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Senate Finance hears fiscal risks of linking to federal HR 1; R&D expensing flagged as main near‑term cost
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Summary
Fiscal staff told the Senate Finance Committee that fully conforming Vermont tax law to federal HR 1 — particularly allowing full expensing for research and experimental (R&D) costs — would front‑load losses and could reduce FY26 revenue by about $21.3 million; the bill blends selective conformity for small businesses with decoupling for larger firms to reduce near‑term impact.
The Senate Finance Committee heard a detailed fiscal presentation on the miscellaneous tax bill and how federal changes in HR 1 would flow through to Vermont tax revenues.
Fiscal office staff explained that many federal personal‑income changes are "below the line" on federal forms and therefore do not pass through to Vermont returns, but several corporate provisions do. The presenter said that the research and experimental deduction (R&D) provisions were the largest near‑term cost driver: "this negative $21,000,000 that you see there was not accounted for in the budget," the fiscal office analyst told the panel, describing updated estimates prepared with the Department of Taxes.
Why it matters: the committee was told those federal changes can be retroactive and that HR 1’s move to allow more immediate expensing effectively front‑loads revenue losses into fiscal years 2026 and 2027. Fiscal staff said the House’s draft attempts to manage that impact by allowing full expensing only for firms that meet a federal small‑business test (averaging $31 million or less in gross receipts over three years) while requiring larger firms to continue amortizing R&D costs over five years.
Committee members pressed staff on which companies would be affected. The fiscal analyst said large multinationals with international income and firms that sell substantially into Vermont are likeliest to see meaningful state‑level changes from international income rules and other corporate provisions, while entities without Vermont sales would generally have limited state exposure.
On the bill’s financial math, staff summarized a set of estimates the committee was shown: under an assumed full conformity the state would have faced roughly a $21 million FY26 revenue shortfall; the selective conform/decouple package in the draft reduces that FY26 loss to an estimated $3.96 million and produces a projected net increase near $14.25 million in FY27 once other provisions and transfers are included.
Members also discussed related tax items in the package — changes to business interest deduction limits, bonus depreciation, rules for qualified small business stock, and expansions to state research credits — and their practical impacts on administration and state revenue. Staff cautioned that some provisions would be administratively challenging if Vermont were to decouple, which influenced the language recommended in the draft.
Next step: committee members agreed to continue technical review and to consider amendments (including a pending PUC technical change on the utility bill referenced earlier). Several senators emphasized calendar pressure, noting the committee wants to resolve revenue language this week because the budget assumes those numbers.
The hearing did not include formal votes on the miscellaneous tax bill; members asked fiscal staff for follow‑up modeling and drafting refinements.
