House Ways & Means hears competing testimony on proposed 13.3% top rate and investment proceeds tax

The House Ways and Means Committee heard three hours of testimony April 16 on a proposal that would add a new top income tax bracket and a 4% investment proceeds tax, with witnesses sharply divided on whether the changes would protect public services or harm small businesses and state competitiveness.

Steph Yu, executive director of the Public Assets Institute, told the panel the state faces growing inequality and federal retrenchment that justify more progressive state revenue. "Vermont's tax system . . . is still regressive at the top," Yu said, and she warned that federal changes could reduce supports Vermonters rely on: about 160,000 Vermonters use Medicaid (roughly 60,000 of them children), the state faces an estimated $2.7 billion in lost federal funding over the next decade, and the end of enhanced premium tax credits affected roughly 30,000 Vermonters and about $75 million in 2026. Yu said these trends make a stronger state tax backstop worth considering.

But business and tax competitiveness witnesses disputed the proposal's economic effects. Amy Spear, president of the Vermont Chamber of Commerce, told lawmakers the draft would reach active business income because many Vermont firms are pass-through entities, create a 3% minimum floor tax on adjusted gross income that can apply when cash is constrained, and make family business transfers and succession planning more expensive. "For pass-through owners, AGI may include business earnings that are already committed . . . to payroll, equipment, debt," she said, arguing the change could reduce reinvestment and complicate retirements tied to business sales.

Andrew Wilford, director of state policy at the National Taxpayers Union Foundation, said the bill's combined effects could sharply raise the tax burden on investment and pass-through income. He described a new 13.3% top bracket (the draft language discussed thresholds of roughly $481,825 for single filers and $586,625 for married couples) plus a 4% investment proceeds tax and warned of revenue volatility tied to capital gains and potential out-migration of high earners. "In a state the size of Vermont, even seemingly minor shifts in migration patterns . . . would have a profound impact on the state's tax base," Wilford said.

Janelle Fritz, a policy analyst at the Tax Foundation, summarized the organization's State Tax Competitiveness Index and said an added 13.3% top rate would worsen Vermont's competitiveness ranking. She cited research on California to show high-rate changes can prompt behavioral responses that reduce expected near-term revenue gains.

Committee members asked witnesses about methodology, baseline choices (pre- or post-TCJA calculations), whether and how the changes would affect Social Security or retirement savings if workers reduce wages to qualify for subsidies, and which specific business structures would be most affected. Witnesses repeatedly referred lawmakers to technical analyses from the Joint Fiscal Office and the Department of Taxes for detailed revenue baseline work and to sector-specific studies for competitiveness claims.

Procedurally, the chair said the committee would later consider an amendment to H.955 offered by Representative Kimball and the chair and then break for lunch before the floor session. No formal vote on the proposed bracket or the investment proceeds tax was recorded during the hearing.

The committee paused for a short break after the morning testimony and signaled additional witnesses would follow after recess.