Montpelier, Vt. – Governor Phil Scott today released details on his tax reform plan, the Working Family Taxpayer Protection Act, to ensure Vermonters don’t see a surprise $30 million tax increase due to changes in federal law.
The Federal Tax Cuts and Jobs Act (TCJA) changed many components of the federal personal income tax structure that will impact Vermont’s tax system. Most significantly, the TCJA nearly doubles the standard deduction and eliminates personal exemptions, while lowering overall federal tax rates. The net result is most Vermonters will pay less in federal taxes.
However, Vermont allows taxpayers to subtract both the federal standard deduction and personal exemption amounts from taxable income. While most Vermonters will see lower federal rates due to the reform, putting the exemptions at zero creates an unintended distortion in taxpayers’ Vermont taxable income, even as their earnings stay the same.
If lawmakers do nothing to change the State’s current link to the federal tax code, more than half of Vermonters, primarily working families, will pay significantly more (a total $42 million) while the remaining Vermonters would see a slight decrease (totaling $12 million). This net total of $30 million more in Vermont income tax would primarily impact working families with children.
“Making Vermont more affordable is one of my top priorities, and I cannot allow this accidental $30 million tax increase on Vermont’s working families,” said Gov. Scott. “I appreciate the work of the Vermont Department of Taxes to identify a plan that not only protects Vermonters from this increase, but also simplifies our system, maintains our progressive tax code – where the wealthy pay more than those with low and moderate incomes – and makes us more competitive with other states through lower tax rates.”
The Administration today shared details with the Vermont Legislature on its proposal, which is revenue-neutral, and ensures most Vermonters will not see an increase in what they pay in Vermont taxes for tax year 2018, as a result of the federal changes. These changes would be in addition to the Governor’s proposal to begin phasing out income taxes on social security benefits and eliminating the tax on military retirement benefits.
“It is important for Vermonters to know that this change ensures working families with children receive the full benefit of the federal tax reductions, and our proposal achieves this without requiring cuts in state spending,” said Susanne Young, Secretary of Administration. “This proposal also greatly simplifies Vermont’s tax calculation, lowers rates and better encourages charitable giving, while adding stability in revenue collection.”
Key provisions include:
- Start with Adjusted Gross Income (AGI) by moving to a system more closely tied to AGI to add resiliency and stability to the Vermont tax system.
- Reintroduce personal exemptions at $4,000 each, which will stabilize both withholding amounts and total tax liabilities while recognizing the financial burden on Vermonters with dependents.
- Create a Vermont-defined income deduction that is equal to $6,000 for single filers, $12,000 for joint filers, and $9,000 for heads of households. This measure keeps the deduction at roughly the 2017 standard deduction level and stabilizes tax liabilities. Those qualifying for the additional federal deduction for the blind or age 65 or over will receive an additional Vermont deduction of $1,000.
- Lower tax rates. High tax rates put Vermont at a competitive disadvantage with other states. Vermont will maintain the same progressivity in our tax code by keeping tax brackets the same while lowering tax rates by .2 percent for all filers.
- Introduce a 5 percent tax credit for charitable contributions. The large increase to the standard deduction and shift away from itemized deductions at the federal level might discourage many filers from donating to charity. This measure will re-incentivize charitable giving, make the benefits of giving available to all Vermont taxpayers (whether or not they itemize their deductions at the federal level), and strengthen the connection between Vermont charitable organizations and all members of the community.
- Increase the Vermont Earned Income Credit to 35 percent of the federal credit (up from 32 percent). The federal EITC and its Vermont counterpart are important tools to incentivize employment and assist lower income families struggling to make ends meet.
The above changes will simplify Vermont’s tax calculation, lower rates, better incentivize charitable giving and increase the stability and resiliency of state revenues.
Click here to view the draft legislation, presented to the Legislature on Monday.
Click here to view a one-page overview of the Administration's proposal.
Click here to view the Vermont Department of Taxes analysis of the TCJA impact on Vermont Income Tax.
Click here to view the forecasted impact of Vermont Tax Reform on Vermont Effective Tax Rates.