Federal tax bill’s cuts concentrate at top, ITEP researcher tells committee

Carl Davis, research director with the Institute on Taxation and Economic Policy, told a legislative committee that the federal tax bill known as HR1 produces large benefits for higher-income families and creates questions for Vermont about whether to “conform” to those federal changes.

Davis said the bill reduces rates, adjusts brackets, expands the standard deduction and the child tax credit, and includes large business tax breaks, particularly accelerated depreciation. “And just to emphasize, around half of the tax cuts in this federal bill are flowing to the top,” Davis said, describing a distributional pattern that he called a “regressive tilt.”

The nut graf: Davis urged lawmakers to treat conformity choices selectively. He said some federal provisions—especially those aimed at business investment and new carve-outs for early-stage investors—translate poorly to Vermont policy, which relies on single-sales-factor apportionment and cannot target many federal incentives to in‑state activity.

Davis presented state-level modeling showing small average dollar gains for low-income households and much larger absolute gains for higher-income families. He highlighted three specific areas for committee attention: (1) the early-stage investor exclusion (expanded in HR1) that he said is administered as an exclusion and is highly concentrated among very high‑income taxpayers, (2) large depreciation and business tax changes that represent the largest conformity revenue risk, and (3) new international-income categories (NCTI/GILTI-like provisions) that interact with Vermont’s sales‑factor apportionment.

On the investor exclusion, Davis said the benefit is highly concentrated and difficult for a state to target: “This is being expanded…94% of the benefit is going out to…millionaire households,” he said, adding that states such as the District of Columbia and several others have already decoupled from similar provisions. On depreciation, he warned the committee that accelerated business depreciation is the single largest business-conformity revenue risk and recommended careful scrutiny before adopting federal changes into state law.

Davis also explained why Vermont’s single‑sales‑factor corporate tax reduces the state rationale for some federal export or production deductions: because Vermont apportions income by where sales occur, expanded federal deductions for export-type income do not necessarily change Vermont’s taxable share of profit. He described the NCTI discussion as another area where states can rely on existing apportionment rules rather than adopt federal percentage write‑offs.

Committee members asked about taxpayer mobility and whether higher state taxes cause high‑income residents to leave. Davis said migration effects exist but the empirical literature generally finds them small and nuanced; he pointed to California’s legislative debate and the experience of Massachusetts and Maryland as examples states can study.

Members and Davis repeatedly noted that the Joint Fiscal Office (JFO) and Ways and Means are doing technical modeling. Davis recommended a case‑by‑case approach—decoupling where federal provisions create large state revenue loss or where the federal rationale does not apply to state policy, and adopting modest federal changes that improve tax administration or advance clear state goals, such as certain dependent‑care improvements.

The committee did not take formal action during the session. Davis concluded by urging careful drafting and more modeling by JFO before any state conformity decisions.

What’s next: JFO is working on modeling the fiscal impacts and the committee will use that analysis to inform any statutory conformity or decoupling proposals.