Ways & Means hears Legislative Council briefing on personal and corporate income tax, federal 'link‑up' and impending federal expirations

Kirby Keaton of the Office of Legislative Council told the House Ways & Means Committee on Jan. 15 that Vermont’s personal and corporate income taxes begin by referencing federal law, then apply state-level adjustments.

Keaton said the starting point for Vermont’s personal income tax is the federal definition of taxable income and pointed committee members to the controlling state provision, 32 V.S.A. § 5811(21). “The tax base for the personal income tax in Vermont are based off of what's called taxable income. That definition is located at 32 VSA section 5811 subdivision 21,” Keaton said.

The presentation explained the annual “federal link‑up,” the statutory cross‑reference that incorporates federal income tax law as of a specified date into Vermont law. Keaton said the link‑up is updated annually (the date in statute is changed each year) and emphasized practical constraints including Vermont’s prohibition on retroactive effective dates under 1 V.S.A. § 214. “When you pay your income taxes in 2025 this year in the spring, you're paying them for 2024,” Keaton said to illustrate timing.

Why it matters: Vermont starts from federal adjusted gross income for many calculations but makes state‑specific additions and subtractions before reaching Vermont taxable income. That means some federal changes automatically affect Vermont unless the Legislature explicitly decouples from them.

Keaton reviewed recent state changes enacted to insulate Vermont from specific federal shifts. He described Act 138 (2022) as creating a refundable $1,000 Vermont child tax credit for qualifying children ages 5 and under and said the credit phases out beginning at $125,000 adjusted gross income; Keaton did not specify the exact AGI at which eligibility ends. He also noted expansions and additions including a Vermont child dependent care credit (set at 72% of the federal credit), an expansion of the Vermont earned income tax credit to 38% of the federal EITC, a Vermont student loan interest deduction, and increased Social Security and retirement income exemptions.

Keaton flagged the scheduled expirations of many Tax Cuts and Jobs Act (TCJA) provisions at the end of 2025 and told the committee members to expect significant federal movement this year. “We will have many of its provisions expiring, at the end of 2025,” he said. He summarized likely federal changes that could follow if Congress does not act, including reversion of some federal rate and credit levels and changes to itemized deductions, but stressed the state effect depends on whether Vermont chooses to decouple or to update its link‑up language.

Committee members asked practical questions. Representative Odey asked whether additional federal revenue created by the SALT cap flows to Vermont; Keaton replied that the extra federal revenue does not stay in Vermont, saying: “No, it just means that some Vermonters who would be able to deduct more than $10,000 aren't able to do so.” Keaton described the federal $10,000 cap on state and local tax (SALT) deductions as a continuing feature at the federal level unless Congress acts.

On corporate taxation Keaton explained that Vermont taxable corporate base begins from federal taxable income with state adjustments and that Vermont has a minimum corporate tax based on Vermont gross receipts to prevent low‑profit reporting where gross receipts are large. He summarized recent structural changes enacted by the Legislature in response to multistate corporate issues: Act 148 (2022) moved Vermont to a single sales factor apportionment (Vermont now uses sales into the state as the sole apportionment factor), and the state adopted a consolidated‑group approach (identified in the presentation as a change from a prior approach) so that activity by a subsidiary with Vermont activity can bring the broader group onto a Vermont return for allocation and apportionment purposes.

Keaton noted federal corporate developments including the TCJA’s move to a 21% federal corporate rate and international tax changes, the Inflation Reduction Act’s 15% minimum “book” tax for very large corporations, and the international “Pillar 2” minimum tax framework. He said Pillar 2 includes a safe harbor that will expire Dec. 31, 2026, and warned the committee that U.S. tax and international rules are in flux and that future federal action could require state follow‑up.

What comes next: Keaton and committee members agreed to a follow‑up session with Pat from the Joint Fiscal Office to present revenue estimates and examples. Keaton said his presentation was intended to orient the committee to terminology and structural mechanics ahead of that deeper technical review.