ITEP witness tells Ways & Means Committee proposed 4% "wealth proceeds" tax would hit top filers and raise about $75M

Miles Trinidad, a state analyst at the Institute on Taxation & Economic Policy, told the Ways & Means Committee on April 16 that a proposed Vermont "wealth proceeds" tax would apply a 4% levy to passive investment income above current federal thresholds and could raise about $75 million for the state.

Trinidad said the proposal is modeled on the federal net investment income tax created by the Affordable Care Act in 2010, a 3.8% levy on passive income such as dividends, interest and certain capital gains. "This is not a tax on wealth. Rather, it's an indirect tax on the proceeds derived from wealth," he said.

Why it matters: Trinidad and ITEP argue the state-level tax would more effectively capture revenue from wealth-derived income without establishing a state wealth registry, and the revenue would come at a time when Vermont faces reductions in federal funding for hunger and health programs.

Trinidad described how the federal net investment income tax targets passive income over thresholds (about $200,000 for single filers and $250,000 for joint filers on federal returns) and said the Vermont bill would generally conform to those thresholds while adding state-specific adjustments. He noted that Minnesota in 2023 used a similar approach — raising the threshold to $1,000,000 and applying a 1% rate — and that Minnesota’s change is expected to bring in about $68 million.

On what the Vermont proposal would tax, Trinidad said the state would apply the 4% rate to capital gains, dividends, royalty income, certain trust income and interest, while excluding federally tax-exempt municipal bond interest because states cannot tax it. He emphasized that long-term capital gains and qualified dividends would make up roughly 80% of the base. "Both of these filers would pay a tax only on the portion of their investment income that exceeds the threshold amounts," he said, explaining how the tax targets the passive-income portion above the red-line threshold.

Trinidad explained that the bill would include anti-avoidance provisions modeled on New York to limit the use of certain trusts (for example, incomplete nongrantor or ING trusts) that can shift passive income out of state tax jurisdiction. "This bill contains technical language to avoid that," he said.

He also clarified who would be exempt: gains from a primary residence up to the federal exclusion (about $250,000 single, $500,000 married), business profits from activities in which the filer materially participates (the material-participation test typically requires roughly 100 hours per tax year), and traditional retirement income — Social Security, pensions, 401(k) or 403(b) withdrawals and qualified annuities.

Committee members asked about the ITEP "Who Pays" methodology and the data underlying the charts. Trinidad said the analysis draws on IRS tables, the American Community Survey and state statistics of income and feeds into ITEP’s microsimulation models; the ITEP publication cited in the presentation is based on 2024 incomes and was published in 2024.

There was a pointed question about whether recent federal tax legislation added new benefits for top earners or simply extended earlier cuts. Trinidad said the chart in his slide shows what people would receive "on top of" the Tax Cuts and Jobs Act baseline (TCJA assumed extended) and the more recent federal changes layered on top of it. One committee member said they had received different testimony from the tax department and advocates; Trinidad reiterated his interpretation, but the committee did not resolve the differing readings during the session.

Trinidad summarized ITEP’s distributional finding that about 96% of Vermont households would not owe the state-level net investment income tax and that the most meaningful impacts fall on the top of the income and wealth scale. He concluded by saying the proposal and a companion new top marginal bracket would make the overall tax system more progressive.

Next steps: Trinidad said he would share additional technical materials and that more testimony, including from other experts, is expected in future committee meetings.

(Quoted speakers and paraphrases are attributed to Miles Trinidad, state analyst, Institute on Taxation & Economic Policy.)