Senate Finance reviews Vermont income-tax structure, distribution and a proposed surtax to fund schools

Patrick Jitson, an analyst at the Joint Fiscal Office, briefed the Vermont Senate Finance Committee on the structure of the state personal income tax, the distribution of who pays it and recent statutory changes, and described the revenue effect of a proposed surtax on very high earners.

Jitson said the state starts with federal adjusted gross income (AGI) and then makes state-specific additions and subtractions — for example, adding bonus depreciation and certain interest while subtracting the state standard deduction and exemptions — to reach Vermont taxable income. "I really appreciate the enthusiasm to learn about income taxes," Jitson told the committee as he began the presentation.

The briefing laid out why brackets, deductions and credits matter. Vermont uses graduated tax brackets (the top marginal rate cited in the briefing is 8.75%), then applies nonrefundable and refundable credits. Jitson explained the difference: nonrefundable credits can reduce a filer’s tax liability to zero but do not produce a payment from the state, while refundable credits can result in a refund if the credit exceeds tax owed. He noted the earned-income tax credit (EITC) has been increased in recent years (described in the briefing as moving from 32% to 36% and later to 38% of the federal amount) and that the state’s child tax credit currently provides $1,000 per eligible child under the reported eligibility ranges.

Jitson told members the tax expenditure report documents roughly $100 million a year in personal income tax expenditures — revenue the state forgoes because of exemptions, deductions and credits written into statute. He characterized those foregone revenues as “revenue the state is not collecting and can’t spend on other priorities.”

On distribution, Jitson showed data the committee discussed: a relatively small number of high-income returns account for a large share of income tax collections. He said roughly 1,000 tax returns reporting more than $1 million pay about 20% of total collections; filers reporting in a high top bracket (the briefing used the range beginning in the low hundreds of thousands) collectively provide roughly half the state’s income tax revenue. He also noted there is significant year-to-year churn among the highest-reporting returns, because capital gains and other realizations cause large fluctuations.

Committee members asked for comparisons with neighboring states and for ‘‘effective rate’’ charts that incorporate credits and exemptions. Senator Chittenden asked for the cross-state effective-rate comparisons and Jitson agreed he could send an older chart compiled by staff that adjusts for credits and exemptions.

Members also discussed proposals to use income tax changes to support education. Jitson described a previously considered proposal that would add a new top marginal surcharge of 3 percentage points on income above specified thresholds (examples given in the briefing: married filing jointly above $500,000; married filing separately above $250,000; single above roughly $410,000; head of household above roughly $455,000). He said that specific surcharge configuration would raise about $87,000,000 a year in additional revenue, "the delta" between current law and the added 3 percentage points on the income in those bands.

Senators reacted in different ways. Senator Matos and other members said that an $87 million estimate could serve as a starter fund for a targeted school-construction or education program but would not be sufficient to fully replace property-tax funding widely. Senator Hardy warned about relying on taxing capacity that might be volatile in a downturn, saying, "just because you raise a rate doesn't mean you're gonna get an increase in revenue." Other senators noted practical limits in taxing wealth directly and cited administrative complications and taxpayer mobility.

Several senators emphasized process and trade-offs: any change that shifts revenue among funds or creates a dedicated new revenue stream for education would also remove that revenue from the state general fund and would need to be weighed against other priorities and unpredictable economic cycles. Jitson and staff noted some federal changes tied to the Tax Cuts and Jobs Act are set to expire and that federal adjustments can flow through to Vermont because the state often starts from federal AGI or ties credits to federal amounts.

The session included technical details and question-and-answer but produced no formal votes or committee directives on legislation. Jitson said he planned to return to the committee with additional analysis and to discuss the governor’s proposals at the next appearance. Several senators said they would like more comparative effective-rate work and updated tax-expenditure and distribution analyses before taking legislative steps.

No formal action or votes were taken at the meeting.