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Ways & Means reviews HR 1 conformity: staff flags short‑term revenue risks, preserves relief for small businesses
Summary
At a May 5 Ways & Means meeting, Joint Fiscal Office analyst Patrick Kirchner said conforming Vermont tax law to federal bill HR 1 would create short‑term fiscal impacts, prompting the committee to conform for small businesses while decoupling larger firms and preserving funds for transportation and education. The committee will decide on amendments by Thursday.
The Ways & Means Committee convened May 5 and spent its meeting examining a miscellaneous tax bill that largely links Vermont law to federal tax changes in HR 1, with staff presenting a fiscal note and policy options.
Patrick Kirchner of the Joint Fiscal Office walked members through how federal changes “flow through” to Vermont, explaining that items that are ‘‘above the line’’ on federal returns generally affect state taxable income while ‘‘below the line’’ adjustments often do not. He said full conformity to HR 1 would have created what the office initially estimated as a roughly $21,000,000 hole for fiscal year 2026 and an estimated $33,000,000 gap for fiscal year 2027 under normal conformity assumptions, which motivated the committee’s targeted response.
Why it matters: the committee’s approach is intended to limit near‑term budget risk while honoring certain federal policy changes. Kirchner described a bifurcated solution: Vermont generally will conform to federal treatment for firms meeting the federal small‑business test (average gross receipts over three years not exceeding $31,000,000) but will require larger corporations to continue amortizing research and other deductions that HR 1 would have allowed to be fully expensed immediately.
Key provisions and fiscal effects
- Child and dependent care credit: Vermont links this state credit to the federal amount. Kirchner said HR 1’s expansion adds roughly $1,000,000 in annual cost to a program that currently costs about $4,800,000, bringing annual outlays near $6,000,000 under the conforming language.
- Research and experimental (R&E) deduction: HR 1 would restore pre‑TCJA treatment allowing businesses to deduct R&E expenses in the year incurred and permit retroactive deductions for amounts previously amortized. Kirchner warned this retroactivity front‑loads costs and drove much of the large year‑one estimates, even if the change may be revenue‑neutral over a long horizon.
- Small‑business expensing and qualified production property: HR 1 raises expensing thresholds for small businesses (from $1,000,000 to $2,500,000) and permits bonus depreciation for certain production property; Vermont’s draft conforms for small firms but decouples for larger businesses to avoid administrative and short‑term revenue challenges.
- Qualified small business stock (QSBS): HR 1 expands the asset threshold and adjusts holding‑period exclusions. The senate moved one QSBS effective date to a later tax year to address taxpayer behavior and timing concerns; Kirchner said that shift does not change the published revenue tables because of uncertainty about when collections would actually appear.
- International provisions: changes to controlled foreign corporation (CFC) treatment and section 250 deductions (FDII/NECTI) alter definitional bases and deduction percentages federally; Vermont’s single‑sales apportionment and lack of foreign tax credits mean the state’s revenue impact differs from the federal estimate.
Fiscal summary and funds
Kirchner presented consolidated estimates from the fiscal note: about a $4,000,000 reduction in revenue for fiscal year 2026 under the draft bill and about a $14,500,000 increase for fiscal year 2027, while also citing a longer‑run aggregate figure that he described as "around $1,314,000,000" going forward. He also noted a statutory reallocation in the bill that would send roughly $10,000,000 more annually to the transportation fund while backfilling the education fund to keep other major funds largely neutral.
Committee process and next steps
Members asked for further data on the split between small and large businesses; Kirchner said taxable‑income weight is concentrated in larger firms while counts of businesses are closer to an even split. The chair said the committee expects to decide by Thursday whether to offer additional amendments or to move some items to a conference committee; the group took a five‑minute break to relieve the warm room.
Attribution: all direct quotes and specific fiscal figures in this article come from Patrick Kirchner, Joint Fiscal Office, during the May 5 Ways & Means Committee meeting. The committee also included Representative Redding and other members in questioning and discussion.
The committee will take further action later in the week on the miscellaneous tax bill and on a separate yield bill scheduled for the following day.
