranks forty ninth in the nation for economic outlook. So, that means that we're operating in the moment of economic fragility. And I think that's very important to have top of mind when we're looking at. So, in a state with weak growth capacity, every tax policy decision should really be evaluated off of one question. Does it strengthen competitiveness or weaken it? And I think it depends on your own individual framing for that. When we're going a little bit down further in the business owners here, many Vermont businesses, as I mentioned, are pass through entities, and this reaches directly into active business ownership income. So, a business may adhere high income on paper, but much of that reported income may already be committed to payroll, equipment, debt service, or reinvestment. That's especially true in rural communities when we're looking at what are the businesses that are making up the vast majority of rural Vermont. Many local employers are family owned in businesses that are structured that way. And this is one of reasons that I just want to point out that the bill reaches farther than it may first appear when you're looking at it. Up next, when we're looking at that 3% rule, this is one of the least, I would say it's one of the most consequential parts of the bill, but it might be the least obvious when you're looking at this. So under the AGI minimum floor, tax liability can apply even when much of the reported income is not truly available cash. So, a business owner may report $300,000 in AGI, but if that income is already tied up no.

[Rep. Emilie Kornheiser (Chair)]: We're all set.

[Rep. Carol Ode (Member)]: It's a crime still popping in

[Amy Speer (President, Vermont Chamber of Commerce)]: the morning. So, a business owner may report $300,000 in AGI, but if that income is already tied up in payroll, equipment, debt obligations, the minimum tax would still apply. So, that creates tax outcomes that can become disconnected from the actual liquidity of a business. So, I guess maybe I'll take one moment to show a little bit of an example. The concern is that AGI reflects income before many real business obligations are accounted for. So, for pass through owners, AGI may include business earnings that are already committed, as I mentioned, to payroll equipment financing debt. That 3% based on income that is reported on paper, but not actually available for liquid cash. I think that's an important differentiation there. And the next piece, because we talk a lot with our members about business succession planning and what does it look like, it makes it a lot more challenging. And then I would say this is one of the more serious unintended consequences because capital gains make up 69% of the investment proceeds tax based. Business sales are central to this bill. So, when a retiring owner sells a family business, they may now face federal capital gains tax, Vermont income tax, and the new investment proceeds tax. That makes employee transitions, family transfers, succession planning materially harder for those businesses that are looking what's next. And I'd also want to note that for many business owners, especially for small business owners, the sale of that business is their retirement plan. And I think that is a very important thing to just dive into for a moment. And I do wanna bring it back to affordability because I know this is central to much of the conversation in the legislature. So if affordability is the policy objective, this bill does not directly address the major cost drivers that Vermonters are facing. It doesn't build housing, does not lower childcare costs, does not reduce healthcare premiums, but it may reduce business reinvestment, make succession planning harder and hurt workforce recruitment. So redistribution and structural affordability reform are not necessarily the same thing. So in Vermont's economy, the proposal before you functions much more broadly than, and I'm not going to say the phrase, I'm going to move on from that phrase, it reaches deeply into active business income, succession planning and the employers that sustain communities across the state. So I will pause there, and I'm happy to answer any questions that Anyone you may

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: have any? Yeah, Representative Waszazak?

[Rep. Edward "Teddy" Waszazak (Member)]: Yeah, appreciate some of the feedback on how the phrase could be fun to be fun to important. Because the goal is, obviously, there are so many small businesses, small restaurants that are, you know, because of gas prices and transportation costs, you know, we can go on, that are struggling. So appreciate the feedback on how we could make this more targeted to support those small businesses. But going to your slide about the economic outlook, momentum, whatever phrase is used, how much of that analysis I've seen that number floated around, but I don't know what went into that analysis. So tax code is one piece of an economy, but there's also, you mentioned healthcare costs, housing costs, how much do you think, if you looked into that analysis, is that ranking based on our tax code or is it based on the fact that we have some of the highest healthcare costs? It is, I guess, all of

[Amy Speer (President, Vermont Chamber of Commerce)]: that, I guess is the best way to put it. So it's a composite number that is looking at a number of different factors. I'm happy to follow-up and give you the deep dive on what Pomeroy and Associates did with that. So they're a national company that does a lot of economic analysis and looking at what's impacting economy. So I'm happy to send that follow-up information It to was a four year trend line that they

[Rep. Carol Ode (Member)]: were looking at. So I will follow-up.

[Rep. Carolyn Branagan (Member)]: Yeah, appreciate that.

[Amy Speer (President, Vermont Chamber of Commerce)]: Representative Branagan?

[Rep. Carolyn Branagan (Member)]: All of that same line, it's difficult from the committee when we hear one thing and then hear completely opposite testimony. Then we have to dig in and look what the facts are ourselves, which we do all the time, every day. However, my question is regarding the economy. The previous person who testified said that raising taxes did not affect the economy. And I can't remember now which slide it was, but you said the opposite, that it harms the economy. Do you have data that backs that up, numbers, examples? So I can see what

[Amy Speer (President, Vermont Chamber of Commerce)]: we have. So we have a Vermont Competitiveness Dash Board that was put together by the Vermont Futures Project that we look at for a lot of our data. A lot of compilation. I will send that to you. I mean, I think when we're One of the great questions that this committee is looking at is do people leave x state over this? And I think there are serious consequences, in particular when we're looking at pass through entities. I would challenge when you're digging into this topic to think through, I'm giving the business perspective, because that's who we represent as an organization. I would say our argument is not based on predicting mass out migration. I want to make sure I'm very clear on this. But there is an immediate concern on reduced competitiveness. So whether you're looking at workforce recruitment, business retention, incremental tax disadvantages, they matter. When people are looking at where am I going to do business, especially in a small state, that ranking forty ninth is Camoille and Associates says the state needs to get back to basics when we're looking at that. I think it's important for us to look at our picture holistically.

[Rep. Carolyn Branagan (Member)]: Have a presence in my hometown and towards 400 people, high paying technical jobs, scientific jobs, leaving next year because of various things about the economic environment. It's very difficult. I'll watch for your mailings, Branagan. Yep, yep, yep. Okay.

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: The types of businesses that benefit from pass throughs is very diverse. I mean, it's everything from our local small sole proprietor who sells the train online, all the way up to hedge funds and private equity corporations. And it is also the fastest growing subsector. And it has been associated nationally with declining corporate revenues relative to the traditional forms. When you look at the Vermont landscape, can you disaggregate the groups that you're talking about? Because I don't think all businesses are the same.

[Amy Speer (President, Vermont Chamber of Commerce)]: I would say all businesses are not the same, absolutely. And I believe whether you're looking at business function or a tax system, it's important to look at it holistically. I like to think of things on a continuum. So when we're talking about businesses, it's about human and capital resources. And I do think that corporate and income can be intertwined because of that pass through entity piece and how they're related.

[Rep. Carol Ode (Member)]: Is that helpful? I'll keep looking. Thank

[Rep. Emilie Kornheiser (Chair)]: you so much for your time.

[Rep. Carol Ode (Member)]: Wondered if we could look through that dashboard together.

[Rep. Emilie Kornheiser (Chair)]: I can have the I actually wrote down

[Rep. Carolyn Branagan (Member)]: the Vermont futures project to have them in mass. And hopefully, they'll do the dashboard. Then

[Rep. Carol Ode (Member)]: You said taxes, taxes income for expenses are accounted for. So can you give us an example of that? So if we're looking

[Amy Speer (President, Vermont Chamber of Commerce)]: at debt financing, for example, I'm trying to give a good, easy, relatable example. It could be for how payroll is treated. It could be for I have a new point of sale system that I need to set up, and I need to buy new computers, and I need to buy

[Rep. Carol Ode (Member)]: owner of a business and you operate as an LLC, and now you have income in that in a year. That's $100,000 and you decide that you need to add a system. Now what happens? So, when

[Amy Speer (President, Vermont Chamber of Commerce)]: we're looking at it, it's not based on liquidity. I would say I think differentiation is when we're looking at this proposal and we're looking at how it's going to impact the pass through entities, it is not necessarily reflective of cash on hand that's liquid, because it could be tied up with other things within the business, depending on if it's farm equipment. Are you getting a reverse osmosis evaporator for your maple sugar operations? So there's a lot of different It's not It's gray. It's something. Like getting something for reverse osmosis. That could

[Rep. Carol Ode (Member)]: be your debt payment, it could be your mortgage, whatever you are financing that is a debt payment is not reflective of that fluidity, I guess. Someone just explained to me on my way here today, if you have $100,000 in income in a year, you're paying income tax on rent, but you have to use, so you get taxed on all that income, but it's not as though you're, put it in your bank account and then you rip off it, you actually have to pay for the new equipment or pay for principal and interest on a mortgage and although the interest is deducted, the principal isn't so. So you're saying, think that's what I understood is you're paying taxes on it because of the way you set up as an LLC, but it's not really your income, you've got to pay all these expenses with it. So in a way, I mean, you would want to exclude that from income somehow.

[Rep. Emilie Kornheiser (Chair)]: I mean, actors do have

[Rep. Carol Ode (Member)]: the choice of organizing themselves. Yeah, I asked that question also. So now, but why would a person continue with an LLC or an S Corp instead of moving to something that is different? People don't go past all of that as their income, because I think a lot of businesses in the state are LLCs and escrow accounts.

[Amy Speer (President, Vermont Chamber of Commerce)]: Yeah, when you look at Vermont per capita, we have one of the highest concentrations of small businesses in the country, which many of them are set up as LLC. So, a family business is a really good example of the type of business that would be set up this way. But it is a choice. It's a choice that businesses make when they're forming, and they make that decision based on all

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: the information that they have at hand.

[Rep. Carol Ode (Member)]: So, then, they become, then would they, if this were to go through, or even with it, as it is, current system, why wouldn't they go to make their business corporations? What's hard and not hard about a corporation?

[Amy Speer (President, Vermont Chamber of Commerce)]: Yes, so some of it depends on a sole proprietor. So I am Amy's Bakery. I'm gonna make this So kind of my example that I use all the time. Have a

[Rep. Emilie Kornheiser (Chair)]: long standing bakery on Main Street in Brattleboro called Amy's Bakery. Okay. So this is not the real life

[Amy Speer (President, Vermont Chamber of Commerce)]: Amy's Bakery. This is a fictional Amy's Bakery. We actually like this. Maybe my sole purpose is that I'm making croissants that I sell at the farmer's market. It's more likely that that small business formation makes more sense than a corporation that is set up to scale and grow very differently than your sole proprietor and your sole more accepted. And so it all depends on If you had the CPA Society come in, they could probably give you examples to say, when we are sitting down and they're talking to businesses that are looking to form, they look at all the pros and cons to say, this is why you would do be a C corp, this is why you'd be an LLC, this is why you'd be an S corp. And it all depends on what your business activities are and your long term plan.

[Unidentified Committee Member]: So I guess I would say

[Amy Speer (President, Vermont Chamber of Commerce)]: I would recommend the CPAs

[Rep. Carol Ode (Member)]: to come in All and

[Amy Speer (President, Vermont Chamber of Commerce)]: right. Thank you so much. You. Sorry, Representative Page.

[Rep. Woodman Page (Member)]: Yes. Our previous speaker spoke about how the feds are having an effect on social programs in Vermont and that is correct. We know, right? But the feds are also having an effect on our businesses And maybe you can address that, well, with the war that's going on right now with gasoline prices. And for me, who lives, who I live near the Canadian border and some of the others here do as well, the tariffs also are affecting So our with that, could you maybe discuss further the issues of the Fed's affecting our businesses and our economy here as well.

[Amy Speer (President, Vermont Chamber of Commerce)]: Yeah, I mean, just like a thriving tax system is based on stability, the economy is also based on stability. And so when you are adding anything that could be disruptive, so whether it's tariffs or a war or social programs that are being disrupted for the employees of an employer, that is eroding confidence. If we're starting to Because it's tourism day, I'm going to talk about that a little bit here just as an example. Thank you

[Rep. Emilie Kornheiser (Chair)]: for taking time away from tourism day. I totally

[Amy Speer (President, Vermont Chamber of Commerce)]: All good. They're in really good hands right now. So, we're looking at a tourism business, for example, they rely on consumer confidence. And so, that what we're seeing is, yes, people might still be traveling, but how they're experiencing travel is eroding. When I talk to the Fed, for example, it's a New England trend that we're seeing where people might still be traveling, starting to erode a little bit, confidence is weakening, and so they're spending a lot less money. And the same can be true in how businesses deciding to operate. So they might say, All right, I need to put a hiring freeze on because I can't look around the corner right now. My supply chain is disrupted. My maybe visitors are eroding. And so we're in a very, what I call, murky moment because we've got hard economic indicators that are looking okay. But then when we look at boots on the ground, what's happening in the small businesses in our state, they're very impacted by this. And we saw a very big, we'll call it pause that happened last April. I would say we're not at the same level of pause, but I think we're at a very cautious phase for business operations, because there's not a lot of confidence in the economy. And the longer that there are foreign conflicts, the more and more that's eroding. For example, the national GDP, I think even three months ago, was projected, I believe, to be growing at over 3%. And now the longer that the conflict is going on, it's eroding. And I want to say it might be at low twos right now that they're expecting that GDP to grow. And Vermont, believe, is expected to grow under 2% in our GDP this year. And that is all tied to that ecosystem that you talked about. So, whether it's tariffs, supply chains, visitors, oversea conflicts, cost of oil, all food. It's all mounting the pressures. When you're looking at a restaurant, they operate on 3% to 5% margins. And so you take away If you have a 20% increase in one thing, that can be devastating. Is that

[Rep. Carol Ode (Member)]: helpful, Remi? Yes. Thank you so much. Thank you so much.

[Amy Speer (President, Vermont Chamber of Commerce)]: Have cheese and crackers today. Oh, thank you. It's Cedar Creek Pro.

[Rep. Charles Kimbell (Ranking Member)]: Oh, alright.

[Rep. Emilie Kornheiser (Chair)]: Next up, we have Andrew Wilford from the National Blackfayers Union.

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: Hi, well, thank you. I don't have any nice PowerPoints for anyone today, but

[Rep. Emilie Kornheiser (Chair)]: You have a very nice background,

[Rep. Carol Ode (Member)]: so Thank you. That'll start.

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: Hopefully that makes having to look at my face this whole time a little bit more manageable.

[Rep. Emilie Kornheiser (Chair)]: I won't tell you how large it is on the wall.

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: So I'll just start by reading my prepared remarks, and then I'll be happy to answer any questions that anyone might have. So yeah, thank you, Madam Chairwoman, Mr. Vice Chairman, and distinguished members of the committee. My name is Andrew Wilford, and I'm the Director of State Policy here at the National Taxpayers Union Foundation. I also run our Center for State Competitiveness, which aims to help states position themselves to attract economic opportunities and strengthen their tax bases through pro taxpayer policies. I'm here to testify on the proposed changes to Vermont's income tax, which include introducing a new income tax bracket as well as introducing a new 4% investment proceeds tax that mirrors the federal level net investment income tax or net. Under the proposed language, the current top income tax bracket of 8.75% would remain, but a new 13.3 top income tax bracket would apply to income above a threshold of $481,825 for single filers and $586,625 for married couples filing jointly. That would tie Vermont for the highest individual income tax bracket in the nation, though the other state that currently has a 13.3% top rate, California, that bracket kicks in at nearly $1,500,000 in taxable income for married filers. At these thresholds, the new top individual income tax rate would fall upon more than just the CEOs we think of when we're talking about, you know, the wealthiest taxpayers. It would affect doctors, tech and research specialists and lawyers. Most importantly, it would affect thousands of Vermont small business owners whose business income through S corporations or LCs or partnerships, as we talked about, passes through to the individual income tax code. Vermont small businesses would also face significantly higher tax rates than C corporations, which would remain higher, which would remain subject to the top rate of 8.5%. Such a rapid and drastic increase would take Vermont for a position where its top income tax rate is roughly similar to most of the other states in the region, besides New Hampshire, of course, and immediately make it an outlier. What's more, it would signal to high income earners that future budget shortfalls in Vermont will be addressed via their tax burden alone. On top of this, the, proposed new 4% investment Vermont investment proceeds tax would be introduced with the same thresholds as the federal level version. And like with the federal level version, it would apply to the lesser of investment income or modified AGI or adjusted gross income above the threshold. High income Vermonters would therefore face punishing tax rates for engaging in one of the most pro growth activities, investment. Vermonters investment income are at the highest level would be subject to a 41.1 all in tax rate, including the 20% federal capital gains rate, a 3.8% federal net, a 13.3% Vermont income tax, where, you know, investment income is taxed through Vermont income, ordinary income tax code, as well as a four percent Vermont investment proceeds tax. Contrast this to New Hampshire, where investment income faces no state tax and would max out at the 23.8% federal rate. Even New York, a state that Vermont traditionally compares favorably against in terms of tax burdens, would appear relatively affordable. I believe it'd be about 34.7% there. Discussion of rates and reduced investment, I recognize can seem abstract, but the consequences are tangible and reach beyond high income earners themselves. Investment is what powers growth, allowing Vermont businesses to expand their operations, hire new workers, purchase new equipment, and develop new products. Investment is also directly tied to the productivity improvements that allow wage earners to command higher salaries from their employers. All of this means that targeting investment with high tax rates is a problem for Vermont's tax base in the future. Investment contributes to the growth of every other form of tax revenue, from income taxes to sales taxes and even property taxes. Discouraging investment in Vermont through higher tax burden shrinks the tax base in the in those other areas, limiting the state's options for the future. There's one other way that high tax burdens would shrink Vermont's tax base, out migration. I think we've sort of danced around this topic a little bit, but I want to dive into it a little bit. Vermont currently comes close to breaking even in interstate migration with a net gain of, I believe, 84 new residents, according to the latest IRS data from 2022. Here at NTUF, our research has consistently found that tax rates and particularly income tax rates are the most predictive metric explaining interstate migration trends. To be sure, many factors can prove decisive at the individual level. But on aggregate, taxpayers leave high tax states and head to more competitive ones. States that have eliminated or recently cut their income taxes, such as Texas, Florida, North and South Carolina and Tennessee are the top destinations for new new residents. Meanwhile, the biggest interstate migration losers are all states with reputations for high tax California, New York, Illinois, New Jersey and Massachusetts. In a state the size of Vermont, even seemingly minor shifts in migration patterns, either in or out, would have a profound impact on the state's tax base and budget. Despite gaining just 84 new residents overall, Vermont added a net of about $93,000,000 in AGI to its tax base in 2022, driven largely by a surge from Massachusetts as the state as Massachusetts abandoned its much lower flat rate via a new millionaire surtax that drove its top rate above Vermont's. We estimate, here at NTUF that migration added about $12,700,000 in additional revenue at the combined state and local revenue. That might not not have broken the proverbial bank. Obviously, hasn't solved all your budget woes in in any in any sense. But once again, even small shifts can prove, significant. New Hampshire, a state with about double Vermont's population but facing, you know, of course, many of the same geographic and demographic challenges, gained about 4,200 new residents and an estimated 72,600,000 in combined state and local tax revenue from interstate migration that same year, despite notably lower tax burdens. This works both ways. Even a few thousand higher income Vermonters leaving for Florida or Texas would represent a substantial drain on particularly considering that the problem often leads to a vicious cycle. Departing high income earners lead to budget shortfalls, leading to tax increases on remaining high income earners in turn leading to an acceleration of the exodus. The proposed increases to higher earner tax burdens being discussed today are drastic and significant enough that a scenario involving, as I said, only a few thousand Vermonters may well prove optimistic. One last factor to consider when relying on tax revenue from high income earners is that these are some of the least stable revenue sources available. Individual income taxes and capital gains income taxes or investment income taxes in particular are consistently more volatile than revenue sources such as sales taxes or property taxes. Of course, within the individual income tax lies a few different subcategories of income. According to the Pew Research Center, by far the most volatile of these is capital gains income, followed by pass through business income, with wage income being the least volatile. Similarly, the California Legislative Analyst's Office has found that capital gains tax revenue is about three times more volatile than revenue from the general income tax. Unfortunately, revenues raised from the proposal being discussed today would fall disproportionately upon capital gains and pass through business income. That means that the revenues generated by these tax increases would hew more closely to the booms and busts of the business cycle, increasing instability and making it harder for legislators and policymakers to plan for the future. In conclusion, I'd like to thank members of the community for the opportunity to testify before you today. I'm happy to answer any questions you have, and I'm happy to work with you in the future, to make Vermont prosperous and competitive.

[Rep. Carolyn Branagan (Member)]: Thank you so much. Representative Kimbell.

[Rep. Charles Kimbell (Ranking Member)]: Thank you for your testimony. I'm wondering if not not just income tax, but if you put if you look at overall tax burden, and then compare Vermont to other states, do you have that kind of statistic available as to where, Vermont ranks in terms of overall tax burden?

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: We try not to reinvent, tax foundations work on that. But Janelle who's, I think, going to Janelle Fritz, who's gonna be speaking later with tax foundation, they maintain state by state ranking of state tax burdens. So like I said, we we don't we don't have one personally because they they

[Rep. Charles Kimbell (Ranking Member)]: That they already do a great job doing Thanks.

[Rep. Carolyn Branagan (Member)]: Yep. Representative. Thank you.

[Rep. James Masland (Member)]: Thank you very much for for being here this morning. You talked about the census figures, I believe. I think you even said 2026 in regards to Vermont's new residents. I believe that I've heard that it is slightly declined in the latest 2026 estimates. Am I reading something different?

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: No. We use we use their latest IRS data, which comes from 2022 because we want to use we wanna look at the impact on adjusted gross income, which Census doesn't really do. And we don't wanna, you know, do apples and oranges where we're looking at AGI from 2022 and population changes from 2026.

[Rep. James Masland (Member)]: Thanks a lot for that clarification. Sure.

[Rep. Edward "Teddy" Waszazak (Member)]: Yes, thank you. You talked about migration and specifically with Massachusetts. Are you familiar with, there was an analysis done by the Massachusetts Center for, it's either budget and policy or policy and budget, I can never remember the order of those two, stated that nine out of 10 people who left Massachusetts were making less than $200,000 a year. So that indicates that rather than wealthy people fleeing the state because of a millionaire's tax, when they in fact have more millionaires now than before they instituted that tax, it's actually lower income people who are the ones who really feel the, you know, cruelty that are going to the Southern States.

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: Sorry to cut you off. No, you're Well, I think part of that just comes from the fact that there are a lot more people making there a lot fewer millionaires than, than lower income individuals. So, that's kind of that's kind of to be expected that there would be less, that you wouldn't have something like 50% of the people leaving being millionaires. Our argument has never been that you're going to, you know, if you if you pass a, you know, 13.3 income tax, you're gonna have no millionaires tomorrow. That's not that's not our argument in any sense. And I think you you pointed out how, you know, the billionaire population has grown in Massachusetts. That's that's an argument we hear a lot, and it generally doesn't it it looks at the the raw number of millionaires. It doesn't look at the share of millionaires in each state. And often, the states that that pass millionaire taxes find that their share of millionaires goes down because, you know, the the the total number can increase because of population growth, economic growth, inflation, but the share decreases. I think that it's important to recognize that, again, even a very small, relatively small exodus, again, you're not no one here is arguing that you're gonna they're they're all leaving tomorrow. But they they contribute enough to the state budget that if year after year, your your share of millionaire, the millionaire population is declining. And, you know, for example, like in New York, New York is losing, we estimate about $33,000,000,000, $4,000,000,000 in revenue every single year at the combined state and local level. And when you sort of compound that, because the people who leave, you know, it's not just your your budget is is dropping by that amount every single year. So it it becomes it becomes more of a problem for the long term. I I don't think that if you if you pass this tax, you're going to, you know, you're you're gonna have no revenue tomorrow or next year. But it just it chips away at the tax base over the long term and makes those makes those decisions of how to raise revenue harder.

[Rep. Emilie Kornheiser (Chair)]: Thank you so much for your time and attention today. I really appreciate it.

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: Sure, thank you.

[Rep. Emilie Kornheiser (Chair)]: Oh, representative Ode, everyone's doing this today.

[Rep. Carol Ode (Member)]: Well, you said Matt, Vermont brought in 84 people. I was thinking about a figure that I had, which is UVM is responsible for about a thousand graduates each year staying in Vermont instead of going back to where the might be from. So who at what who is coming in? Who is going out? Do you have the exact?

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: Yeah, it's it's it's I mean, it varies by year. But in in 2022, which is the year that, the latest IRS data in the year that, I was talking about, again, the biggest, pop, you know, net increase came from Massachusetts, I think, followed by New York. And the the biggest loss, went to New Hampshire. I mean, not a not a huge, I think, net of about 200 something people, but also Florida and Texas, which I think, is something that pretty much the entire Northeast is experiencing. But yeah. But

[Rep. Carol Ode (Member)]: What more can you tell me besides where they were going coming from?

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: Sorry. I I missed

[Rep. Carol Ode (Member)]: What more can you tell me besides where they're coming from and where they're going to?

[Andrew Wilford (Director of State Policy, National Taxpayers Union Foundation)]: Well, I think you can draw conclusions based on where they're going to and where they're coming from. Again, I think that part of the part of the picture here is that is that a state can be I mean, obviously Vermont's income tax rate is a lot, lot higher than Florida and Texas, but it's it still is currently lower than New York's. It's it's slightly lower than Massachusetts's. And and I think also that, we we sort of see I think we think of millionaire tax movement or even or even general taxpayer movement as being a matter of, oh, if someone hits this, like, exact threshold, then they'll leave. Like, if you if you raise their taxes by one more dollar, then then they hit the point where they're no longer willing to pay and they leave. I think that's not the case. I think oftentimes, and I alluded to this in my remarks, that tax increases that fall exclusively upon one group, specifically the wealthy, tend to have a sort of moral impact that causes them to leave, which is that they view they they see or they perceive that their that future budget shortfalls are going to be their responsibility to address and and not and with, you know, without any increases upon the general population. So I think that that's, you know, that's what we've seen in a few other states. We've seen that, most notably in California right now, where, you know, the they're considering a 5% wealth tax. It's not even on the ballot, but we've already seen substantial out migration, because of that perception that, if if they stay, it's just gonna be it's just a matter of time.

[Rep. Emilie Kornheiser (Chair)]: Thank you. Thanks so much for joining

[Rep. Carolyn Branagan (Member)]: us. Thanks.

[Rep. Emilie Kornheiser (Chair)]: So next we're gonna go to Janelle Fritz from the TACS Foundation. And then we're gonna take a break, and then we'll hear from our last two witnesses.

[Janelle Fritz (Policy Analyst, Tax Foundation)]: Hi. Good morning. Thanks for having me.

[Amy Speer (President, Vermont Chamber of Commerce)]: Good morning.

[Janelle Fritz (Policy Analyst, Tax Foundation)]: Hi. My name is Janelle Fritz, as you said, and I'm a policy analyst at the Tax Foundation. For those who may not be familiar, we are a nonprofit, nonpartisan tax policy research organization. We focus on issues at the state, federal, and international levels. I focus on state. So while we don't take a position on legislation, I do really appreciate the opportunity to discuss Vermont's proposal to add a fifth higher individual income tax bracket, which is aimed at high earners. So the first thing I wanna say is that no state makes tax changes in a vacuum. Any substantive change a state makes will either improve or harm its competitiveness with other states affecting population, jobs, and the general economy. But tax codes are complex, which means that making meaningful comparisons between states is difficult. So as Andrew alluded to, to address this issue, the tax foundation publishes a study each year called the state tax competitiveness index. In it, we rank all 50 state tax codes on how well they encourage economic growth. We give an overall competitiveness rank in addition to rankings for the subcategories of corporate income, individual income, sales, property, and unemployment insurance taxes. We examine both the rates and the basis of each category, and we look at around a 170 variables. I think it's around a 173 that we looked at last year to provide a reasonably complete picture of state tax codes. Obviously, we can't capture everything, but we try and have, variables that capture the most important things. A rank of one is best and 50 is worse. So as of 07/01/2025, which is our snapshot date for our most recent index, Vermont ranks forty second overall with a rank of 39 on the individual income tax component. So this, unfortunately, poor income tax ranking largely stems from a high top marginal rate of 8.75%, a relatively high number of tax brackets. Vermont has four. A lot of other states have only one, and a high top rate kick in. It was 249,700 as of tax year 2025. So the income tax in the index accounts for 31.8 of a state's overall index score. How we determine those weights is if there's a tax that has a lot of variability between states where a lot of states do things vastly differently, We will weight that more than, say, unemployment insurance taxes where a lot of states are very similar just because if businesses are looking at where to locate, those bigger differences are probably going to matter more. So that's why we weight things as we do. So if Vermont were to change its tax code today and create the proposed fifth tax bracket with the top rate of 13.3% kicking in, as it said in the draft, of $481,825 for single filers, we ran this through the index, and Vermont would rank forty fourth overall as opposed to its current forty two and forty fourth in the individual income tax category, which is a significant drop. So a tax increase of this size would substantially impact Vermont's economic competitiveness, and this is, of course, reflected in the state's index ranking. In the Northeast Region, Vermont is largely surrounded by high income tax states already, except New Hampshire, of course. While it does have a high top rate of 8.75%, Vermont still has a lower rate, like Andrew said, than New York, which is at 10.9%, New Jersey, which is at 10.75, and Massachusetts, which is at 9%. If the proposed tax bracket were to be enacted, Vermont would see the highest top rate in the region for sure, and it would tie with California and having the highest top income tax rate in the country. However, Vermont's top rate would actually be more aggressive than other high earners taxes. So California, New Jersey, New York, and Washington DC all see their high earners taxes kick in at a million dollars, while Vermont's would kick in at less than half of that amount, which is worth noting. Top income tax rates do matter. Most economists consider the individual income tax to be the second most economically damaging of the major taxes right after the corporate income tax because income taxes do fall on labor and investment. The strongest economic impact of these taxes is at higher income levels because of the outsized role of the economic decisions of high earners, their greater incentive and ability to adjust their activity to reduce their tax liability, and their far greater, physical mobility, which can include moving out of a state altogether to avoid really high taxes. It's not just individuals who would be paying this tax as Amy mentioned before. Many small businesses, including LLCs and s corporations, they pay taxes through the individual income tax. So an even higher top marginal rate would substantially burden small businesses, as she already mentioned. Now we do admit taxes are not the only factor that contribute to a state success. After all, a well structured tax code isn't about to make the Wyoming Basin a metropolis, and a poor tax structure isn't going to make Manhattan a ghost town. But tax structure does play a role in a state's Acknowledging this. Thank We realize that this is not the end all be all. We've heard that before. We agree, but it is important to note that it does really play a role in successes or failures, and even a state that's not going to become a ghost town can still see some ramifications from uncompetitive rate changes. One of those states is in fact California, which is worth mentioning because it levies the same 13.3% top rate that you guys are thinking of. So economists Rau and Chew in 2024, and I can send you the name of this study if you'd like. They analyzed proposition 30 in California, which increased the top marginal income tax rate by three percentage points in 2012. So they show in their study that high earners reported between 321,000 and $436,000 less in taxable income in the first three years following the reform. So they have shifted some things around. That's about 10% of their baseline income of 4,150,000.00 in response to the major tax increase. The study also shows that there was meaningful out migration effect, which increased with income and it was concentrated among those top earners. So those responses together meant that the state lost about 61% of the potential extra tax revenue they would have received from proposition 30 within two years of the reform. So they did in fact see different, actions from those high earners moving around their income and possibly even moving out of the state. So Vermont would do well to learn from this example. So the Department of Taxes reports that taxpayers with incomes above $500,000 in Vermont accounted for 30.41 of the state's income tax revenue in tax year 2024, Giving those residents more motivation to shift around their income or move out of the state could significantly cut into the revenue that this new tax bracket would otherwise drastic rate increase like the one being discussed right now would have negative effects on Vermont's economy. It would harm the state's ability to attract and retain residents and small businesses and potentially could generate less revenue than lawmakers might hope because it does motivate those movements by high earners. A top rate of 13.3, as I said, would give Vermont the highest top rate in the country tied with California. This would send Vermont apart as a high-tech state even among its neighboring high-tech states. The change would drop its overall index ranking from 42 to 44, harming its competitiveness. As other witnesses have said, caring for those with lower incomes is extremely important. We are not trying to downplay that at all, but trying to solve that issue through large rate increases can backfire because it can stifle the economic opportunity that would otherwise build up those who need it. When it comes to a tax code, the best thing you can do is to have a broad base and a low rate that encourages economic growth, creating and retaining good jobs. Thank you so much again for the opportunity to testify. I am happy to answer any questions and I would also be happy to send around a link to our index as we also cite a lot of other studies on the effective income taxes in there.

[Rep. Emilie Kornheiser (Chair)]: I have a question, and I'm really glad you're here. Thank you. Whenever I see these state by state rankings, especially in the context of Vermont, I am always just really perplexed about how one could summarize such an incredibly complex system.

[Janelle Fritz (Policy Analyst, Tax Foundation)]: It's not easy.

[Rep. Emilie Kornheiser (Chair)]: Lines. And particularly, when we talk about a high tax burden, at what income bracket are we talking about that at, especially given we have so almost every aspect of our tax base is adjusted for income in one way or another. Right? Our sales tax, groceries are exempt. It really goes on and on. Our property taxes are very income sensitized, I think, more than almost any other state. And then our income tax brackets, the idea that three brackets would somehow be worse than one bracket is very confusing to me. So can you talk through that

[Janelle Fritz (Policy Analyst, Tax Foundation)]: a little bit? Absolutely. So I wanna make the distinction that the state tax competitiveness index is not necessarily a measure of a tax burden on a specific taxpayer. What we are looking at is how attractive is a state's tax code. Like, much are they going to attract residents, keep residents, keep businesses as opposed to other states? So in terms of, like you mentioned, the tax brackets, yes, if you have a lower income in a state with a graduated income tax, you will have lower income taxes. Yes, you are absolutely correct. What we are thinking of in terms of the preference for a flat income tax as opposed to progressive is because a flat income tax does a couple of things. First, it is good for states and that it allows the state to predict revenue a lot more easily. There are a lot more ability to predict future revenue, even under tax changes, if there's just the one rate. This also helps because it doesn't affect taxpayer choices as much. Like I was talking about before with high income taxpayers, they are more able to either shift their income or decide how much income to make at those higher tax brackets. If there's only one rate for everyone, they're not going to do that because there's just no motivation for them to make any other choices because everything is subjected to the same tax rate. It makes things a little bit easier for states in terms of that revenue. It also is a little more attractive when attracting taxpayers and say small businesses because when people are locating, they tend to look at top rates. Even if in Vermont, maybe someone who is moving in would have a lower tax rate than in nearby Massachusetts because of that progressive tax system. The taxpayer who's thinking about moving might not necessarily know that. They're not going to go through and calculate, okay, I'm going to be taxed at this rate. I will have this kind of deduction. I can have these different credits from the state. They're looking at top level things generally. That's especially true for businesses. So by having the kind of sticker price of the state actually match what the burden is, it helps attract more people to the state, even if you're raising the same amount of revenue as a different state. That was kind of rambling. Is that kind of what you were thinking of?

[Rep. Emilie Kornheiser (Chair)]: Yeah, I guess what I'm taking away from it is you're looking what makes a state attractive for this index is the burden on sort of the highest income people in the state.

[Janelle Fritz (Policy Analyst, Tax Foundation)]: Mostly, yes. I'm trying to say that that top rate is what people are looking at. Even if they're not going to pay it when they come in the state, that's what people are going to see when they're thinking about it.

[Rep. Emilie Kornheiser (Chair)]: That's what high income people are going to see when they're looking about whether or not.

[Janelle Fritz (Policy Analyst, Tax Foundation)]: That's even what just general businesses are going to see or just general residents. When they're looking at different places to live, that top rate is usually what they see first. It's not necessarily the income tax rate they'll actually be paying.

[Rep. Emilie Kornheiser (Chair)]: It's not the effective tax rate.

[Janelle Fritz (Policy Analyst, Tax Foundation)]: Right. Right.

[Rep. Emilie Kornheiser (Chair)]: Okay. I think to some degree that's partly because these metrics and ratings such as the ones that you publish have become very broadly shared about, rather than because people are digging into the websites of tax webs or digging into state tax websites before they work somewhere. But I appreciate that. You. Yeah, I understand. Yeah. Thank you so much for your time today. I really appreciate it.

[Amy Speer (President, Vermont Chamber of Commerce)]: Yeah, thanks What for

[Rep. Emilie Kornheiser (Chair)]: is happening, team?

[Rep. Edward "Teddy" Waszazak (Member)]: Don't know.

[Janelle Fritz (Policy Analyst, Tax Foundation)]: Am I

[Rep. Emilie Kornheiser (Chair)]: going too fast?

[Rep. Carol Ode (Member)]: I don't

[Rep. Charles Kimbell (Ranking Member)]: know. A question for you on mobility and the rise of remote work or the ability to operate from anywhere, especially with COVID that really accelerated that. In your comparison state to state, do you see more mobility because of the ability to work from anywhere, or do you see less and there's shifts going on with that? So is tax flight a greater possibility in your analysis because of the ability to work from anywhere?

[Janelle Fritz (Policy Analyst, Tax Foundation)]: I think that's definitely a factor. As you mentioned with COVID, with more people working remote, people have more ability to work where they want to. I think one of the things that also comes into play with remote workers is different filing and withholding thresholds in different states where sometimes as soon as you work in a state for a couple of days, technically you are under the authority and have to file for that state. So that's a little bit that maybe be keeping things a little more stable than otherwise. But yes, I would say that there is a lot of tax movement in terms of where we're seeing migration. We are seeing migration towards a lot of low tax states. Florida, Tennessee, Idaho, they are seeing a lot of in migration. States like California and New York are seeing a lot of out migration. There is at least some overlap between a state's tax code and how much they are attracting residents.

[Amy Speer (President, Vermont Chamber of Commerce)]: And there's also a lot All

[Rep. Emilie Kornheiser (Chair)]: of those states also have very low housing costs unrelated to the tax. But there's like all Anyway, the world's

[Janelle Fritz (Policy Analyst, Tax Foundation)]: gonna have Of And

[Rep. Emilie Kornheiser (Chair)]: if you're trying to summarize it in testimony, it's not your fault, Janelle.

[Janelle Fritz (Policy Analyst, Tax Foundation)]: Right. No, there are a lot of factors that go into where someone is moving. We're not saying that tax policy is gonna be the first thing they think of. They're like, man, I'm gonna get a job here, but tax code, not gonna do it. That's not really gonna happen. What we're trying to say with the index is if there are two equally good options, like let's say, and this happened to me, I get a job in DC and I have the option to move to either Virginia or Maryland because I'm not paying housing prices in DC. I chose to move to Virginia because the taxes are better. That's the kind of thing that we're saying. If there are two options, they may go for the one that has a better tax code.

[Unidentified Committee Member (possibly Rep. Rebecca Holcombe)]: Thank you.

[Rep. Carolyn Branagan (Member)]: Janelle, you mentioned earlier on you had a paper that had links to further information that you had summarized somehow. That would be helpful to me anyway, and

[Amy Speer (President, Vermont Chamber of Commerce)]: I bet the rest of the group are on

[Rep. Carolyn Branagan (Member)]: the table. If you could add more of that, it'd be helpful. Thank you. Absolutely.

[Rep. Emilie Kornheiser (Chair)]: Thank you so much for your time. I really appreciate it.

[Janelle Fritz (Policy Analyst, Tax Foundation)]: Thank you. Best of

[Rep. Carol Ode (Member)]: luck. Thanks. We are going

[Rep. Emilie Kornheiser (Chair)]: to take a five minute break, and then we have two more witnesses before