Advocacy Update: Week 15, 2022

Longtime LCC Priority, Federal Tax Deduction of Business Owners, Needs Support (Request Action)

We need you to advocate for this; at the bottom of this section, there is information on how you can help advance this work. 

As part of the Governor’s proposed tax relief package in H.527, which carries most of the his tax relief proposal, a longtime priority of the Lake Champlain Chamber is included – a State and Local Tax (SALT) deduction cap workaround for pass-through entities (LLCs, S-Corps, and partnerships) that the IRS gave its blessing to in 2020. Vermont has been behind in adopting what about 24 states have already done, and about a dozen other states are working on. The Supreme Court this last week also refused to hear a challenge to the SALT cap, further cementing its prominence. 

The workaround would allow a federal tax cut to Vermonters at no cost to the state and is widely understood in most high-tax blue states as a way to be competitive with other states with low taxes that do not offer as many services. This would be a monumental step to build back to a place of competitiveness taken away by the Trump Administration’s “Tax Cuts and Jobs Act,” which capped SALT as a punitive measure to blue states.

The proposal has been on the table since the beginning of the session with little interest until about a week ago, at which time two members of the Senate Finance Committee, Senators Sirotkin and Brock, decided to pursue the proposal in their other Committee, the Senate Committee on Economic Development, Housing, and General Affairs. The two worked out language with the Tax Commissioner and a plan to add it as an amendment to the Omnibus Economic Development bill. However, when they went to add the amendment during a Senate vote, the Chair of Senate Finance objected to the amendment because it was within the jurisdiction of her Committee and had not gone there. The issue was advanced only as a study, that way, the sponsors didn’t need to move it through the Finance Committee. Sidestepping the ensuing issues around politics and protocol, what ended up happening was masterful threading of the needle by the leadership. 

What’s next?

LCC hopes to revisit the Sirotkin-Brock amendment originally proposed before it became a study. The bill will go to the House Committee on Ways and Means. We would like them to substitute the study language for the Sirotkin-Brock amendment. We need you to reach out to the members of each of this committee and convey your support for this tax relief. 

Here are some main points to convey to legislators:

• 20 other states have enacted the SALT cap workaround, and so should Vermont! Other states are moving to do this, putting us at a further competitive disadvantage. 
• We are sending $50 million to the federal government we do not have to – that money could be staying here in Vermont and being put to work to help Vermonters.  
• The federal government will pick up the cost of this tax cut that the state legislators have within their power to create. 
• As we see growing inflation, this provision can help small businesses owners across the state keep their prices down by covering some of their margins. 
• The only reason SALT was capped was as a punitive measure meant to hurt blue states like Vermont, which utilizes it the most because they have high taxes. 

Here are some FAQs: 

How does the proposal work?

• Here is an example of how this might work for a taxpayer. The state tax paid by the pass-through can be deducted from the pass-through’s income at the federal level because the SALT deduction cap does not apply to businesses, only to individuals. This reduced federal tax is then passed onto the pass-through members, so they pay less federal income tax. The pass-through also passes on the state tax to its individual members. The individual members can then claim a state income tax credit for the tax paid.

Would the state lose money on this? 

• The federal government will pick up the cost of this tax cut that the state legislators have within their power to create. 
• The state will likely make more money on this proposal because of the elective tax liability. A filer would be eligible for credit equal to 90% of the member’s pro-rata share of tax paid by pass-through. The state could bring in as much as $5 million in additional revenue. 

How much would this save eligible Vermont filers? 

• It’s estimated that between 20,000 and 30,000 state filers could elect to use this and bring in a savings of about $50 million to the state by lessening what is paid in federal taxes. 

Should we wait until every filer in the state can access a SALT deduction again?

• Just because this has been repeatedly stalled in Congress doesn’t mean we should pass up meaningful tax relief for those who have a path available.  
• To wait would be to needlessly continue sending Vermont dollars to Washington just because we want the perfect solution instead of a good one for the time being. If we can save $50-250 million now, we should. 

Congress will likely do this for everyone, so why don’t we just wait for that?

• People have been saying this for years, however, it is clear Congress won’t get this done, we need to do what we can ourselves. 
• Because the SALT cap affects blue states, and because of the partisan nature of Congress, this usually can’t make it to the final round of negotiations in most packages. 

This sounds like a handout to the rich?

• No, any business owner making as little as $25,000 can make use of this. 
• See this overview from the State Joint Fiscal Office showing the filers impacted.