Finance Committee reviews governor’s personal income tax proposals; estimated $13.5 million annual cost

The Finance Committee met virtually on Feb. 8 to review personal income tax proposals in the governor’s fiscal plan, including changes to the child tax credit, the state Earned Income Tax Credit (EITC) for taxpayers without dependents, the Social Security income exemption and the treatment of military retirement and survivor benefits.

The presentation, delivered by Patrick Jettison, summarized estimated revenue effects and program details the administration included in the budget request. "These 4 provisions, 13 and a half million," Jettison said when asked about the combined cost of the four personal income tax proposals in the governor’s package.

Why it matters: The proposals would change who qualifies for credits and exemptions and would reduce state tax revenue by an amount the presenter and the tax office estimated at roughly $13.5 million annually (for the four items together). Committee members pressed for clarifications about eligibility rules, filing behavior among low-income taxpayers and how the measures interact with federal rules and other state supports.

Key proposals and estimated impacts

- Child tax credit: The governor would raise the age cutoff for the state child tax credit from children ages 5 and younger to children ages 6 and younger. Jettison said the change would expand the number of age-eligible children by about 18.5% and increase the annual cost of the credit by about $4.5 million, raising the program’s annual outlay from roughly $24 million to about $28.5 million in the first year.

- Earned Income Tax Credit (EITC) for taxpayers without dependents: The proposal would increase Vermont’s EITC percentage for claimants with no qualifying children from the current 38% of the federal credit to 100% of the federal credit. Jettison said that change is estimated to cost about $3.0 million annually and would raise the state total EITC payout to about $29.9 million per year.

- Social Security income exemption: The governor would raise the state income thresholds used to determine the Social Security exemption, increasing the exemption threshold by $5,000 for single and married filers (so higher-income filers could exempt more Social Security income). The tax office estimate provided to the committee put the revenue impact at about $2.1 million annually.

- Military retirement and survivor benefits: Current law lets taxpayers exempt up to $10,000 of military retirement and survivor benefits subject to the same income thresholds as the Social Security exemption, and taxpayers must choose between that exemption and the Social Security exemption. The governor’s proposal would remove the income thresholds and uncapped the amount of the exemption for military retirement and survivor benefits; Jettison said the tax office estimated the annual revenue cost at about $3.9 million.

Other item noted

- Increase in the cap on transferable tax credits awarded to developers: The presenter also noted a separate administration proposal to raise the annual cap on certain developer tax credit awards by $2.0 million (an increase in authorized awards, which historically are often sold to third parties such as banks or insurers).

Details and context from the presentation

Jettison gave counts and program usage data to help the committee weigh the proposals. He said about 21,000 tax returns claimed the state child tax credit in the most recent year, receiving roughly $24 million in total value. For the EITC, he cited about 32,000 recipients statewide and emphasized that the state EITC is calculated as a flat percentage of the federal EITC; changes at the federal level historically flow through to the state program. On Social Security, Jettison noted that roughly 86,000 tax returns include some form of Social Security income (retirement, disability or survivor benefits). For military retirement and survivor benefits, he said Vermont has about 3,900 military retirees (about 3,600 receiving benefits) and roughly 750 survivors in the dataset he reviewed.

Committee members asked several technical questions, including about filing behavior for low-income taxpayers (how many eligible households actually file to claim credits), how the EITC’s phase-in and phase-out ranges operate, and how the proposed changes might interact with other programs such as child-care subsidies. The committee chair and other members also discussed timing and next steps: the committee can expect to be asked for input once the full budget (the “big bill”) is released and will be invited to comment on trade-offs and fiscal impacts.

What the committee did not do

No formal motions or votes were taken on these proposals during the meeting. The discussion was informational; committee members requested further follow-up and said staff and the tax office would be called on for more detailed numbers as the budget process moves forward.

Looking ahead

Committee members indicated they expect to revisit these items when the administration files the comprehensive budget and when related bills reach the committee. The presenter noted some of the changes are tightly linked to federal definitions (for example, the EITC’s federal eligibility rules), so future federal policy actions could affect the state cost and eligibility design.

Ending note

The committee ended the discussion by scheduling follow-up briefings and flagged other revenue and tax-structure issues that may be considered this session, including an income-based education funding bill referenced during the meeting.