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New Federal Tax Law May Cloud State Revenue Forecasts

Vermont Statehouse dome on a cloudy day.
Kirk Carapezza
Changes in the federal tax code could make it harder for economists to predict how much Vermont will collect in state revenues next year.

State revenues are the life blood of Vermont government, but projecting just how much money will be coming into state coffers next year could be more difficult than usual.

Lawmakers and the governor rely on revenue projections to know how much they’ll have to spend in the state budget. While those projections are never an exact science, this year could be especially tough for economists to predict — that’s because of a provision in the new federal tax law that will allow for increased deductions on income generated from businesses.

Commissioner of Taxes Kaj Samsom says the 20 percent business income deduction is known as a “pass through.”

“This change to pass-through income is gonna have a greater kind of variability around it, and some behavioral change,” Samsom says. “You could have people changing the way they do business in order to get that 20 percent deduction, so that’s gonna be a little bit more challenging.”

Samsom says businesses, LLCs and sole proprietorships could use some accounting maneuvers in order to take advantage of the new deduction. If they do, state income taxes could take a hit as a result.

Samsom says it’ll be tough to predict how many businesses will try to avail themselves of the pass through. And he says it doesn’t necessarily mean overall revenues will suffer as a result.
Preliminary calculations, according to Samsom, indicate that state revenues will actually see a bump next year as a result of the federal tax code changes.

“But the potential size and scope of the opposite impact of the pass-through deduction flowing through to Vermont taxable income could swallow that up,” Samsom says. “It could be a close call, could break it even, but that’s the variable piece that we have to do some more work on.”

Samsom says his department is working with the Legislature to come up with a new consensus revenue forecast for the next fiscal year.

The Vermont Statehouse is often called the people’s house. I am your eyes and ears there. I keep a close eye on how legislation could affect your life; I also regularly speak to the people who write that legislation.
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