JFO walks Ways & Means through Vermont personal and corporate income tax rules, recent changes and revenue volatility

Pat Jitterton, a revenue analyst with the Joint Fiscal Office, told the Vermont House Ways & Means Committee on Jan. 22 that the state’s personal income tax calculation begins with taxpayers’ federal adjusted gross income and then moves through a series of Vermont-specific adjustments, brackets and credits before producing a final liability.

Why it matters: personal income tax provides more than half of Vermont’s general fund revenue and corporate income taxes about 10 percent. Changes at the federal level and state choices about deductions, credits and apportionment can materially affect the state budget and the distribution of tax burdens across income groups.

Jitterton said the “starting point for all of this is the 1040 IRS form,” meaning federal adjusted gross income (AGI). From AGI the state adds or subtracts items that differ from federal rules (for example, Vermont adds back interest from out-of-state municipal bonds and bonus depreciation). Vermont then applies its own standard deduction and personal exemptions, which function to shift taxable income by family composition, and runs the result through Vermont’s marginal rate schedule.

On personal income tax specifics, Jitterton highlighted recent state changes and major credits. Vermont now uses its own standard deduction and exemptions that grow with the federal inflation adjustments, he said, and the state’s top marginal personal rate reaches the upper tier of the schedule. Major tax expenditures in the personal code include the earned income tax credit (EITC) and a child tax credit established in Act 138 (2022). The child credit is $1,000 per qualifying child younger than 6 for households with AGI up to $125,000 and phases out over the next $50,000 of AGI, Jitterton said. He also described the Social Security income exemption and a $10,000 exemption for military retirement pay; taxpayers who qualify for both must choose which exemption to claim.

Jitterton described refundable versus nonrefundable credits and gave the charitable contribution credit as an example: Vermont’s credit equals 5 percent and is capped by a contribution base of $20,000, which yields a maximum credit of $1,000 under current law, he said.

Representatives asked for clarifications about residency and allocation. Representative Odey raised the six-month-and-a-day rule used to determine residency for allocation; Jitterton responded that income earned while physically in Vermont is typically allocable to Vermont tax liability, and that a retired person who no longer lives in-state generally would not owe Vermont tax on out-of-state income. Jitterton noted nuance arises where residents spend part of a year working remotely outside Vermont or where employers’ payroll reporting affects tax filing obligations.

On corporate income tax, Jitterton walked the committee through the distinction between C corporations — which pay the corporate income tax — and pass-through entities (LLCs, S corps, sole proprietorships), whose profits are taxed under the personal income code. Vermont’s corporate top marginal rate of 8.5 percent applies to net income above $25,000, with lower brackets below that threshold.

Jitterton summarized major recent structural changes to corporate apportionment. Vermont moved from a three-factor apportionment (sales, payroll and property) to a single sales factor, he said, and shifted to combined filing for unitary groups under a Finnegan-style approach instead of the earlier Joyce approach. Jitterton explained those moves were intended to bring all subsidiaries in a corporate “ecosystem” into one filing and to apportion taxable income to Vermont based on sales into the state. He also described repeal of the so-called 80/20 exclusion (which previously excluded subsidiaries with primarily foreign sales from apportionment) and a repeal of the throwback rule; together, those changes make the apportionment calculation more inclusive of a corporate group’s activity.

Jitterton added that roughly 70 percent of corporate returns report zero taxable income to Vermont and that the tax is volatile: corporate income taxes are concentrated in a small number of large filers and can be affected by mergers, settlements or late compliance from a few firms. He said a one-time, high-value event in September drove a large part of the recent variance between forecast and collections and that, absent such singular events, corporate receipts have tracked differently against forecast.

Several lawmakers asked questions about competitiveness, behavior and policy trade-offs. One representative asked whether moving to a single sales factor favors firms based in Vermont; Jitterton said the single sales factor is agnostic to where firms are based and ties liability to where sales occur. Another lawmaker raised the policy question of whether state credits (for example, the charitable contribution credit) have intended behavioral impacts on donations; Jitterton suggested the state could review the historical effect of that credit.

Jitterton also flagged federal uncertainty: personal provisions enacted by the federal Tax Cuts and Jobs Act (TCJA) are set to expire and federal definitions (AGI, subpart F income, and other corporate provisions) can change; the Joint Fiscal Office watches those federal changes because Vermont often couples to federal definitions. Jitterton said JFO is approaching a 10-year tax study that will reexamine how the tax code channels benefits (tax expenditures) and the interaction between tax-side policies and direct spending.

No committee votes were taken during the briefing. Lawmakers requested follow-up analysis on several items, including: (1) the share of personal income tax revenue attributable to pass-through business income; (2) historical behavior of the charitable contribution credit; and (3) updates to benefits-cliff analysis tied to income and eligibility thresholds.

Jitterton closed by urging attention to federal developments and by offering to provide more detailed write-ups and fiscal notes on requested items.