Vermont Legislature SmartTranscripts:

[Rep. Emilie Kornheiser (Chair)]: Good afternoon, Louisiana Means Committee. Today is April 21, and it's 01:00. We are going to continue our work on the committee bill for new income tax brackets. And then for the rest of the week, we're going to alternate between this committee bill and legislation that has come from other committees. The Senate put S-two 20 into the yield bill on Friday. And so we're going to leave S-two 20 on that there wall and wait for the yield bill to show up, which I think won't be until next week. Those are my public service announcements. It's going be a week of fun alumni visits. This afternoon, we have Graham Campbell joining us, former JFO staff to this supported this committee. And tomorrow, we have former senator Janet White joining us to testify in Adele. So that's fun.

[Rep. Rebecca Holcombe (Member)]: With that, Pat, would you like

[Rep. Emilie Kornheiser (Chair)]: to join us? Thank you. So folks, last week, there were a lot of questions about what happened during TCJA and how we responded. And so Todd, Kirby, and Graham are all going to help us unearth that historic experience.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah. Patrick Chittenden, joint fiscal office. So just to give the committee a quick sense of sort of the order of operations, I'm gonna go in. I'm gonna start with going through a lot of the TCJA provisions that under normal conformity would flow through. We'll also look at a few of the items that would not flow through because they're below the line at the time. We'll look at some of how both federal tax changes for Vermonters and state tax changes for Vermonters would look, because in this situation, they were both winners and losers. Yeah, then I'll do a very brief explanation of some of the things Vermont changed to respond to TCJ, but Kirby's gonna walk you through in a little more detail on specifically the language and the mechanics of what some of those changes were. So that's sort of how things will flow. I do know Graham needs to start at 01:30, so we'll get as far as we can until then and then pick up where we left off. Okay, and we're gonna be focusing on the TCJA personal income tax provisions. There were obviously a lot of things happening on the corporate side, but we will just focus on personal income taxes today. So yeah, TCJA made several changes on federal personal income taxes in 2017. Many of these would have flowed through to Vermont under normal conformity. Two of the sort of big items that would affect Vermont in terms of flowing through were the expansion of the standard deduction and the elimination of personal exemptions. So on one hand, what they were doing is expanding deduction that everyone, every taxpayer can take. But for those taxpayers who have a lot of exemptions, you'll see that that may not have been as beneficial to them at the time. And at this time, so now if the federal government made changes to standard deduction or personal exemptions, that wouldn't affect us. But you'll hear a little bit more about that when we start talking about the response that Vermont had. And then a lot of the other changes that you can see here were relating to deductions at the time. There was changes to a lot of the itemized deductions. So a lot of the deduction changes were specific to itemizers. Part of the thinking was we can make these itemized deductions a little bit less generous because what we're doing is disincentivizing people from itemizing by greatly increasing the standard deduction. And when I say we, I mean the federal government and at the time, the way Vermont's tax code was set up, that would have been true for a lot of Vermonters. But you'll see as we go on, that wasn't sort of the only dynamic at work on the federal side. So I'm gonna try and go through each of these provisions, kind of high level overview, just to give you a sense of what some of these changes were. Zoom bars in the way that are in the way of my titles. Okay. Oh, and sorry, before we go through those individual things that flowed through, here's just quickly some of the things that did not flow through. There was a lowering of marginal income tax rates and reconfiguring of some of the brackets, a doubling of the child tax credit from 1,000 to 2,000, along with some eligibility and refundability changes. There was a large increase in the estate tax exemption, which I know is not necessarily personal income taxes, but know that somebody has taken testimony on that this year. And then also increase the exemption amount and phase out for the alternative minimum tax. Like I said, these were all things that are below the line on the federal level, even at that time, which would not have flowed through, but were important provisions when thinking about the totality of what Vermonters are paying both on their federal return and on their state return. So changes that float through. TCJA was in 2027. Coincidentally in 'twenty seven, there was one particular change that was made in the miscellaneous tax bill that year that was not necessarily a direct response to TCJA, but prior to then, if you can see my cursor, this had actually been our starter for Vermont income taxes. There are still some states out there that are still hooked up to federal taxable income as their starting point, but this is when the change was made to make our starting point, taxable income, federal taxable income, and move it on up here to be federal adjusted income, or sorry, federal adjusted gross income. And why is that important? In 2017, we made that switch to AGI while maintaining and allowing a lot of the federally allowed deductions, including the standard deduction linked up to their amount, the personal exemptions again linked up to their amount. So that shift sort of gave Vermont immediately a little bit more control in everything that's happening between the calculation of adjusted gross income and tax, which sets the stage for all of these changes that the TCJA made with regards to, again, the standard deduction, personal exemption, and a lot of these deductions that apply to itemizers. Would you call that decoupling? That's a good question. I don't know if I would have a super technical term for it because like I said, we shifted the starting point from taxable income to gross income, but we were still linked up to a lot of those federal deductions. So a lot of that federal law still applied even though it was happening on the Vermont side of things. We were doing some of those calculations on the Vermont return to allow those deductions to still apply. It's maybe a shift. Be like, we decoupled? Yeah, that's maybe a shift. So yeah, again, sort of to the highlights. So TCJA expanded this standard deduction from 6500 inflation, obviously, from 6,500 to 12,000 for individual filers. And at the same time, increased from 13,000 to 24,000 that amount for married filers. At the time, Vermont tax code was linked up. So, you saw from the miscellaneous tax bill some references in Kirby's language linked up to US code, whatever number. This looks similar to that at the time. So it was really just linking up Vermont to the federal amounts. So for that reason, that expansion would flow through to Vermont. And when you greatly expand the standard deduction, which everyone takes, that's going to have a large downward effect on Vermont revenues as it flows through. Conversely, TCJA repealed the personal exemption, which is just saying that at the time 4150, you were allowed to take an additional exemption for yourself, your spouse and any dependents. So you can see right away, if you are a tax filer with a large family, you might be getting dinged a little bit by this new setup. If you're an individual filer with no dependents, this could be very beneficial. And so that's sort of something as we're going through, I want you to all keep in mind, especially when we get later in the presentation to taxpayers who are seeing tax increases from this and those who are seeing decreases. And looking at it from a federal context and we'll look at the brackets a little bit on the federal side of things, while this shift from having both the personal exemption and standard deduction to really just having one larger standard deduction, for a lot of those people who might be getting dinged by that dynamic, there were definitely tax rate decreases, those marginal income tax rates, so that is something offsetting some of those changes on the federal level for a lot of people. So those are two of the larger items. Second thing that they did have a lot of language in TCJA about had to do with itemized deductions. Part of the thinking, as I think I mentioned, was that we're greatly expanding the standard deduction. It's going to disincentivize people from itemizing, because when you're filling your return, have the option of federal return, you have the option of itemizing or taking a standard deduction. It's one or the other, not both. And so prior to TCJA, taxpayers who were itemizers had to phase down their itemized deduction amount if they were single, if their income was over about 260,000, if you were a joint filer, it's about 315,000, that's where that phase down kind of starts. But what TCJA did was suspend the limitation for these itemized deductions temporarily from 2018 to 2025, HR1 made those permanent. And so by suspending the limitation on itemized deductions, that's something that would have had a downward effect on Vermont, because remember at the time, were linked up to what the federal definitions are for what your standard deduction or itemized deduction that you could take was. Some of the particular itemized deductions, there was a deduction for pass through income prior to TCJA. This was just treated as normal income. What that bill did was allow a deduction of 20% for qualified business income for itemizing taxpayers. Again, taxpayers who did not itemize would instead take the standard deduction and this wouldn't apply. Again, this is something where you're increasing the amount that an itemizer can take. So increasing the deduction that they can take, that's something that flowing through Vermont has a downward sort of force on state revenue collections. Mortgage interest and casualty losses. These were two itemized deduction areas where the federal TCJA made sort of itemizing less attractive if you had these types of expenses. So prior to TCJA, itemized taxpayers could deduct mortgage interest on up to about a million dollars in indebtedness to two homes. So if you were below that threshold, if you had a million or less in indebtedness, the interest you're paying on those loans could be deducted. What TCJA did was lower that indebtedness threshold from a million down to 250,000. So a lower amount of debt that you're paying interest on that you could then put towards your itemized deduction. So that's something that would have a downward effect flowing through to Vermont for itemizers on state revenue.

[Rep. Rebecca Holcombe (Member)]: I'm sorry, You just said 250,000, but the slide says 750,000. Did it go by?

[Patrick Chittenden (Joint Fiscal Office)]: It went down 250,000.

[Rep. Emilie Kornheiser (Chair)]: Down by 250,000. Down

[Patrick Chittenden (Joint Fiscal Office)]: by, yeah. Sorry about that. Now you're

[Graham Campbell (former JFO Fiscal Analyst)]: trying to make sure that

[Patrick Chittenden (Joint Fiscal Office)]: I understand.

[Rep. Rebecca Holcombe (Member)]: My understanding was that when this all happened, the result was that a lot fewer German owners were able to take advantage of the deductions. So before, they used to get a lot more ability to deduct interest and donations and stuff like that. But with this change in federal law, they didn't get that anymore, so they gave it to people on air. Do you remember that happening?

[Patrick Chittenden (Joint Fiscal Office)]: So there are some of these deductions for itemizers that were made a little more attractive or generous, if you call it, but there's certainly plenty that were made less attractive with the idea that with the expansion of the standard deduction, we're gonna have fewer people itemizing. But really, you talk about some of the large tax decreases for a lot of people, someone might previously have been itemizing that was great for them, but the standard deduction increase is more palatable now. Either it's not worth the work to pull all the information together or they're better off for it. But really, a large mechanism for decreasing a lot of people's federal tax liability was the reduction in the marginal tax rates and some of the reconfiguring of the tax bracket schedule. So was the result

[Rep. Rebecca Holcombe (Member)]: that the federal government got more money from tax, from the income tax, or less? So what was the objective of doing all this?

[Patrick Chittenden (Joint Fiscal Office)]: No, it was certainly a federal tax decrease. A lot of people effect of the Tax Cuts and Jobs Act was to lower personal income tax receipts, generally.

[Rep. Rebecca Holcombe (Member)]: His tax first, June?

[Patrick Chittenden (Joint Fiscal Office)]: Yes, 2017. So I think he would have had sworn in in January year. Yep. Another piece in terms of itemized deductions that was changed. So previously taxpayers could deduct losses not compensated by insurance if they exceeded 10% of their AGI. What this bill did was change that to you could only do so if the losses happened or incurred during a federally declared emergency. It's again, making this less attractive so that you can really only take advantage of this deduction if you had losses during one of those emergencies would have had an upward effect on Vermont revenue collections because if you're an itemizer, you can deduct less with this change unless you meet the requirements. State and local taxes. So prior to TCJA, itemizing taxpayers could deduct all of their state and local property taxes and either state and local income taxes or sales tax. TCJA limited this amount to 10,000. And so taxpayers not itemize would instead take the Taxpayers who made the shift of not itemizing and instead taking the standard deduction, the expanded version. This is not something that would apply to them. But what's sort of interesting and looking at some of those old materials about this is that at the time, Vermont did not allow for the federal deduction for state and local income taxes, but it would allow it for state and local property taxes. So what taxpayers who are still itemizing are incented to do is apply their property taxes towards that deduction. And that's something that could still come through under conformity here. But then, if there's still a little leftover before the cap, they could claim some of those income taxes that they've had to pay. And so the upward effects on taxes by making this, on Vermont tax collections, making this more restrictive, it's sort of offset by the fact that people could still apply their property taxes towards that. It's just the income tax piece of it that if they didn't put their property taxes towards the federal deduction amount would have that upward effect on revenue. Does that make sense? Sort of a swap and making sure you're applying the right dollars towards the deduction. So overall for itemizers would have an upward effect, generally speaking, on top of our revenue collections, but it is mitigated by that sort of swap. Charitable contributions. So prior to TCJA, itemizing taxpayers could deduct charitable contributions up to 50% of their AGI. TCJA increased that to 60%. And so that is something that could potentially increase the value of that deduction for itemizing taxpayers, which again would have a downward effect. So something that through conformity would have flowed through. Medical expenses and moving expenses prior to TCJA itemizing taxpayers. I'm going to keep saying that a lot of these have to do specifically with itemizing taxpayers could deduct unreimbursed medical expenses to the extent that they exceeded 10% of their AGI, that amount was reduced to 7.5%. So, unreimbursed medical expenses exceeding 7.5% of their AGI. And for itemizing tax bearing, this increase in the amount that you could deduct would decrease their taxable income having a downward effect on Vermont revenue collections. The other thing had to do with moving expenses. This is something that was sort of above the line baked into the AGI calculation, so not really part of the itemizing discussion here. But it was greatly this has to do with moving moving in proximity to work as a requirement to do that work. TCJA really restricted this to military service members who had to relocate for that reason. Okay. So, next, and actually after this section, it might be a reason for a stop and point before we get into a lot of charts and numbers for Graham. Oh, after this next section. Yeah, after this next little section. It's not as long as that one. So next, I'm gonna talk about some of the ticket items in TCJA that would not have flown through even under normal conformity. Did you

[Rep. Emilie Kornheiser (Chair)]: say ticket items?

[Patrick Chittenden (Joint Fiscal Office)]: Items and provisions.

[Rep. Rebecca Holcombe (Member)]: Oh, okay, cool.

[Rep. Emilie Kornheiser (Chair)]: I just want to make sure I'm

[Patrick Chittenden (Joint Fiscal Office)]: right there. So the first one had to do with the reconfiguration of the tax bracket schedule. On the left here, can see prior federal law, And on the right here, can see TCJA, what that changed it to. Again, the brackets themselves are pegged to inflation, the current ones will not look exactly like this, but this was sort of the swap that happened at the time. You can see that if we look at the tax rate schedule here and compare it over here, you can see that all of the rates except for the very lowest rate were all decreased by about two to three to 4%, depending on which bracket you're in. And then also some of the different tactical income bracket amounts were reconfigured a little bit. But really, overall net effect of all this was this was a driver of a lot of the very significant income tax breaks that people saw in their federal return. So driving a lot of the tax breaks on the federal return, Vermont has their own marginal tax rate schedule. So this is not something that, barring Vermont sort of trying to mirror would have flown through. So in the previous section, you saw all these sort of upward and downward effects from those different provisions that would flow through in terms of increasing or decreasing their taxable income. Once you reach that point on your federal return, these new sort of lower rates would really drive a lot of those income or tax decreases for a lot of people, not something that barring any change would have applied to Vermont at the time. Child tax credit, which Vermont now has its own. It's a standalone, not coupled to anything federally, but this bill increased that credit amount from a thousand per qualifying child to 2,000. Also previously, the credit was refundable up to 50% of income over 3,000. When we say earned income, that's income from work, not any kind of passive income. And so what TCJA did was just instead of having this 15% of earned income sort of consideration, the refundable amount was changed to 1,400, but it had this additional piece in it of $500 that was non refundable. If it was a qualified dependent but didn't meet the age requirements to be a qualified child. So, that was a change there. Previously, the credit phased out at 75,000 for individual filers and 110 for joint filers. TCJA bumped that up to 200,000 per single and 400,000 for joint. Again, this is not a provision that would have flowed through to Vermont, so it would not have any sort of Vermont state revenue collection impact. There were some changes to the estate tax previously. Individual states valued at 5,000,000 or so 5,000,000 of individual states would be exempt 10,000,000 of joint estates would have been exempt. And what TCJ did was essentially double these thresholds. So if it was a single estate, 10,000,000 was exempt from this tax, about 20,000,000 was exempt for a joint. And so these are indexed for inflation. So for 2016, about 15,000,000 is the joint exemption and about 30 is the married exemption for the estate tax. Vermont's got its own standalone estate tax. So again, these provisions were not something that was gonna flow through. And I will just note, this isn't personal income tax, so it's a little bit different conversation, but Vermont does have its own standalone with our own thresholds and what does and doesn't apply. So those are the pieces that do flow through and don't flow through. The next section will probably take a little bit, but what we'll be looking at next is all the people who did see tax increases on either their federal or state and those who saw tax decreases on their federal or state and how that sort of dynamic of some people seeing very large tax decreases was sort of mitigated a little bit by people seeing tax increases.

[Rep. Emilie Kornheiser (Chair)]: Thank you. That is a perfect segue, and Graham has joined us. Hello, Graham Campbell. Hello. Welcome to Ways and Me, and it's very good to see you.

[Graham Campbell (former JFO Fiscal Analyst)]: It's great to see you too. Is this is this a new room I'm looking at?

[Rep. Emilie Kornheiser (Chair)]: Yes. We added an additional committee member last biennium and had to move rooms, and we never got our old room back, unfortunately. But there's more space in here. Yeah. The art fits better. There's more staff staff and a lovely little desk.

[Graham Campbell (former JFO Fiscal Analyst)]: Oh, wow. Okay. So we you've really upgraded.

[Rep. Emilie Kornheiser (Chair)]: In some ways, but we lost that tree that had the birds on it. So, you know, back to day. You We can't watch people come over from the Pink Lady anymore either.

[Rep. James Masland (Member)]: You see the retractions.

[Rep. Emilie Kornheiser (Chair)]: So thank you so much for hopping in from a very different time zone to unearth the history with us. Really appreciate it.

[Rep. James Masland (Member)]: Where are you located?

[Graham Campbell (former JFO Fiscal Analyst)]: I am currently in in Wellington, New Zealand. It's it's about to take over to five 05:30 in the morning on, I guess, it'd be Wednesday now. So

[Rep. Rebecca Holcombe (Member)]: It's pretty fun. Yeah. Yeah.

[Rep. Emilie Kornheiser (Chair)]: And yeah. So we're really glad you're here. Folks just have a lot of we're talking about, you know, the recent Trump tax changes and wound up trying to unearth some of the decisions that we did last time and thought it would be fun to have you tell us about what some of our thinking was in the past as far as you can remember it.

[Graham Campbell (former JFO Fiscal Analyst)]: Yeah. I'd be I'd be happy to to talk through some of that. I prepared just some brief reflections last night, which I put together in a slide deck for for the committee. But I should just say I haven't done this well. For the record, my name is Graham Campbell. I am a former JFO fiscal analyst from, let's see, 2017 through 2023. So, was the Tax Cuts and Jobs Act and the first round of Trump tax cuts were kind of like the first thing that I ended up working on when I joined JFO. So it was kind of a a baptism by fire. So the whole process is is not something that I'll easily easily forget. So when the chair sort of asked me to to come talk about some reflections, what I remember at the time, it was pretty easy for me to to say yes. So if it's okay, chair, I'll just talk through briefly what I have, and then, you know, I'm happy to take it in in any direction that the committee finds useful and answer

[Rep. Emilie Kornheiser (Chair)]: Absolutely. The floor is yours, however you wanna use it. Thanks.

[Graham Campbell (former JFO Fiscal Analyst)]: Sweet. Let me just

[Unidentified participant (Zoom/technical aside)]: pull up this PowerPoint.

[Graham Campbell (former JFO Fiscal Analyst)]: Right. Can everyone see that?

[Rep. Emilie Kornheiser (Chair)]: Yes. Yes. Look those green mountains.

[Graham Campbell (former JFO Fiscal Analyst)]: Yeah. It's one of the things that's changed since I was at JFO is that AI has become a thing. So this is, like, the first time I've used AI to help me create a PowerPoint design, and this is what it came up with for Vermont. So technology has changed things over time. Yeah. Like I said, I think these are just some some overall reflections thinking about the Tax Cuts and Jobs Act, also known as the first Trump tax cuts, and what was sort of going on at the time and what we were thinking about back in 2017, 2018. And then I have some sort of concluding slides that I was sort of thinking about that, you know, might be good sort of food for thought as the committee moves forward with whatever work it's it's currently looking at and sort of keeps this journey for sort of tax reform and improving the tax system going in Vermont. Before I wanna before I begin, I just wanna say that this is these are sort of my thoughts in a in a personal capacity that reflect anything on on JFO. And so I I also will say that I have been out of the game for, you know, three years. So there'll be quite a lot of stuff that I won't be as current on to say Pat would be. So might have to defer defer to Pat on some of the on the questions that are more related to to newer content. But I guess I the first thought I'd have about the Tax Cuts and Jobs Act and how Vermont reacted to it, which is in the form of act 18 act eleven two thousand eighteen, Is that this is, like, actually a really, really long journey to get to act 11 for the full decoupling of Vermont's tax code from the federal system. And I think it really begins around 2001. Prior to 2001 and up to about 2001, Vermont's personal income tax regime was basically a simple I mean, there was more to it, but largely, it was just 24% of the federal tax liability. So you would just sort of put on the form whatever your tax liability was, and then we'd multiply it by 24% and take that as revenue. That all really changed in 2001 with the first round of of the George w Bush tax cuts, where the, a lot of things changed, namely, some of the the rates. And then there's a second round of Bush tax cuts as well, which changed things like how dividends and capital gains were were taxed. But 2002, Vermont decoupled from the federal tax system for the first time by inch mainly by introducing its own, income tax rates based upon federal taxable income. So the reason we did this is because back in 2001, we were just taking that sort of federal tax liability and multiplying by 24%, but the Bush tax cuts reduced, you know, federal taxes on Vermonters back to 2001. So the way that we handled that was by by sort of decoupling, creating our own rates, but still relying on federal taxable income for for the starting point for Vermont taxes. And that's what the sort of movement on federal taxes kept going with this the second Bush tax cuts in 2003. And then I would characterize the period of 2005 to 2017 as Vermont had learned that, you know, it was going to be at the whim of federal tax policy, and it really started to move towards independence and decoupling from the federal system. So some key milestones were in 2009, the state started limiting, the deductions from federal, from adjusted gross income to federal taxable income on the itemized side. So there were limits placed on the state and local tax deduction. There was capital gains exclusion, sort of created Vermont's own specific capital gains treatment relative to the federal regime. In 2015, we eliminated the state and local tax deduction, then we capped itemized deductions at two and a half times the federal deduction except for medical and charitable deductions. And so there's really like, every year, there were discussions going on about how Vermont could become more independent from federal tax code, from 2005 to 2017. And I think one of the sort of seminal reports and work done on this was the February, which was one of these commissions that the that the legislature has set up, to examine in-depth the the tax code and ways that it could be, made more efficient and stronger. And their first recommendation was to recommend or restructure the personal income tax, and they made six recommendations within that. I've highlighted three of them here because each of these really speaks to the push to start decoupling from the federal tax code. So its number one recommendation was around personal income tax, and its first recommendation within that recommendation was to shift from federal taxable income to adjusted gross income. And then second one was to eliminate the the standardized and itemized deductions on Vermont's tax code. The whole sort of goal here was around providing independence to the Vermont revenue system and making it a, I guess, a cleaner and more simpler system. And you can see one d is a similar sort of recommendation around making things simpler to understand for taxpayers and to and to decouple as well from the federal the federal system because there were we were still picking up a lot of those federal deductions back in 2011. And so things really start to pick up steam in 2017. In 2017, we set adjusted gross income as the starting place for Vermont personal income taxes. But it was kind of I wouldn't call it, like, a a nominal change, but it was it was it didn't actually mean that much in the grand scheme of things in 2017. Because the way it worked is we set Vermont taxes to adjusted gross income, but then we would then ask people to start putting in their deductions they had on their federal tax form as well. So but as I understood at the time, that first change was to start sort of laying the groundwork for, eventual chipping away at the remaining bits of the federal linkages in the personal income tax system. But then the tax cuts and jobs act was passed in late two thousand seventeen that really forced the legislature's hand, to kind of accelerate this completely. And at the time, that was that was kind of the real push to really pull the pull the federal linkages up by the root and and truly decouple. And so that that's what really led to act 11 of 2018. We created our own birth on specific personal exemptions, new standard deductions. There's new charitable tax credit. We removed all the deductions. We started from from adjusted gross income. And so what I'm sort of laying out here is that act 11 happened, I think, relatively quickly in 02/1718. It felt very felt like a big move at the time. We were moving changing a lot of things, but it was actually really a long journey to that point. And it was something that the legislature had been eyeing for a long time. And this was really the the push to to get the legislature in Vermont over the edge. And so why did we why did Vermont end up making the change? The first sort of short term view was mitigating the revenue impact on Vermonters. I think Pat may have spoken to this, but at the time, we were estimating that the tax cuts and job debt, because of those flow through from the federal deductions, was going to lead to all sorts of wackiness in the Vermont in terms of how how many Vermonters would be paying more and who would be paying less. But on net, it was expected to raise close to about $30,000,000 in extra personal income tax revenue at the time. But like I said, it was really in a way that was not how would I put it? Not in a way that the legislature or the administration would have designed the tax proposal. A lot of the the increase in taxes was because of the loss of a personal exemption, which meant that large families, people with larger households ended up paying a lot more if we hadn't changed anything. And then there were, you know, things like some of the loss of this the itemized deductions, which were making people pay more, which weren't people who the legislature thought were in the sort of goal of being progressive were not necessarily what the goal was. And so the the proposal was to to completely decouple from the system, come up with new specific Vermont deductions, personal exemptions, and then keep a couple of the existing itemized deductions and change some things to credits. But this was the, the sort of overall net impact relative to 2017 Vermont tax law. So what this table shows is, it's the table that I created at the time, and it basically shows by income bracket, the total so the second column's the total tax change in millions of dollars from h nine eleven, which was the the bill to to to change everything in the personal income tax side, the average change in taxes, the change in effective tax rate, so the total tax paid over their income. And then on the far right was sort of the share of total returns that fell into each income bracket. So relative to the tax law in 2017, the net effect was really just a small increase in revenue raised relative to what had been in place prior. So the number one goal at the time was to make this a relatively new revenue neutral tax policy change. Yes.

[Rep. Rebecca Holcombe (Member)]: Rob? Sorry. You're you're good. Okay. Sorry. Thought there was a question.

[Graham Campbell (former JFO Fiscal Analyst)]: So, yeah, the number one goal is to make this a revenue neutral tax policy, which I think was was mostly achieved. That's the short term goal. The long term goal, I think, was was a sort of three separate things. The first was and probably foremost was independence of our revenue systems from federal tax policy. So the legislature had learned that lesson 2001 and, again, in 2003, had been pushed by the tax commission and had been sort of undertaking a long journey to decouple from the federal system. And so this really provided that push to to finally move away on the personal income tax side from the federal system. The second was a was a simplification of Vermont's tax system. The the new system, at least I believe, what is much more straightforward for Vermonters to complete their taxes than than the old system. So for instance, there's a there's a Vermont personal exemption. There was Vermont standard deduction. There were a couple of deductions, like, in in credits. So there was the charitable tax credit, but there was none of this adding back federal deductions. There was none of this multiplied by two and a half times the federal standard deduction that would and that would be your cap. So it really simplified the Vermont tax personal income tax system. And so that that, I think, is a long term benefit to to Vermont. And then finally, there was an eye to moving the system, at least on the legislative side, to improve progressivity and equity within the tax code. The chart on the right shows Vermont's effective tax rates by income band for 2019 versus 2024. And so what we see is a post tax change actually, there might be an error on my part. I think 2024 here is mixed mixed up the years. I'll correct this. But I think what I'm showing here is 2000 the green should be 2019, and the blue should be 2017. But, basically, the two years after the switch, the Vermont tax code became more progressive. So the green line shows post tax change, and the blue line shows pretax change.

[Rep. Rebecca Holcombe (Member)]: Okay. And

[Graham Campbell (former JFO Fiscal Analyst)]: so the green line immediately lowered effective tax rates for for people in the lower income brackets up to basically about 75,000, and then it, basically made the curve a little bit steeper beyond, a 100,000, a 150,000. And so since that point in time, the Vermont tax code system has actually gotten quite a bit more progressive in term after the passing of the the child tax credit and the improvement of the the earned income tax credit over time. So but this just shows the change relative to the two years that we were, pretax change, post tax change, and just got a little bit progressive, and has since gotten it's gotten more progressive over time.

[Rep. Rebecca Holcombe (Member)]: So I'll wrap up by

[Graham Campbell (former JFO Fiscal Analyst)]: just talking about some, I guess, reflections and the things that, I considered as it was look looking back upon that that overall experience. And the thing that I kept coming back to was that in the when I was at JFO, that sort of north star for thinking about good tax policy was the National Conference State Legislature's principles of high quality tax system. Tax system should be sustainable or reliable. It should be simple. It should be economically competitive, fair, accountable to taxpayers, and tax neutral. Meaning that it doesn't affect behavior. It's not does not lead to a lot of workarounds for people to try to figure out within the tax system. And so my reflections are kind of put through these these these lenses and then these these principles. And what I'd say is that after thinking through all this is that act 11 and sort of the Tax Cuts and Jobs Act was a really good example of the trade offs that the legislature needed to make and still makes every day between all of these things as you design a tax system. But most specifically around act 11, I think there was a real rub between the simplicity and the fairness of the system. So act 11, I think, made the personal income tax quite a lot simpler for taxpayers, and it made the system more progressive as that chart showed in the last page. But since that passage, I think when I was at GFO and, you know, as I sort of read in the digger occasionally, there are there's been pressure to improve the fairness of the taxes to make it more progressive over time or prove improve fairness for certain constituencies, which will have the effect of improving some of that fairness, but it also will, you know, change and weaken sort of the strength of the simplicity of the tax code. So examples of that were military exemptions and credits, social security exemption expansions. There was a lot of pushback at the time around the charitable tax credit in act 11 to make that more generous or to make it a deduction. There were been calls when I was at the legislature to expand the medical deduction quite a bit, and there was this new student loan interest deduction, which was passed, I think, in my last year. So there's there's just constant pressure that you all and you all see this every single day to to improve the fairness of the of the tax code, potentially at the at the expense of simplicity. The second would be around reliability versus the fairness side. So like I said, it the the the tax code was quite a lot more progressive in 2000 because of act 11, but it potentially made revenue a bit

[Unidentified participant (Zoom/technical aside)]: more I don't

[Graham Campbell (former JFO Fiscal Analyst)]: I I say more volatile here, but more accurately, I would say it's it was just a little bit more difficult to predict because what it meant is that there was more income being generated from higher income taxpayers and a and a smaller a large portion of the tax base received, you know, relatively small tax cuts as a result of act 11. And that's sort of the real heart base of the personal income tax revenue system. And so the more revenue was being generated from higher income bands, and that income tends to be a little bit more volatile over time. And so what I think that meant is for guys like Tom Covet and Jeff Carr, it made their job a little bit more difficult. And it probably will mean in the long run that sort of how would I put it? Misses in the forecast or, you know, extra revenue or less revenue coming in than forecast might become more of an issue. I think also the Social Security exemption that was put in place in act 11 might also become a bigger issue over time as the state's population ages. That was one that was really, at the time, thought about a lot because the size of Social Security benefits that are going to Vermonters is growing really fast. I remember I did I saw an issue brief when I first joined JFO, but the amount collected for Social Security benefits was, like, 30,000,020 like, 15 or something like that. And then one of the last things I published before I left was an update of that issue brief, and it was, like, close to 70,000,000. So it,

[Rep. Emilie Kornheiser (Chair)]: like We actually Graham, we actually still use that issue brief sometimes. So thank you for it. I think we have one question here from representative Holcombe.

[Rep. Rebecca Holcombe (Member)]: Thank you. Going back a little bit, you referenced the medical deduction. Do you have any sense of who that is benefiting or hurting the most? Who's who's using the medical deductions, demographically? Or is there a pattern? There may not be a pattern.

[Graham Campbell (former JFO Fiscal Analyst)]: Yeah. I think that might be better question for Pat to answer. At the time So prior to act 11, it was really being used by large portions of the population. So there was a lot of people using the medical deduction for things like nursing care, unexpected medical expenses, and it was a pretty sizable deduction. I think it was, like, somewhere between 5 and $10,000,000, but over time, I'm not sure how that's that's changed. So I I think the best person to give you the answer on the most up to date data on that would be Pat.

[Rep. Rebecca Holcombe (Member)]: Thanks. Back to you.

[Graham Campbell (former JFO Fiscal Analyst)]: And the final slide I have here is just thinking about fairness versus reliability and thinking about the tax system as really, like, a system within you know, that incorporates many different tax types and layers of government. Right? So the act 11 made Vermont's personal income taxes much more simple. It made it more reliable, so it was not subject to changes of independent federal tax policy income federal personal income tax policy, I should be more clear. And so Vermont has much more control about its personal income tax regime and how it wants to shape and who it wants to be contributing personal income taxes. I think the sort of long goal of the legislature is to push towards a significant progressivity in the in the personal income tax code, low effective rates, but high marginal rates for high income taxpayers. So that's the long run goal of the Vermont legislature. Over the past twenty, thirty years, that has not necessarily been the goal of the federal tax regime. The last three no. I should say four now if you count the the most recent one, have really moved the federal system towards less progressivity in the code. And so one of the big things that was being talked about when act 11 was passed is how should Vermont consider overall tax liability? Should we be looking at the federal regime and thinking about, well, if the federal regime long term, the way they're collecting taxes is going to mean more budget tightness down the road at the federal level, does that mean that more stuff more responsibilities are gonna end up falling to Vermont, and therefore Vermont needs to respond accordingly and increase revenue to help pick up some of those those new obligations that would that would potentially fall to us under a budget tightening situation at the federal level. And so there was a lot of discussion in act 11 because a lot of the news out there was talking about the tax benefits that higher income taxpayers are receiving federally. And that's what this chart on the right shows. This is from an issue brief I wrote about state and local tax deduction cap workarounds back in 2023, 2022. Can't remember. But there's a chart in here where I compared actual data for tax year 2018 versus tax year 2017 of what people paid on their federal taxes in Vermont. And so what you can see is that people from fifth under 50 to about $200,000 receive anywhere between, on average, you know, zero to about $1,500 in federal tax reductions. This is actual data. It's the difference between the two years. But then people, you know, from 500,000 to a million received significantly larger in dollar terms tax reductions from their liability from 2,018 to 2,017 after the passing of Tax Cuts and Jobs Act. And so, like I said, there were a lot of discussions about, you know, should act 11 try to claw back tax cuts from high income earners? And then subsequently, there were questions about, you know, there was a period of time right before I left in 2022 about what are called these pass through entity taxes that Vermont should pick up where, Vermont could give, tax cuts to, pass through businesses. So see, for s corps and and sole proprietors by creating sort of an a niche thing within the Vermont tax code to allow them to deduct that income federally. And so that would be tying us back to the federal code with the attempt of trying to piggy it back off some of the benefits of the federal tax system. And then there have been a lot of different discussions about high income surcharges at the legislative level for quite a long time. And I should also note that H911, when it passed the House in 2018, had a high income education surcharge on it that it contributed, I think, close to a $100,000,000 in education personal income tax to the ed fund. It was largely paid by high income earners. And so the all of this discussion was around, you know, taking place in the in the in the backdrop of large federal tax cuts and the potential need for Vermont to pick up more responsibility. So should we respond to that? On the flip side, there were just a lot of discussions around, well, what if the federal government decides to increase taxes? Right? Sure. Is Vermont going to be responsible cutting taxes for those people to give them a break as well? So, ultimately, none of those things have kinda come to be, but it was those are the there was a lot of discussion going on back in 2017, and I think there's still a little or at least when I before I left, there was discussion about, you know, how should Vermont think about its tax system in a holistic sense? Should we be sort of looking just at Vermont, or should we be thinking more broadly about the impacts of that on our our budgetary system? So I'll close there, and I really appreciate the opportunity to come talk. And if I can be helpful with the committee and there are any questions, I can I can take those?

[Rep. Emilie Kornheiser (Chair)]: Thanks. I think representative Masland has one and then representative Page.

[Rep. James Masland (Member)]: Hi, Graham. Not sure if I looked at the screen or look at the camera, but I'll try to look at the camera and see if it works. I think you said just a moment a while back there was a high income education tax surcharge. Is that what your words were? And I Yeah. What what that was and how it worked? Yeah.

[Graham Campbell (former JFO Fiscal Analyst)]: We're we're we're really plunging the depths of my memory here, but there was an education income tax surcharge passed by the house, I think, along with h nine eleven that did not ultimately make make it into act 11. Okay.

[Rep. James Masland (Member)]: What was what was supposed to happen?

[Graham Campbell (former JFO Fiscal Analyst)]: It would there was supposed to be all yeah. There was all of that there was all of that personal income tax change, so all, like, the decoupling. That was, like, one part of the bill. And then there were the other part was to introduce this education income tax surcharge, mostly on high income taxpayers to help fund the education fund that year. And I yeah. It was mostly on high income earners. It was straight onto adjusted gross income, so it was just a percentage of adjusted gross income. It's a very simple, clean surcharge, and it raised a significant amount of money at the time, then it would all go to the education fund. And so but but that did not that did not, I don't think, clear the senate, if I remember right, and it didn't make it into the the final bill. But the goal at the time was there was as there is, I understand, you know, right now, there were you know, the education fund was a perennial issue, and there were calls to make the education tax system a bit more progressive and to move it from the property tax. And I think the the Ways and Means Committee at the time thought a way to do this was to slowly and gradually introduce a specific income tax into the education fund. Didn't ended up actually doing that, but I think at the time, there was concern that basically, there were, like, budget surpluses being put into the education fund, general fund budget surpluses being sort of used to top up the education fund. And that is, I think, an indirect way of providing income tax to the education fund because most of the general fund's revenue sources come from the income tax. And so there was a desire to make this a little bit more cleaner, clearer to taxpayers that, okay, a good a fair amount of your of income tax is going to just go directly to the education fund going forward rather than every year the legislature will be trying to figure out how much general fund might go towards the education fund.

[Rep. Emilie Kornheiser (Chair)]: Section seven of h nine eleven s passed the house in 2018.

[Rep. James Masland (Member)]: Thank you very much, Graham.

[Rep. Emilie Kornheiser (Chair)]: I looked it up. I didn't know that. Yes. Represent the page.

[Rep. Woodman Page (Member)]: I'm curious, I think it was in the 80s or 90s, there's a lot of discussion over flat tax, know, with no deductions. I was wondering whether Vermont has ever considered anything like that. What effect would it be on our tax system and whether is it the fair system as well?

[Graham Campbell (former JFO Fiscal Analyst)]: Did you say, I'm sorry, did you say a flat tax?

[Rep. Woodman Page (Member)]: Yes.

[Graham Campbell (former JFO Fiscal Analyst)]: I am not aware, and this is me might be because of my tenure at JFL. I was not aware of discussions around a flat tax in Vermont. I think the I I never I I I I don't think I can recall sort of a flat tax that I modeled for the entire personal income tax system. And I think that's because when I was at the legislature, there was a large push for of the principles that I talked about earlier that the legislature, I think, was really felt was important for the tax system was to have progressivity in the tax code. And so having a flat tax, it produces, I think, a different version of what's of equity. Right? It's it's more sort of horizontal equity in the system. So everyone pays the same amount. That that's an argument for fairness. Whereas vertical equity, as it's called, is more around people who have more ability to pay do pay more. And I think the legislature over time is trended towards more of that vertical equity lens. And so what I think it would mean would would be it would mean sort of a loss of that of the existing progressivity in the tax code, and it would mean probably, depending upon where it was set, probably higher taxes for lower middle income taxpayers because they at least at the time when I finished up in Vermont, I think it's still the case, they have relatively low effective tax rates and even negative effective tax rates. And then it would probably mean lower taxes for upper middle and higher income taxpayers depending upon how you and how and if you introduced different deductions or credits into the system. So that's what I would say at a high level, but I think it would very much depend upon how it was structured and how you kept existing deductions and credits in the system.

[Rep. Charles Kimbell (Ranking Member)]: So, Graham, at the time, 2018,

[Rep. Rebecca Holcombe (Member)]: and

[Rep. Charles Kimbell (Ranking Member)]: it was moving to adjusted gross income, and there was compression of tax brackets as well, as I recall, And I'm trying to remember because it was big to go from your taxable income level to AGI because it lowered the percentage, which was a big perception issue as well from outside saying, hey, look, our top tax rate has actually gone down from like nine and a half to 83 quarters. Do you remember the arguments around that?

[Graham Campbell (former JFO Fiscal Analyst)]: I do. So the Blue Ribbon Tax Commission really advocated for, like, a wholesale simplification of the tax code, which was around putting everything on a onto AGI and then stripping out every deduction and credits out there and then just lowering the rates to as low as possible. And at the time, that was, like, kind of the starting place for thinking about how to decouple Vermont from the tax code. Some people who you might be interested in talking with the

[Rep. Rebecca Holcombe (Member)]: tax code

[Graham Campbell (former JFO Fiscal Analyst)]: and Andrew Stein, They were the people who helped design some of that stuff. But, basically, what it came down to was once once the starting with adjusted gross income was, like, the first step, if that if you kept the existing rates in place, you would have raised a a ton of extra income. And so the question is, if we wanted to make the act 11 tax neutral for Vermonters in the overall level, how do you handle that? You can lower all the rates by a lot and maintain progressivity, or you can keep, I think, what are what are more targeted tax benefits in the system through things like the standard deduction and personal exemption. And so they they opted to keep in the personal exemption, the standard deduction. And I think the reason that was was kind of twofold. One was the major goal at the time was to not or keep it revenue neutral at all income levels as well. Right? At least when it was first designed. So that is really hard to do unless you kind of mimic what was already in place. And that's kind of how this started. That was, like, the first proposal from the tax department is it looked a lot like a simpler version of what we already had. So And that was, like, the main goal coming out of the administration was keep revenue neutral at each individual income bracket. Alright. Each individual income level. And so what that meant is you had to you basically had to include the personal deduction, the standard deduction in there to make that the case. You couldn't just lower all the the rates. What eventually, I think, happened at the end of the day is that because of the reduction of some of the existing itemized deductions and the conversion of the charitable deduction to a to a tax credit, it sort of created some extra income, if you will. And what that was how that was sort of handled was that flow through to lower rates. But so we first collapsed the brackets, and I think the top rate came down to eight seven five as opposed to eight nine five. So there's a little bit of extra money that was left over after the house, I think, changed it, and that was used to buy down the rates. So it was like the goal number one was to keep everything revenue neutral, but also more specifically, keep everything revenue neutral at every individual income level. So you kinda had to mimic. And then the leftover money was used to lower rates.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah. Thank you. Yeah.

[Rep. Rebecca Holcombe (Member)]: Anyone else have any questions?

[Rep. Emilie Kornheiser (Chair)]: Graham, thank you so very much for joining us. Good morning. Have a nice breakfast. Say hello to your family, and hope to see you soon.

[Graham Campbell (former JFO Fiscal Analyst)]: Yeah. Good luck. Thank you so much for having me. Take care. Was a really pleasure.

[Patrick Chittenden (Joint Fiscal Office)]: Bye. That

[Rep. Rebecca Holcombe (Member)]: was fun. Pat, are we back to you, or we could probably back Or to you?

[Patrick Chittenden (Joint Fiscal Office)]: All right. So Patrick, to enjoy fiscal office, picking up where we left off. This actually what you just saw kind of segues nicely and including some of the questions you have today, segued nicely into this section here. So I talked a little bit about some of the bilateral revenue pushes and pulls, some things having sort of upward effects on Vermont, some having downward effects on Vermont. And sort of in the next few slides, one thing you'll see is that depending on your situation, there was a certain likelihood that you were going to have a higher tax bill in Vermont, or depending on your situation, a lower one. So these two tables are actually something that Grant created. They are showing you the probability based on your AGI of you either having to pay more on your federal tax return or having to pay more on your Vermont tax return. You could see on the federal side that depending on what you're sort of irregardless of what your income was, they were very unlikely that you would be someone who was subject or who would experience a federal tax increase. So, all of these are below 10% chance of you experiencing an increase in your federal return. Looking at Vermont, because of some of the things Graham just talked through with you with things that were coupled and flowing through, there was anywhere from a 15% chance if you were sort of on the lower end of the income scale, all the way up to approaching 80% chance of you paying more on your Vermont tax return. And again, some of that has to do with some of the federal changes that weren't flowing through, some of the offsetting pieces like the tax bracket change that they had. So, if you were one of these individuals who was paying more, either federally or on the state level, these charts are showing you what those average dollar amounts were by income. So again, you can see that for those people, again, we saw on the previous slide, this is less than 10% of returns in those income brackets.

[Rep. Emilie Kornheiser (Chair)]: Your axes in three. Sure.

[Patrick Chittenden (Joint Fiscal Office)]: So this left hand axe is showing you tax change, average tax change, and the bottom is showing you income. And this will be true for the next two charts, which you have to do that actually. And then, so again, if you were experiencing an income tax increase regularly, all the way at this top bracket that we have here as about $8,000 increase, again, applying to a very small proportion. It really is going to be very specific to the situation of that particular taxpayer. But on the Vermont side, all of these tax increases, especially in this sort of area here where we saw about 80 of tax returns in those income levels were expected to have tax increases assuming normal conformity. You can see that, again, on the sort of top ends on the Vermont level, that would have been about a $1,200 tax increase, assuming that normal conformity. But less than 10% of people on the federal level are expected to be paid more or estimated to be paid more. There's a whole slew of individuals who we would be expecting to pay less. So all the way on the left hand side here, can see that those individuals at about $27,000 in AGI, about 65% of them would be expected to experience a decrease in their federal taxes. But as you move up the income spectrum and reach all the way towards the top here, it is approaching 100% likelihood that you would experience a decrease in your tax liability federally. On the Vermont return, sort of the inverse relationship is true until you do get to that upper tier. You can see that the lower income you were, the more likely you were to experience an increase in your Vermont state tax return. And as income's going up, chance going down.

[Rep. Emilie Kornheiser (Chair)]: This is all before we acted?

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, all of these charts are assuming normal conformity. So if you had not acted and just linked up at the time, these were some of the estimates that were the basis of some of the decisions.

[Rep. Emilie Kornheiser (Chair)]: I know representative Ode was particularly interested in this conversation, she's out today. So if anyone can update her when she that would be super lovely. Could

[Rep. Charles Kimbell (Ranking Member)]: you just go back to the other slide? Because it's just the inverse of

[Patrick Chittenden (Joint Fiscal Office)]: thanks, it's not just the inverse. Well, sorry, if you wanted to compare this slide to another one, it would be just this far. So again, on the left hand side, you'll see the average tax decrease by these different income buckets and then the bottom axis is income. So you can see on the federal side, it's at the lower end issue or someone who would be expected to pay less. It's about $100.200 dollars an expected federal tax reduction. But as you do go to some of these higher income levels, the expected average estimated decrease in taxes was about 10,000 and then all the way going up further, $34,000 reduction in your federal tax liability. Now, remember, we're talking about 2018 here. If we were to put the These are nominal dollars. If we were to put them inflate them to today, some of these increases would be looking more, decreases would be looking a little more significant.

[Rep. Emilie Kornheiser (Chair)]: Am I understanding that there weren't overall trends per income bracket? It was really about a particular mix of income that was whether or not you would gain or lose?

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, and are you talking federally or on the Vermont level? So on the Vermont level-

[Rep. Emilie Kornheiser (Chair)]: I see that you have people in the same brackets who are winning or losing in these slides.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, in a couple of slides, have some different filing statuses, which maybe we'll get some of that.

[Rep. Rebecca Holcombe (Member)]: I will wait.

[Patrick Chittenden (Joint Fiscal Office)]: And this is kind of combining those slides together. So in those, the red bars are going to represent individuals in those income levels who are the average tax increase on their federal taxes. And then conversely in blue, it's specifically for the people who are experiencing federal tax decreases, what that average amount would have been. Okay. So we have a contingent of people paying more and a contingent of people paying less on their Vermont tax returns. So there's sort of the people who would be owing more at the time were estimated would have owed about $42,000,000 more in personal income taxes on their Vermont return. For the people who were expected to be paying less, they were estimated to be paying about $12,000,000 less in aggregate. So the change there, which is something you saw referenced in Graham's slides, or maybe he just said it, was about a $30,000,000 personal income revenue increase if the state had just opted to fully link up under its normal conformity. So that's where some of the What actually happened in response to that? I know Kirby is going to go through a little more detail, but it kind of brings back to the question, why the disparity? Why are some people experiencing these increases while others are experiencing decreases? So, thinking about it federally, changes to those marginal brackets, those two tables I showed right before we broke, really all those tax rate decreases were happening sort of above that first bracket. So, that first bracket, the tax rate being applied there wasn't being touched, but above that 25,000 threshold, you saw about between 2% to 4% decreases across the board in each of the marginal brackets going up in income. So that is something that provided very large tax breaks at most income levels. But again, if you're sort of further down the income spectrum, that maybe wasn't something that was gonna be benefiting you. So the act also made several deductions available for itemizers less generous, sort of again, the whole idea of by expanding the standard deduction, we're encouraging fewer people to itemize, but that was at the expense of the personal expenses, which sort of offsetting the standard deduction increase where they were repealing those completely. And this I just wanted to

[Rep. Woodman Page (Member)]: I'm just curious, with all these changes, for those that have to pay more taxes versus those that paying less, Is there a slide showing what effect it had on Vermont's economy based upon these tax changes?

[Patrick Chittenden (Joint Fiscal Office)]: I don't have a slide on that. Mostly what I'm focusing on is strictly state revenue. So that also may not be something that our office typically engages in that dynamic economic impact modeling.

[Rep. Woodman Page (Member)]: But obviously, it would have an effect on you, depending on what was done at the time.

[Patrick Chittenden (Joint Fiscal Office)]: I think my very evasive answer will be debate. But yeah, no, that's not really waters we usually wade into in our office. Sort of getting back to that dynamic of standard deduction versus personal exemptions and who does and does not benefit from that extension and repeal. What you're looking at here is the change in taxable income based on your filing status and how many exemptions you're reporting. Households So that would be claiming fewer personal exemptions, you can see that that repeal is being more than offset for them by the increase in the standard deduction. So the blue, the negative numbers mean that those individuals are experiencing a decrease in their taxable income because this increase in the standard deduction more than offsets the repeal of personal exemptions for them. So that's where if you're a small household with fewer exemptions, personal exemptions, you're going to be the type of household that would benefit. Firstly, you can see as we shift to red here, that's showing you taxable income increases. So, you have enough exemptions in these situations where the larger standard deduction is just not helpful to you. And so, that's a lot of why you see in those charts earlier, there's a large swath of people who are going to be paying more if the state had gone through with normal conformity, that was the $42,000,000 tax increase on the Vermont side. And then there's going to be, so did some of these smaller household taxpayers who are going to be experiencing tax decreases because the larger standard deduction is more valuable to them than their personal exemptions. And just to sort of give you a little sense of the distribution by filing status and number of exemptions, this table on the bottom here is showing the number of returns that fall into these buckets you see above. That's helpful. And this is sort of looking at it in a slightly, in a somewhat similar way. So on left, we have number of returns and on the bottom here, you have the income. I think I'm missing some of labeling here. So I'm gonna update this slide and send it to the committee because I'm now confused by it because of the labeling. But I think what's a little bit more interesting than that slide even

[Rep. Emilie Kornheiser (Chair)]: Absolutely, much better than that slide. This

[Patrick Chittenden (Joint Fiscal Office)]: is going to include the net changes at all the different income levels. It's aggregating everything together to include that $42,000,000 increase for some taxpayers and that $12,000,000 decrease for others. So that's this 30,000,000 increase you see here. And you can see that sort of in this middle belt is where you see a lot of the net increase for taxpayers contributing towards that 30,000,000. And then it's really sort of some of these areas towards the top and far bottom where there are some projected decreases. And so, yeah, so that $30,000,000 question in 2018 was sort of the impetus for a lot of the decisions that went on in, I guess, not this room, the former room that this committee was housed in. And so I just have this last slide talking about some summarizing some of the changes were made. Kirby is about to go through each of the responses in more detail, but Vermont did decouple from the standard deduction and establish it. So at state level one, the same was true of the personal exemptions. The dollar figure amounts that they were set at the time were largely reflective of what the federal ones had been before TCJA. So that was how some of the dollar figures were targeted. Act 11 also created the not charitable deduction, increased the EITC from 32% to 36%. We've all done some work on EITC in the recent past, you know that that has since been changed also. It also lowered some marginal tax rates and collapsed the top two brackets, which I know Kirby is going to talk about, and implemented that social security exemption at that time. So, it was sort of part of the overarching discussions that were happening at the time to take this, I don't if you'd call it a $30,000,000 windfall, maybe not, but sort of use that to tailor the reformed personal income tax code to maybe be a little more targeted to some of the folks that basically you wanted to change the tax code for. So, yeah, and the package that was ultimately passed was largely designed to offset the $30,000,000 net increase that was expected. So that was another piece sort of shaping the conversation of if we do so, by how much kind of conversations. So that's the last slide. Again, Perfi will talk a little more detail about the specifics of the responses.

[Rep. Rebecca Holcombe (Member)]: Sure.

[Rep. Emilie Kornheiser (Chair)]: Briefly, and maybe some of you remember this, it seems like it was passed by the House and Senate, but there's no Committee of Conference report, even though there was a Committee of Conference, and then it was vetoed, and

[Rep. Rebecca Holcombe (Member)]: then it was put in the budget.

[Patrick Chittenden (Joint Fiscal Office)]: I I'm going to

[Rep. Emilie Kornheiser (Chair)]: expect see there's

[Patrick Chittenden (Joint Fiscal Office)]: been a lot

[Rep. Emilie Kornheiser (Chair)]: of fun happening here at some point. Yeah,

[Patrick Chittenden (Joint Fiscal Office)]: it's fun to see infinity. Thanks,

[Rep. Rebecca Holcombe (Member)]: bud. Perfect.

[Patrick Chittenden (Joint Fiscal Office)]: Good afternoon. Good afternoon, Mr. Mr. The Council.

[Kirby (Office of Legislative Counsel)]: And to piggyback off your last question, I was curious, I'm looking at stuff a minute ago. Apparently in 2018, the governor vetoed two budgets, and there was a special session held basically in June. And then this budget passed, and that's when these reforms happened in May 11.

[Rep. Emilie Kornheiser (Chair)]: We only have, like, twenty minutes or so with you until our next witness hops into the Zoom. We can do it. Oh, okay.

[Patrick Chittenden (Joint Fiscal Office)]: I guess I go back to

[Kirby (Office of Legislative Counsel)]: my office and work sooner? Yes. Nice

[Rep. Rebecca Holcombe (Member)]: to be with

[Patrick Chittenden (Joint Fiscal Office)]: you too, Kirby. Let's all be here. I've got stuff to

[Kirby (Office of Legislative Counsel)]: So, what I'm going to show you is focused narrowly on Vermont's response specifically and changes to Vermont law. So very little on the federal stuff that's background. So I think you've heard a whole lot about that. So here's an outline. These are the major changes that came out of it. From a personal income tax starting point, which moved from federal taxable income to AGI. As Graham mentioned, that Black Belt did not do a lot, but it kind of enabled some of these other changes or lent to them. There was a creation of the Vermont personal exemption, the Vermont standard deduction, and also deduction for aged and blind that piggybacks off those same categories at the federal level. There's the creation of the Vermont charitable deduction, the creation of the social security exclusion, the increase to the Vermont EITC, and then Vermont's own personal income tax marginal rates were all adjusted downward then there were fewer brackets as well. So let's start walking through. Just so you know, all the changes we're talking about were effective starting in tax year 2018, so that's when you can think of as the starting point for all of this decoupling. So the first change was actually Act 73 of 2017. This was not Act 11 from special session in 2018. This was actually the year before. Graham mentioned this. It was a change that set other things up, but this section 13A, you can see, changed our definition for personal income tax from being based off of federal taxable income to federal adjusted gross income. As Graham mentioned briefly, at the same time this change was made though, there was a bunch of other stuff below this that basically brought all the federal stuff back in like it was before. So there are all these add backs that pretty much put us in the same situation as if we didn't decouple. So this by itself was not decoupling. But this is, as we've talked about before, since we're using AGI as the starting place, it means that the above the line deductions don't flow through, and this is what makes that happen. I think I covered that. So that was the only thing from that Act 73 that really made it through. Act 11 ended up undoing the other stuff that kept Vermont coupled to a lot of things federally. So we'll walk through those. First was section H1 of Act 11. If you do pull up Act 11 by the way, and you're interested in looking for yourself, all of the H sections in the budget were basically a little, I don't want to say many, it was like pretty much a full miscellaneous tax bill tucked into the budget under the H sections. So we're just focused on personal income tax here, but there were other tax changes, many other tax changes. So what this one does is it set up a personal exemption of $4,150 per person for Vermont. So as Pat mentioned, federally there were no more personal exemptions, but this was the creation of a Vermont personal exemption in response to the federal changes.

[Patrick Chittenden (Joint Fiscal Office)]: Is that the present exemption forty one fifty, is that still in place at that number, or is there any inflation?

[Kirby (Office of Legislative Counsel)]: I should have anticipated that. I didn't double check.

[Patrick Chittenden (Joint Fiscal Office)]: If you could just let me know.

[Kirby (Office of Legislative Counsel)]: Okay. Sure. Also what was happening in section H1 was the creation of the standard deduction. Since it's per month standard deduction, 6,000 for unmarried or married filing separate, 9,000 for head of household, and 12,000 for married filing jointly. And I don't have my notes here for this one. Should've done this was the Check something. This was the $1,000 deduction that's piggybacking on the federal deduction for the age and the blind that I mentioned before. That's why I blanked on that one, because it's one that's not thought about often.

[Rep. Rebecca Holcombe (Member)]: What's that? They're using the CPI though. Nice

[Rep. Emilie Kornheiser (Chair)]: nerding people.

[Kirby (Office of Legislative Counsel)]: Yeah, we're looking at old versions of the law, so you know. So what else was done? So in section H2, you had the change for the marginal personal income tax rates. So the lowest bracket, marginal bracket rate was 3.55 at the time. That was changed to 3.35. Then the next bracket was 6.8 and was changed to 6.6. Then the next bracket was 7.8, changed to 7.6. And in the next two brackets, there was one at eight point eight and one at 8.95, and those were collapsed down to one highest bracket at 8.5.

[Rep. Rebecca Holcombe (Member)]: Go back once, please.

[Patrick Chittenden (Joint Fiscal Office)]: You.

[Kirby (Office of Legislative Counsel)]: Next change we had was section H3. BERRot was decoupled from the federal deduction for charitable contributions and created its own credit for charitable contributions. And it was set at 5% of the first 20,000 in charitable contributions for a taxpayer. Doing the math, that's effectively a maximum of $1,000 for the credit for charitable contributions. And it's designed as a credit and federal level production.

[Rep. Charles Kimbell (Ranking Member)]: There's a lot of mashing of petite for that. That it would result in fewer donations being made to nonprofits. Yes. That's right.

[Kirby (Office of Legislative Counsel)]: I generally think that the federal incentives are, since they have a higher rate, they're more tactful for behavior, I would logically think.

[Rep. Rebecca Holcombe (Member)]: They're more what?

[Kirby (Office of Legislative Counsel)]: That if the tax code is going affect someone's behavior, then we'll be looking at the federal because there's a higher tax rate at the federal level. So that's what you would be looking to, to see whether, you know, if you're choosing to do something or not, like how the tax code will affect your behavior.

[Rep. Rebecca Holcombe (Member)]: Okay, so you're thinking of these changes that were made during the special session were not that big of deal.

[Kirby (Office of Legislative Counsel)]: Probably shouldn't have said anything. Just saying personally, I think of it because this is going sound like I'm talking policy. It sounds like I'm talking policy. I'm just saying that when I tend to think about these things, and maybe I'm not giving Vermont enough credit for its clout in people's minds, I think that people's behavior is driven by federal policy, to the extent that it's driven at all, which is hard to know that, right? Because it's anecdotal. But I do think that the decisions taking into account federal tax policy and the tax code into your decisions, especially if you're paying it up at the highest federal rate, that's a pretty high rate. Considering Vermont's highest rate is a lot smaller than the federal highest rate, I would just say logically that that's not going to be the main thing you're organizing your tax planning around.

[Patrick Chittenden (Joint Fiscal Office)]: That's a

[Rep. Rebecca Holcombe (Member)]: smashing of teeth. I would describe it as whining, at the same time we got rid of that top bracket, which we just kind of skimmed over in your explanation, but we did get rid of that top bracket and moved everybody who was in it down and And you know you didn't get one thing you know.

[Rep. Emilie Kornheiser (Chair)]: We'll try to find you one retroactively. Okay. Representative Holcombe and then

[Rep. Rebecca Holcombe (Member)]: Oh, this is also when donor advised what funds exploded, isn't After the federal tax

[Rep. Emilie Kornheiser (Chair)]: Because the federal tax cut's not Yeah.

[Rep. Rebecca Holcombe (Member)]: But my point is, this is nothing. I mean, was just chump change compared to the federal benefit. So that in terms of donation.

[Patrick Chittenden (Joint Fiscal Office)]: Pretty thought, thank you.

[Kirby (Office of Legislative Counsel)]: Yeah, I mean, it being accredited means you don't have to itemize, so there's at least some benefit there, I would note section H four amended the section of law we have on the earned income tax credit. Before these changes, Vermont was allowing a credit equal to 32% of federal credit and that was changed to 36%. And if memory serves, that can increase since then. I think we did that last year. Section h five created the Vermont exclusion for social security benefits. This one I know we're familiar with from last session because the exclusions for retirement pay and military retirement, all of that also lives in that same section. But the section was first created with Act 11 for the purpose of excluding social security benefits income for single taxpayers and AGI's 45,000 or less. It was completely excluded and for married filing jointly, it was 60,000 or less having all of the social security benefits income excluded. And then there were phase outs of 45,000 to 55,000 range and 60,000, 70,000 range respectively for those groups. This was the creation of that exclusion.

[Rep. Rebecca Holcombe (Member)]: What the cost of that is now?

[Patrick Chittenden (Joint Fiscal Office)]: What

[Rep. Emilie Kornheiser (Chair)]: happened? Was that your last slide?

[Kirby (Office of Legislative Counsel)]: Those are the personal income tax changes.

[Rep. Emilie Kornheiser (Chair)]: Thank you. Thanks, Kirby. Any other questions for Kirby? Why don't we take a five minute break? We will get an answer from Pat on the other side of the break and be joined by some witnesses. So five minutes means we're back here at 02:40