Climbing expenses and fewer taxpayers requires tax increases, Legislature thinks – but for whom?

Editor’s note: The author will join WDEV’s Hot Off The Press today at 11:35 to discuss looming income tax changes, Vermont’s demographic decline, Act 181 and the other seismic issues reported below. Tune in AM 960, FM 96.1, and wdevradio.com and call in 802-244-1777.

By Ben Kinsley, Campaign for Vermont 

After initially looking like it would be a tame week in the Legislature, it certainly didn’t turn out that way… A real lamb to lion situation.

This week the Legislature turned its attention to two questions that will shape Vermont’s fiscal future for years to come: who pays, and how much? House Ways & Means spent the better part of three days dissecting proposals to restructure Vermont’s income tax brackets and create a new investment income surtax, while simultaneously wrestling with what to do with the revenue: cut middle-class taxes or stand up a state-run health care premium assistance program to replace expired federal subsidies. Meanwhile, a sobering demographic briefing from the Joint Fiscal Office reminded the Committee that the population trends underlying all of these revenue assumptions are heading in the wrong direction.

Also this week… a key House Committee endorsed repealing significant sections of Act 181, the Senate put forward a significantly different approach to this year’s property tax bill, and the Ethics Commission’s budget request was gutted right as they are being asked to do more.

Let’s dig in.

Income Tax Overhaul Takes Shape in Ways & Means

The House Ways & Means Committee devoted three hearings this week to a draft bill relating to income tax brackets and investment income. What started as a historical review of Vermont’s 2018 decoupling from the federal Tax Cuts and Jobs Act (TCJA) evolved rapidly into a debate over competing visions for the state’s tax code: and a new investment income surtax, increase the top end tax bracket rates, or rebalance the brackets all-together. Each of these approaches could generate tens of millions in annual revenue but also create real-world impacts on taxpayer behaviors.

Early in the week, fiscal analysts walked the committee through the choices Vermont made in Act 11 (2018), when the state decoupled from the TCJA. That process was described as “a really, really long journey” that had been building since the early 2000s. The key takeaway for the committee’s current work: every bracket or rate change forces tradeoffs between simplicity, progressivity, revenue reliability, and administrative complexity.

Two Competing Visions: By Thursday morning, the Committee was evaluating two mutually exclusive amendment structures:

• Option A creates a new top bracket with a marginal rate of 12.7% (revised down from an initial 13.3% proposal modeled on California’s tax rates), estimated to generate approximately $100 million beginning in FY2028.
• Option B takes a different approach: raise the threshold of the existing top bracket (so more income is taxed at intermediate rates) while simultaneously lowering the bottom marginal rate from 3.35% to 2.7%. This produces broad-based tax cuts for lower- and middle-income filers — about $135 per return for those under $85,000 AGI, roughly $450 per return for a middle bracket — offset by concentrated increases on approximately 4,600 top-bracket returns averaging about $20,000 each. The net revenue effect is roughly neutral.

A New Investment Income Surtax: Alongside the bracket debate, the Committee reviewed proposed language for a Vermont Investment Proceeds (VIP) surtax. This would essentially be a state-level analog to the federal Net Investment Income Tax (NIIT), but at a 4% rate (versus the federal 3.8%). The tax would apply to capital gains, dividends, taxable interest, rent, royalties, and passive income. Excluded income categories would include wages, Social Security, retirement plan withdrawals, municipal bond interest, and primary home sales. The applicability test mirrors federal mechanics: the tax hits the lesser of net investment income or the amount by which modified AGI exceeds thresholds ($200,000 single / $250,000 joint). Narrowing the base to more closely match the federal NIIT reduced the JFO revenue estimate from $58.6 million to approximately $48.6 million.

Committee members pressed on an important nuance: many high-income returns reflect one-time events (like the sale of a business), not persistent high earnings. JFO pointed to the ongoing 10-year tax study as a resource for separating those patterns. This is a critical distinction if the Legislature wants to avoid taxing one-time liquidity events at rates designed for recurring wealth.

What to Do With the Money: Health Care Premium Assistance vs. Tax Cuts: if Vermont raises $48–100 million in new revenue, where should it go?

Legislative Counsel presented draft language for a state-run health care premium assistance program that would cap premiums at 10% of modified AGI for qualified health plans on Vermont Health Connect, benchmarked to the second-lowest-cost silver plan. The proposal also includes the expansion of the Qualified Medicare Beneficiary (QMB) threshold from 150% to 200% of the federal poverty level and a new nonrefundable small-employer premium tax credit for businesses with 100 or fewer employees that pay at least 50% of employee premiums on the exchange (carry-forward up to 10 years).

The policy motivation is clear: when enhanced federal premium tax credits (ARPA/IRA) expired, roughly 9,272 Vermonters lost federal subsidies, QHP enrollment dropped from ~32,000 to ~30,000, and the number of people with no subsidy rose by approximately 4,500. Earlier DVHA estimates pegged the value of those lost federal subsidies at $65–75 million, meaning even the full $48.6 million VIP surtax revenue wouldn’t fully replace what the federal government used to provide.

One notable gap in the draft: the small-employer credit is nonrefundable, meaning nonprofit employers (a significant share of Vermont’s economy) cannot benefit unless they happen to have unrelated business income generating tax liability. Legislative Counsel flagged this explicitly. If the goal is to support employer-based coverage broadly, this design choice needs revisiting.

Vermont’s Demographic Caution Light

Sandwiched between the tax hearings, the House Ways & Means Committee also received a demographic briefing that should be required reading for every legislator voting on revenue or spending policy this session.

The numbers:

• Vermont’s population stood at 648,493 as of mid-2024, and is declining. After a pandemic-era surge of ~4,100 people (2020–2021), growth slowed and then reversed. The 2024 estimate showed the first year-over-year decline since 2019, and preliminary 2025 data show an even larger decline.
• Natural change has been negative since 2020 meaning that there have been more deaths than births every year. In 2023–2024 alone there were approximately 5,000 births versus 6,700 deaths (−1,723 net change).
• In-Migration has reversed. After adding 6,160 people between 2020 and 2024, domestic migration turned negative in the most recent year (−500). International migration, which contributed over 6,000 people since 2020, is also slowing substantially (down to roughly +600 in the preliminary 2025 data) likely reflecting federal immigration policy changes.
• The age structure is shifting fast. The 65–79 cohort grew by more than 13% from 2020 to 2024, the largest percentage increase of any age group. Meanwhile, children aged 0–4 declined by 2,200 (−7.7%) and the 5–17 cohort fell by 3,450 (−3.8%).

Vermont Futures Project Executive Director Kevin Chu reinforced the point with his Economic Competitiveness Dashboard, which ranks Vermont poorly on a composite “economic momentum” index. His most striking finding was that Vermont is the only state in the country experiencing both natural population loss and negative net migration.

The fiscal implications for our state are extensive. Vermont’s personal income tax base is concentrated among the 45–64 age cohort, the group now aging into retirement. As that cohort shrinks and the 65+ population grows, income tax revenue faces structural headwinds at precisely the moment demand for services, like long-term care and health care workforce is accelerating. The consumption tax base faces similar pressure as retirees generally spend less.

This is the backdrop against which every revenue and spending decision this session should be evaluated. A tax code restructured around a small number of high-income filers becomes more volatile as the population ages. A health care system dependent on a shrinking workforce becomes harder to sustain. An education system serving fewer children with sustained staffing levels becomes harder to justify. The demographic data imposes constraints that the Legislature ignores at Vermonters’ peril.

Housing Production: S.328 and H.775 Converge

The Senate Economic Development Committee worked Tuesday to merge two housing vehicles (S.328 and H.775) into a single bill. A key House addition under debate was a 1% sub-credit facility (~$12 million) dedicated to modular/off-site construction, paired with an accelerator pilot program for bulk procurement of housing units.

Huntington Homes’ Jason Webster highlighted the importance this new program by noting that bulk orders of 20–100 units unlock real efficiencies, but only for committed, permitted projects. He argue that the state’s financing tool must follow developer commitment, not fund speculation.

Committee members repeatedly linked the pilot’s viability to Act 250 and municipal permitting reform. Several senators questioned exposing state capital without concurrent steps to ensure projects can actually be built. One senator framed the test bluntly: “The decision tree needs to put affordable housing at the top.”

On a parallel track, House General and Housing Committee is exploring attaching universal design requirements to the pilot program (citing 1–3% incremental costs with 3–10% ROI) but more work is needed on that proposal.

S.325 Gets a Strike-All: Act 181 Tier 3 Repealed, Road Rule Gone

The House Environment Committee spent the full week working through a strike-all amendment to S.325, producing a significant recalibration of Vermont’s land use reform trajectory (Act 181 and Act 250).

Gone: The road rule and Tier 3 jurisdictional trigger are both repealed. This is a direct response to the public backlash that had, as ANR warned last week, begun “seeping into other priority areas.”

Retained: Forest-block and habitat-connector criteria (delayed to January 1, 2028); housing-related Act 250 exemptions realigned to common sunsets (mostly January 1, 2028). Priority housing definitions were left unchanged.

New: In place of a top-down Tier 2 study, the Land Use Review Board (LURB) must contract with a neutral NGO to develop a public engagement plan by January 15, 2027. The engagement plan is intended to gather statewide input on risks to agricultural soils, forest blocks, habitat connectors, and headwaters. This is a meaningful shift, refocusing on community priorities first, rulemaking second. Also, a proposed Joint Legislative Environmental Oversight Committee would provide off-session monitoring of LURB and ANR implementation, though some members questioned its authority and scope.

Senate Finance Reshapes the Property Tax Bill

Senate Appropriations walked through the Finance Committee‘s amendment to H.949 (aka the Yield Bill) Thursday and voted it out, revealing a materially different approach to property tax relief than the House. The bill is scheduled to hit the Senate floor on Tuesday.

The split: the House divided the ~$104.9 million transfer from the General Fund (to the Education Fund) across two years to create an off-ramp from one-time buy-downs that have been persistent the last few years. Senate Finance applied nearly the full amount ($100.9 million) in FY27, reserving $4 million for a one-year renter credit expansion (which probably creates its own little cliff).

The math: the House version  resulted in ~6.7% average property tax increase. The Senate version is closer to the Governor’s recommended increase at ~3.8%. That’s a meaningful difference for homeowners, but perpetuates the cliff effect we’ve flagged all session. As one committee member stated, “I don’t think what we’re doing is sustainable at all.”

The amendment also embeds S.220 spending controls in the bill, which would reduce the excess spending threshold drops from 118% to 112% (this creates downward pressure on spending by taxing spending above that threshold at an increased rate). Safe-harbor protections (flat spending, bonding, good-cause appeals) remain intact. The one-year renter credit raises the cap on credit amounts from $2,500 to $3,250 and shifts the top-tier formula from 10% to 12.5% of fair market rent.

This bill is headed to conference, where the 3.8% vs. 6.7% gap will be the central negotiation. The Governor’s preference for a near-full buy-down gives the Senate approach political tailwinds, but the fundamental question remains: every dollar of one-time General Fund dollars used to suppress property taxes this year creates a cliff next year, or requires more one-time funds. We’ve seen this movie before.

Personally, because spending controls are now included in the bill, a reasonable compromise solution might be to hold 1/3 of those one-time funds back. That hold-back plus the spending constraints that would hit next year seem likely to erase most of the cliff that would be created by using this year’s one-time funds.

The Candidate Disclosure Debacle

House Government Operations spent the latter half of the week on S.298 (now retitled the “Voter Protections Act”), which is new to our lineup for a good reason. First, a little bit of history: Act 171 (2024) updated candidate disclosure requirements but left murky who posts the form, answers questions, and maintains the system. The Ethics Commission, which is already severely under-resourced, was asked to take on these duties despite having its staffing request cut by Senate Appropriations this week. Commissioner Erlbaum didn’t mince words: “Our jurisdiction has been state public servants… not candidates. That’s a whole new something for us… it seems like the beginning of mission creep.”

The Committee brokered a compromise where the Ethics Commission hosts the authoritative form and FAQs; the Secretary of State links to it and emails candidates directly with the required resources. But the underlying problem, mandating transparency infrastructure without funding the agency tasked with delivering it, remains unresolved. Candidate filing opens on Monday. The system will muddle through, but “muddling through” shouldn’t be the standard for democratic infrastructure.

The House and Senate are going to have some work to do here to square this circle.

Looking Ahead

• House Ways & Means must choose between competing amendment structures for their income tax overhaul and decide whether new revenues should target health care premiums or middle-class tax cuts. Watch for whether the committee demands actuarial estimates before committing to a premium assistance program whose costs remain genuinely unknown.
• Senate Education continues working through H.955 (education reform/CESAs). The Governor’s promised veto looms (the House’s 79–62 vote falls short of a veto-proof majority) meaning the bill’s fate may depend on whether the Senate version can attract broader support or whether the chambers reconcile their approaches.
• S.190 (reference-based pricing) continues its journey through the House. Combined with the premium assistance proposals emerging from Ways & Means and S.197’s primary care payment reform, this remains potentially the most consequential cost-of-living policy cluster of the session.
• H.775/S.328 (housing production) gains steam in Senate Economic Development. The central questions: does the 1% modular credit facility survive, and will the committee pair financing with any permitting reform. Or, will they leave the pilot exposed to the same regulatory barriers that stall housing projects today?
• S.325 (Act 250/land use reform) will continue to be refined in House Environment. Key outstanding items include the LURB’s legal opinion on the dormant regional plan review statute, and whether the proposed oversight committee’s authority is sufficiently defined before it’s created.
• H.949 (yield bill) heads to the Senate floor and almost certainly to conference committee. The 3.8% vs. 6.7% property tax increase gap is the central negotiating point, and the sustainability of one-time General Fund transfers is the question neither chamber (or the Governor) wants to answer honestly.
• S.298 (Voter Protections Act) was voted out of committee on Friday afternoon, whether the Ethics Commission subsequently gets the resources to do what it’s being asked to do remains to be seen.

This was a week where the numbers told the story. All of them point in the same direction: Vermont’s fiscal margin for error is shrinking, and the policy choices being made right now will determine whether the state adapts to that reality or continues to build on assumptions that the data no longer supports.

On behalf of Vermonters,