Theo Wells-Spackman is a Report for America corps member who reports for VTDigger.
When Vermont’s House Ways and Means committee first began reviewing changes to the federal tax code in last year’s Republican-led One Big Beautiful Bill Act, it seemed like the impact on state revenue would be mild. But as the weeks of study wore on, lawmakers grew more worried.
According to the latest predictions from the state’s Legislative Joint Fiscal Office, new federal tax changes were poised to cause a $33 million hole in the 2027 budget lawmakers are drawing up right now. And for the current year’s budget — which the state is more than halfway through spending — analysts projected a loss of over $20 million.
Now, House lawmakers and Gov. Phil Scott’s administration want Vermont to break with federal changes in several key areas of corporate and business tax law to keep state revenues on track, via a proposal experts say will ultimately increase revenue estimates slightly.
“We really don’t have that kind of ability to absorb that loss,” Rep. Charlie Kimbell, D-Woodstock, the Ways and Means ranking member and point person for the bill, said of a possible decrease in tax revenue. “We had to make some changes.”
Federal tax changes don’t impact Vermont’s finances directly. But like many states, Vermont updates its state tax code annually to incorporate complex changes at the federal level into its own bylaws. It’s a process called “linking up,” a strategy intended to keep states’ tax codes up-to-date without imposing an undue burden on local officials, and also to make life easier for taxpayers by keeping requirements relatively uniform between state and federal policy.
“In the areas that we are able to link up, it’s kind of like a win-win,” said Deputy Tax Commissioner Rebecca Sameroff in an interview Friday. Nonetheless, she said, the administration is generally “pleased” with House lawmakers’ efforts to balance revenue with business-friendly policy.
A number of other states, she noted, are undergoing similarly selective “link-up” processes.
Passing on certain federal tax changes isn’t without precedent in Vermont either. Legislators sometimes vote to scrap particular provisions and let the rest of the changes “flow through” to become part of the state’s tax system — though major impacts to state revenue are relatively rare. The last comparable effort of this scale was in 2018, when Vermont opted out of several significant policies affecting personal income tax, a move lawmakers call “decoupling.”
H.933, a catch-all tax bill put forward by Kimbell’s committee, proposes separating from several main parts of the new federal tax code for corporations and other businesses. The bill passed in the House Friday and will move to the Senate.
First, the bill would decouple the state tax system from some new federal deductions for income earned overseas, a measure that would mostly affect large multinational corporations.
Many businesses would also need to continue deducting the cost of production or refinement facilities over the course of many years in their state tax filing, instead of being able to do so all at once as laid out in the federal code.
Lawmakers also recommended decoupling from a similar provision for companies’ “research and experimentation” costs, but elected to remove the option of immediate deduction only from businesses with total revenue over $31 million. They also separately sought to expand the state tax credits for such expenses.
In Vermont, state Chamber of Commerce President Amy Spear said, research and experimentation can mean anything from high-tech engineering work to a brewer testing a new recipe for craft beer. She and Sameroff are both particularly supportive of the bill’s measures around research costs, which Spear said could be key for early-stage businesses that need immediate cash flow to grow.
In general, she said, this bill would be “a meaningful step forward in aligning Vermont’s tax structure with how businesses operate today.”
More controversially, the bill would not allow investors to entirely exclude capital gains made from shares in certain smaller businesses, even though they’ll be able to in their federal tax return.
Sameroff said this provision in particular is a concern for her department. For the sake of a relatively small amount of revenue that the state “doesn’t really rely on,” she said, levying tax on gains from stock of this kind could discourage investment in startups and small businesses that are important for Vermont’s economic development.
Lawmakers amended H.933 Thursday to allow a partial — though not complete — deduction of such income via Vermont’s existing capital gains exclusion.
But House leaders agree that strong steps are necessary to ensure the state’s budgeting stability.
“If we didn’t do some of this, there would be some huge losses of revenue to the state — huge — that the governor hadn’t planned on or budgeted for,” House Appropriations Committee chair Rep. Robin Scheu, D-Middlebury, told her colleagues earlier this month.
The new projected revenue also “helps dramatically,” added Scheu, as her committee attempts to balance its priorities in a tight budget year. In the budget proposal House Appropriations voted out on Monday, the committee drew on $9.4 million in new available revenue from the proposed tax changes.
Many of the remaining tax provisions from last July’s federal budget law, including to the child and dependent tax credit system, will be incorporated into Vermont law without alteration, Kimbell said.
“The thing that makes all of us kind of nervous is, what did we miss?” he said.
