Ways & Means committee reviews proposed Vermont investment proceeds tax, debates housing and business carve-outs

The Ways & Means Committee on April 15 reviewed a draft “Vermont investment proceeds” (VIP) tax that would levy an additional surtax on certain types of unearned income for higher-income filers.

Kirby, the committee presenter, said the draft is modeled on the federal net investment income tax (NIIT, 26 U.S.C. §1411) but would include state-specific adjustments. "At the federal level ... it's a surtax. It is applied in addition to the income tax," Kirby said, explaining that NIIT is a 3.8% tax applied to the lesser of net investment income or modified adjusted gross income above statutory thresholds. He told the committee the VIP bill under consideration would use federal thresholds and return information for administration but would apply a 4% rate in Vermont and include several add-backs to the tax base.

Why it matters: supporters frame the proposal as a way to raise revenue from high-income households that receive a large share of unearned income (capital gains, dividends, royalties), while critics warn certain base choices could have unintended local effects.

What the draft would do: Kirby summarized the main features in the bill language shown to members. The VIP tax as drafted would: - Impose a 4% surtax on the lesser of (a) the VIP taxable investment income or (b) the amount by which a filer’s federal MAGI exceeds the federal thresholds cited for NIIT (as stated in committee materials, single filers $200,000; joint filers $250,000; the transcript records “married filing separately: 25” and does not clarify that figure). - Start from the federal NIIT base (capital gains, dividends, taxable interest, rental and royalty income, certain business trading income, and part of annuity payments) but add back several items that the drafters propose Vermont tax: income from out-of-state state and local obligations, certain qualified small-business stock gains, excluded opportunity-zone gains, gains from property held in trade or business not otherwise subject to NIIT, certain partnership or S-corp disposition gains, net unrealized appreciation in employer securities, and investment income from particular types of trusts. - Route revenues to the general fund (the draft does not create a dedicated fund).

Committee questions and concerns: members asked how the tax would interact with employee stock ownership plans (ESOPs), retirement accounts, and sales of family or farming businesses. Kirby said dividends and capital gains from ESOPs "could" be part of the base and deferred deeper ESOP technical questions to Pat’s forthcoming numerical presentation and to witnesses scheduled to testify. One member warned that including rental income could "end up increasing rent" because landlords might pass the additional tax burden through to tenants. Kirby acknowledged the concern and said the federal definition already includes rental income; he suggested witnesses and fiscal analysis would better illuminate the potential housing impact.

Administration and thresholds: committee staff explained the proposal is intended to be administrable by "piggybacking" on federal returns and using federal MAGI for the threshold calculation. Kirby noted Vermont must exclude items that federal law bars states from taxing (for example, federal obligations) and that some federal exclusions could be decoupled or adjusted for state policy. He repeated the 4% proposal has been consistent in prior versions in the Senate and House drafts.

Next steps: the committee paused its discussion to hear Pat’s fiscal examples and to review bill language after a short break; additional testimony and witnesses are scheduled the following day. The fiscal note on H955 will be discussed Thursday, and the committee plans to continue trust-related discussions on Friday.

Attribution: quotes and technical explanations in this account come from the committee presentation and member exchanges during the April 15 Ways & Means Committee meeting. The primary presenter identified in the transcript is Kirby; Pat and committee members asked follow-up technical and policy questions. Jake Feldman (TAC) was announced as a later witness but did not appear in the recorded discussion.