Joint Fiscal Office outlines proposed 4% "investment proceeds" surtax
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Summary
At a Ways & Means Committee meeting, Joint Fiscal Office analyst Patrick Titterton presented draft legislation for a 4% Vermont "investment proceeds" surtax modeled on the federal NIIT but with an expanded tax base; JFO estimated about $60 million in annual revenue and the draft routes funds to the general fund, effective for tax year 2027 (FY2028).
Patrick Titterton of the Joint Fiscal Office told the Ways & Means Committee that proposed language would create a 4% Vermont surtax on net investment income, modeled on the federal net investment income tax but expanded in several ways.
Titterton said the surtax would follow the federal MAGI thresholds (single $200,000; married filing jointly $250,000; married filing separately half that) and apply the tax to the lesser of (a) net investment income or (b) the amount by which MAGI exceeds the threshold. "The tax rate's 4% instead of 3.8%," Titterton said, noting the state rate is slightly higher than the federal surtax. He added, "Our estimate for this is just shy of $60,000,000 on an annual basis" for fiscal year 2028, and that the current draft directs revenues to the general fund.
Why it matters: committee members pressed staff on who would be affected and how the base differs from the federal law. Titterton said the draft would "add back" certain items that are excluded under the federal NIIT — examples discussed include interest on bonds issued by other states, gains from qualified small-business stock that are federally exempt, certain Opportunity Zone dispositions, gains tied to active business sales, net unrealized appreciation in employer stock held in some retirement/ESOP accounts, and some incomplete-gift non-grantor trust situations. In each case staff said the goal was to broaden the Vermont base beyond the federal NIIT where policy makers choose to do so.
Members raised practical and equity questions. One member asked whether ESOP-style accounts or employer retirement stock plans could leave ordinary workers worse off; Titterton explained how net unrealized appreciation can be sheltered in employer plans and that the tax generally triggers on realization (sale or withdrawal). A representative asked how many Vermonters would be captured; Titterton cited IRS-derived counts for the 2020 tax year showing roughly 12,000 Vermont returns would have been subject to the federal NIIT and noted the largest counts fall in the $200,000–$500,000 AGI range while most NIIT revenue is paid by million-plus filers.
Committee members also flagged data gaps and behavioral risks. Titterton said federal reporting on Opportunity Zones has been limited historically but is expanding, and he acknowledged Vermont does not comprehensively collect all data needed to fully evaluate some features. Members expressed concern about cliffs (small income changes that can affect benefit eligibility) and the potential for taxpayers to change residency or use trusts to reduce Vermont tax liability; staff said additional testimony and deeper analysis could be scheduled.
Next procedural step: staff walked through the draft statutory language (definitions, thresholds, allocation rules for part-year and nonresident individuals, and tax administration cross-references) and agreed to provide annotated comparisons and to bring additional witnesses in follow-up sessions. No formal action or vote occurred during the morning session.
