Gov. Phil Scott signed a corporate tax reform bill into law Tuesday that is expected to slash taxes for manufacturers in Vermont.
Initially introduced last year to remove the sales tax on menstrual products, S.53 this legislative session turned into a vehicle for a variety of major corporate tax reforms. (The so-called tampon tax exemption advanced into law in 2021 in a different bill.)
Perhaps the biggest change is an overhaul of the way Vermont determines the size of a company’s presence in the state for the purposes of calculating corporate income taxes. Historically, most states — including Vermont — have used a three-factor formula that takes into account in-state payroll, property, and sales relative to nationwide payroll, property, and sales when figuring out how much a company owes in state corporate taxes.
S.53 drops that three-factor formula in favor of one that looks solely at sales. That will be a boon to companies with a significant physical footprint who employ large numbers of people in Vermont but who conduct most of their sales outside the state. Manufacturers and some wholesalers, for example, are among the most likely to benefit. The bill does not change the way payroll and property taxes are calculated.
Once fully implemented, analysts with the Legislature’s Joint Fiscal Office said that part of the bill could cut corporate taxes by roughly $11 million a year.
“It may not be the deciding factor in whether a corporation decides to locate here, but it may well be a factor that they look at when they make the decision,” said Rep. Janet Ancel, D-Calais, the outgoing chair of the tax-writing House Ways and Means Committee.
Rep. Emilie Kornheiser, D/P-Brattleboro, the committee’s vice-chair, said she doesn’t think a single-sales formula will help Vermont be more competitive. But she still supported the change.
“From my perspective, it was a question of fairness. Corporations with people and property in Vermont are paying taxes in other ways,” she said.
The corporate reform package, as a whole, is designed to be revenue-neutral to the state, which means that while some companies will see their tax burden go down, other businesses will pay more. Kornheiser argued that the changes, in totality, shift more of the corporate tax burden on to businesses that aren’t also employing people in Vermont and maintaining property.
Business lobbyists struck a note of ambivalence when asked about the bill. “There are winners and losers,” said Austin Davis, government affairs manager for the Lake Champlain Chamber of Commerce. The Chamber has not come out for or against the bill.
Bill Driscoll, the vice president of Associated Industries of Vermont, which lobbies for manufacturers, said he’s a big fan of the single-sales factor provision in the bill. Other provisions? Less so.
S.53 also makes big changes to the state’s minimum corporate tax, which under current law maxes out at $750. Under the new law, the smallest companies will see their minimum tax go down (from $300 to $100) but the largest businesses — with gross receipts of $300 million or more — will now have to pay at least $100,000.
“Very few states have something quite as draconian as what Vermont has adopted here,” Driscoll said.
Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities, a left-leaning Washington, D.C. think tank, has been arguing for years that the switch to single-sales is little more than a corporate giveaway with scant economic development value. He testified before Vermont lawmakers as they debated S.53.
But he said he’s not too worried about Vermont making the change, and was fairly resigned to it given that most states are going in that direction. He likes the new corporate minimums adopted by Vermont — as well as two changes that will impact how a company’s subsidiaries are included when the state calculates their tax burden. Combined, those three changes are estimated to bring in a little over $12 million a year.
“There are pluses and minuses in the package, but overall, it’s a very good bill. And it will help ensure that corporations pay their fair share of tax in Vermont,” Mazerov said.
As part of the package, House lawmakers also pushed this year to apply sales taxes to cloud-based software, an effort which the Senate again rebuffed. But Kornheiser said she fully expects that perennial debate to return next year.
“There is a persistent need for revenue in the state of Vermont in order to meet the needs of Vermonters,” she said, adding that an exemption to the sales tax on a “thriving part of our economy doesn’t really make very much sense.”
Corrections: An earlier version of this story misstated S.53’s changes to the state’s minimum corporate tax. Due to an editing error, the three-factor formula was mischaracterized.
