Joint Fiscal Office: linking Vermont to federal HR 1 could cost about $21 million; committee weighs selective decoupling

Patrick Tidditchy of the Joint Fiscal Office told the Ways & Means Committee on Monday that newly available federal receipts and revised modeling have raised the estimated near‑term revenue impact if Vermont moves its conformity date to include federal HR 1.

"If you just move up the conformity date so that you're pulling in all those provisions for HR 1, this is what the revenue impact would be," Tidditchy said as he walked the committee through updated tables showing an estimated $21,000,000 budget shortfall tied to full linkage.

The committee heard that the single largest driver of the change is a modification to how domestic research and experimental (R&D) expenses are treated at the federal level. HR 1 restores immediate deductibility and—because it is retroactive to 2022—front‑loads a large portion of those deductions into the near term. JFO staff presented that this produces an $18.9 million swing for the domestic R&D line in the state's estimates.

"What we've seen in a lot of states is that those who are conformed are seeing larger decreases than they maybe were expecting otherwise," Tidditchy said, describing updated data from other states and federal forms that informed JFO's revised figures.

Committee members asked whether the forgone revenue would circulate in Vermont and who benefits. Tidditchy cautioned that corporate tax incidence depends on factors such as single‑sales factor apportionment and ownership structure: "the parent company, the unitary filing group, yes, they'll be saving some money on their taxes, but they could be located in Texas or Delaware," he said, noting that the dollars saved do not necessarily remain in‑state.

Several members also pressed JFO on methodology. Tidditchy said the office moved in part from Vermont‑specific datapoints to a scaling approach using other states' collections because of limits in state federal‑form visibility; that shift increased the estimated magnitude of some provisions. He acknowledged scaling is not preferred in every case but said incremental federal and state filings are improving the office's view.

Kirby Dean of Legislative Counsel clarified the statutory status of Vermont’s link up: "Last year's link up was to 2024," he said, adding that HR 1 passed in 2025 and would only become part of Vermont's conformity if the Legislature adopts a new link date; if the committee linked up this year without decoupling parts, the effective federal date pulled in would be 2025.

Tidditchy ran through a set of HR 1 provisions that would flow if Vermont links: restored immediate deductibility for R&D (retroactive to 2022), an increased cap on business interest deductibility (from 30% to 50%), expanded immediate expensing for qualified depreciable business assets (from $1,000,000 to $2,500,000), changes to treatment of foreign‑derived intangible income and GILTI, adjustments to charitable contribution rules for corporations, expansion of qualified small business stock (QSBS) rules, and an increase in the federal child and dependent care credit that would raise the state cost of a parallel credit.

JFO previewed draft committee language that would not simply adopt HR 1 wholesale. The proposed approach would selectively decouple from several HR 1 treatments—specifically the research deduction, special depreciation for qualified production property, the QSBS exclusion and the section 250 foreign‑income deduction—while linking to other provisions. The draft also proposes raising the annual statewide cap for downtown and village center tax credits from $3 million to $5 million and increasing Vermont's R&D credit from 27% to 75% for activity occurring in the state.

Committee members expressed concern about distributional effects and visibility into which Vermont firms or taxpayers would benefit from the federal changes. One member said the tax cuts at the top "are really quite significant" while tax relief for working Vermonters is modest; others pressed for state‑specific modeling on QSBS and R&D recipients. Tidditchy acknowledged that federal returns and other states' data are improving the picture but that the tax department will need to provide additional, Vermont‑specific information for a fully informed decision.

No vote was taken. The chair called a short break and scheduled a detailed walk‑through of Kirby Dean's draft language after reconvening; members said they would study the materials and expect additional presentations from tax department staff before any action.

The committee did not adopt a conformity decision at this meeting and will continue deliberations after receiving fuller tax‑department detail and the legislative language to consider decoupling options.