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Committee reviews proposal to mirror federal net investment income tax at state level
Summary
The committee examined language to levy a Vermont investment‑proceeds (net investment income) tax modeled on the federal NII tax. Patrick Tutin (JFO) explained the tax would apply to net investment income or MAGI amounts above statutory thresholds and listed included income and explicit exclusions (wages, Social Security, retirement plan withdrawals, municipal bond interest).
The Ways & Means Committee also considered a proposal to adopt a Vermont investment‑proceeds tax patterned on the federal net investment income (NII) tax. Patrick Tutin of the Joint Fiscal Office told members the draft mirrors the federal approach to defining net investment income but uses a different rate in committee discussion (4% in the draft language referenced, compared with the federal 3.8% rate).
How it would work: the tax would apply to the lesser of a taxpayer’s net investment income or the amount their modified adjusted gross income (MAGI) exceeds statutory thresholds (Tutin cited example thresholds used in the draft: $200,000 for single filers, $250,000 for married filing jointly, $125,000 for married filing separately). Tutin said net investment income includes capital gains, dividends, taxable interest, rent and royalty income and other passive income; the proposal explicitly excludes wages, Social Security benefits, unemployment, qualified retirement withdrawals (401(k), IRAs), municipal bond interest, sale of a primary residence and active business income.
Tutin walked the committee through numeric examples illustrating the “lesser of” rule: for a single taxpayer with $50,000 in net investment income and MAGI $300,000 (i.e., $100,000 over the $200,000 threshold), the tax base would be the $50,000 of net investment income; in a second example with MAGI only $225,000 (i.e., $25,000 over the threshold) and the same $50,000 in investment income, the tax base would be $25,000.
Members probed technical points: whether capital gains receive Vermont’s existing capital‑gains exclusion treatment (Tutin said many stock gains are not eligible for Vermont’s 40% exclusion up to $350,000 and that qualified small business stock and business‑sale gains would require case‑by‑case assessment), how active business income differs from passive investment income, and the difference between realized and unrealized gains (Tutin noted taxes are triggered at realization, i.e., on sale).
No formal vote on the investment‑proceeds language occurred during the portion recorded. Members asked JFO staff to extract additional historical tax‑study figures to clarify how many filers are persistent high earners versus those who have one‑time realized gains from business sales.
