The State government made a number of changes to Vermont’s tax code in 2018, some of which related to the federal Tax Cut and Jobs Act and some of which were politics as usual. The key changes are discussed below.
In fiscal year 2018, Vermont had a budget surplus of $55 million as a result of much higher than expected tax revenues. Through the first nine months of fiscal year 2019, Vermont’s tax revenues are well ahead of last year. What do you do with greater than planned financial resources? The obvious options include increasing expenditures, cutting taxes and/or repaying debt.
Well, after an extended legislative session and threats to shut down the state government, Vermont actually increased taxes, mostly on businesses. The non-residential education property tax rate was increased 2.9%% to $1.58 per $100.
Some other changes were also made to Vermont’s education property tax, designed to increase collections. First, the upper limits of home values eligible for property tax income adjustments were lowered. The maximum property tax income adjustments available were also changed.
Income Tax: Social Security Benefits
Vermont did manage one clear tax reduction. Having been one of only 13 states taxing Social Security benefits, Vermont now has large tax exemptions for Social Security.
Based on income thresholds, up to 85% of Social Security benefits are taxable at the federal level. The federal taxable amount flows through as adjusted gross income to Vermont. Under the new tax code, joint filers with income up to $60,000 will be fully exempt from state tax on Social Security. There are reduced exemption rates above $60,000 and no exemption at all above $70,000.
Amendments Related to the Tax Cut and Jobs Act
As briefly discussed in the prior article, the Tax Cut and Jobs Act increased the Standard Deduction and eliminated Personal Exemptions. The combined effect of these changes was estimated to be an increase of $30 million in Vermont personal income taxes. In 2018, Vermont changed its tax code in an attempt to neutralize these federal tax code changes. In particular, Vermont did the following:
- Vermont changed its jumping off point from the federal tax return from Taxable Income (income after all deductions and exemptions) to Adjusted Gross Income (income before any deductions or exemptions). This aligns Vermont with the majority of other state governments in the country and provides Vermont with much greater flexibility to manage its own tax base.
- For state tax purposes, Vermont now has a $4,140 personal exemption for all eligible family members.
- For state tax purposes, Vermont has its own Standard Deduction ($12,000 for joint filers).
- Charitable donations are only deductible to the extent taxpayers itemize deductions. By doubling the Standard Deduction, the Tax Cut and Jobs Act greatly reduced the number of taxpayers who would itemize deductions, thereby limiting the ability to deduct charitable contributions. Vermont has offset this by creating a 5% non-refundable tax credit for charitable donations up to $20,000, available to all state taxpayers whether they itemize or not.
- The Tax Cut and Jobs Act changed the method for determining the annual limits for Earned Income Tax Credits (“EITC”), having the effect of slowing the growth rate in these tax credits. In reaction, Vermont increased the State Earned Income Tax Credit from 32% of the federal EITC to 36%.
- Last, there was a very modest reduction in Vermont’s personal income tax rates, about 0.20% across the various brackets and the number of brackets were reduced.
Vermont was one of many states that adjusted their tax codes in response to the Tax Cut and Jobs Act. The key objective was to prevent an inadvertent tax increase by way of rule changes at the federal government level. It looks like Vermont has largely accomplished this.
There could be some short-term problems for individuals, businesses and the State government as everyone comes to terms with the new tax codes. Tax witholding rates and estimated tax payments could prove to be too high or too low. Presumably, most of these issues will get resolved over the course of the 2019 tax cycle.
Winners: There are some 158,000 Social Security beneficiaries in Vermont. Some meaningful portion of these Vermonters will see their tax bills go down in 2019 and have a bit more money to spend as they themselves see fit.
Losers: There are over $41 billion of non-residential properties in Vermont. The owners of these properties, many of which will be Vermont businesses, will see their property taxes increase by 2.9%, or over $18 million in the aggregate.