Committee reviews package of Vermont income tax exclusions and credits including veteran credit and military-pension exemption

The House Ways & Means Committee on April 29 reviewed a package of proposed changes to Vermont income tax exclusions and credits that committee staff said would fit within the House budget’s $13.5 million allocation for tax measures.

Legislative counsel Kirby Keaton presented draft language and said the package includes an expansion of the Vermont child tax credit, a larger state earned-income tax credit (EITC) for filers without dependents, $5,000 increases to Social Security and civil-service retirement exemptions, a new exemption for military retirement and survivor benefits, and a $250 refundable Vermont veteran tax credit.

Keaton said the child tax credit change is the administration’s suggested language to raise the upper age from 5 to 6 for the state refundable child tax credit and to add clarifying “guardrail” language about administration of the credit. “This does not change current practice at all,” Keaton said. Pat Titterton of the Joint Fiscal Office said staff estimate the child credit expansion would raise the state tax expenditure from about $24 million to $28.5 million annually.

The EITC change would leave the program tied to federal eligibility rules but increase the Vermont share for filers who have no qualifying children, narrowing the gap between childless claimants and those with children. Keaton described the change as adopting a larger percent of the federal credit for those without qualifying children; Titterton said the estimated ongoing cost of that change is about $3 million.

On retirement exclusions, the draft raises the income thresholds used to determine eligibility for the state exclusion of Social Security and Civil Service Retirement System (CSRS) benefits by $5,000. The Joint Fiscal Office estimated that higher thresholds would add about $2.1 million in annual tax expenditures to the approximately $8.2 million the state now foregoes on Social Security income.

The package also would create a new Vermont military-retirement exemption. Under the presented construct, military retirement and survivor benefits would be fully exempt for taxpayers with adjusted gross income (AGI) at or below $125,000, with a phase-out for higher incomes up to $175,000. Titterton said the Joint Fiscal Office estimates roughly 2,200 of Vermont’s roughly 3,600 military retirees who receive benefits would qualify for a full or partial exemption under that formula, with an estimated cost of about $2.5 million annually.

In addition, the draft would add a $250 refundable Vermont veteran tax credit targeted to veterans with AGI at or below $25,000 (full credit) and phasing out up to AGI of $30,000. Titterton said Census-based and VA-derived estimates imply roughly 15% of Vermont veteran households have AGI at or below $25,000 — about 5,200 veterans by his calculation — and the Joint Fiscal Office put the credit’s annual cost at about $1.4 million.

Titterton told the committee that the two military-related pieces — reducing the military exemption’s fiscal exposure by using the 125/175 income range and adding the $250 refundable veteran credit — let the package stay within the roughly $13.5 million budget footprint the House has set for tax proposals. “These two new pieces…are actually consensus estimates now with the tax department,” Titterton said.

Committee members asked implementation questions. One member asked how the state would verify service if some veterans do not file returns; Keaton said verification would be an administrative decision for the Vermont Department of Taxes and noted the Vermont Veterans’ office can provide discharge records upon request. The committee asked staff to invite the tax department to testify on likely implementation steps, outreach to nonfilers and which documents the department would accept for proof of service.

No motion or vote was taken on the language. The chair said the committee would continue work on the bill and expected to take it up again the next day for a possible vote.

Background: under current law Vermont ties its EITC to the federal EITC and carries separate statutes for state child tax credits and exemptions for retirement income. The draft language discussed on April 29 largely follows governor-recommended provisions for the child credit, EITC and the $5,000 retirement threshold increases, with staff adjustments for the military and veteran provisions to hold the package to the House budgeted amount.