Republican Gov. Phil Scott’s nearly decade-old push to exempt military pensions from state income taxes hit a key milestone Tuesday when the Vermont House of Representatives overwhelmingly approved legislation that includes tax breaks for retired servicemembers.
Vermont is one of the few states that does not fully exempt military pensions from state income taxes, and the fifth-term governor has been calling on Democratic lawmakers to add the exemption since he was sworn into office in 2017. He reiterated that plea in his budget address in January, saying the move would attract “a valuable and important part of the workforce, and (make) sure those who serve our nation can afford to thrive and retire here too.”
The proposal has never won traction in the Democratically controlled Legislature, which tends to target tax relief measures toward economically disadvantaged populations. But Brattleboro Rep. Emilie Kornheiser, the Democratic chair of the House Committee on Ways and Means, said a groundswell of support for the plan compelled her committee to include the exemption in a broader tax relief bill.
“I’ve heard from so many members, and so many members of the public, about how important it was to people to have a tax exemption related to military pensions,” Kornheiser said Tuesday.
The legislation, which passed by a vote of 142-2, does not offer the blanket exemption Scott has been seeking. Instead, it would offer a full state income tax exemption on the military pensions of residents who make up to $125,000 in adjusted gross income. People who make $125,000 to $175,000 would receive a partial exemption. The exemption would also apply to survivor benefits.
Kornheiser said offering tax relief to Vermonters making more than $175,000 would erode the progressivity of the state’s tax structure.
“We were trying to find a way to thread the needle that we were honoring folks’ service and still making sure that the folks who most needed to be benefited in our tax code were receiving those benefits,” she said.
According to the Legislature’s Joint Fiscal Office, Vermont has 3,593 military retirees receiving pensions benefits. Nearly half would qualify for a full exemption under the bill, and 627 would receive a partial exemption.
For us it’s important for workforce development, to keep the talent we have here in Vermont, and to give us as a guard the tool to bring in the talent that we so desperately need here.Maj. Gen. Gregory Knight, adjutant general of the Vermont National Guard
The legislation also includes $250 refundable tax credits for military veterans who don’t have a pension and make less than $25,000 a year. The exemptions and tax credits combined would provide nearly $4 million in tax breaks annually to former servicemembers.
Jason Maulucci, Scott’s director of legislative affairs, said the governor supports the plan.
“We hear all the time stories ... from career military folks who might be an engineer, they might be a plumber, they might be an electrician, who want to continue to contribute to the workforce, but they choose other places to live because every other state provides that income tax exemption,” Maulucci said.
Maj. Gen. Gregory Knight, the adjutant general of the Vermont National Guard, called the legislation a solid “compromise” that will help Vermont realize the economic potential of its military sector.
“For us it’s important for workforce development, to keep the talent we have here in Vermont, and to give us as a guard the tool to bring in the talent that we so desperately need here,” Knight said.
The bill is part of a wide-ranging $13.5 million tax relief package that still needs support in the Vermont Senate. It would expand the child tax credit by providing $1,000 tax credits to income-eligible households with children of up to 6 years old (credits currently expire when children reach 5); it would boost the earned income tax credit for low-income workers without children from a maximum of $247 to $649; and it would increase the income threshold at which older Vermonters receive an exemption on Social Security benefits.
Woodstock Rep. Charlie Kimbell, a Democrat, said tax credits are a tool to “equalize the public burdens” on the people of Vermont.
“They are low-income households without children, often living paycheck to paycheck, who continue to be taxed even when they are at or below the poverty line,” Kimbell said. “They are households with children who have the highest household expenses in their lives and the lowest household income.”
Washington County Sen. Ann Cummings, the Democratic chair of the Senate Committee on Finance, has long been opposed to singling out military pensions as the lone occupation worthy of tax-exempt status. She said she’s willing to consider the House proposal, but she said she won’t support any plan that doesn’t also include tax credits for unpaid caregivers.
