HOME PAGE POSTS

A policy framed around who it targets often raises a more important question: how it works. In Vermont, that distinction can change the outcome.

This week, the House Ways and Means Committee continued its review of a draft bill that proposes new taxes on high-income earners, investment proceeds, and income from pass-through businesses. The proposal is framed around higher-income filers, but in practice it reaches many Vermont small businesses because their income is reported through owners’ personal tax returns. In Vermont, business and personal income are closely connected, a distinction is not technical. It shapes how this policy will be felt across Vermont’s economy.

The Vermont Chamber testified before the Committee on this proposal and submitted a detailed white paper outlining how the bill functions within Vermont’s business structure. That testimony focused on the interaction between the proposal and Vermont’s pass-through business model, particularly in rural regions where locally owned businesses are the backbone of the economy.

At the same time, testimony from other organizations reflected a broader policy conversation.

Proponents argued it would boost tax fairness, respond to federal changes, and raise revenue for public investments, noting that higher-income households often pay a smaller share of their income in state and local taxes and that added funds could help address affordability challenges. Opponents raised concerns about Vermont’s competitiveness, warning that higher marginal rates and new taxes on investment and pass-through income could affect business investment, workforce recruitment, and long-term growth.

Against that backdrop, the question is not only who the bill is intended to impact, but how it operates in practice.

What the Proposal Does

At a high level, the bill introduces three structural changes to Vermont’s tax framework:

• New surtax layers on higher-income
• A 3% minimum tax floor based on adjusted gross income (AGI)
• A new tax on investment proceeds

Individually, each of these is significant. Together, they represent a shift in how income is taxed in Vermont. Notably, the minimum tax floor is tied to adjusted gross income rather than taxable income. That distinction is central to understanding the bill’s broader effects.

Why It Reaches Beyond Wealth

The proposal is framed as targeting wealth; however, in Vermont, that framing does not fully capture how the policy operates.

Most Vermont businesses are not taxed as traditional corporations. They are pass-through entities, including LLCs, S corporations, partnerships, and sole proprietorships. In these structures, business income flows directly onto the owner’s personal tax return.

That means changes to personal income tax policy often function as changes to business taxation. This includes many of the businesses that define Vermont’s economy:

• Farms
• Inns and lodging businesses
• Contractors and trades
• Small manufacturers
• Specialty food producers

This structure is especially common in rural Vermont, where locally owned businesses are often the primary employers in a community.

The AGI Constraint

One of the least visible but most consequential elements of the proposal is the 3% minimum tax floor based on AGI. AGI is an accounting measure. It reflects income before many real-world obligations are accounted for. For pass-through businesses, income reported on a personal return may already be committed to:

• Payroll
• Equipment replacement
• Debt service
• Reinvestment into operations

This creates the potential for tax liability that does not align with available cash. For businesses with narrow margins, seasonal cycles, or high reinvestment needs, that distinction becomes particularly important.

Business Succession and Capital Gains

The proposal also introduces a new tax on investment proceeds. According to the state’s analysis, capital gains represent a significant share of that tax base. In Vermont, capital gains are not limited to passive investment activity. They are often tied to business succession.

When a business owner retires and sells a company, those proceeds typically represent:

• A lifetime of reinvestment
• A transition to new ownership
• The continuation of a local employer

Changes to how those transactions are taxed can influence whether businesses are transferred locally, sold to outside buyers, or closed altogether. In rural communities, where businesses often serve as economic anchors, those outcomes carry broader implications.

Context Matters

This proposal does not exist in isolation. Vermont already has one of the most progressive tax systems in the country. At the same time, the state ranks near the bottom nationally in economic outlook. That combination shapes how policy changes are absorbed.

In a state working to grow its workforce, expand housing, and strengthen long-term economic capacity, the structure and impact of tax policy matter.

Affordability and Outcomes

The proposal is often discussed in the context of affordability. However, it does not directly address the primary drivers of cost:

• Housing supply
• Workforce availability
• Healthcare costs
• Childcare access

At the same time, it may influence:

• Business reinvestment
• Workforce recruitment
• Ownership succession

Redistribution and structural affordability are not the same.

The Bottom Line

In Vermont’s economy, this bill would function more broadly than a tax on wealth. It reaches into active business income, business transitions, and the employers that sustain communities across the state. As policymakers continue to evaluate the proposal, the focus should remain on how it operates in practice.

Because in Vermont, structure determines outcome.

As previously reported, after months of work by the House Ways and Means Committee, the Tax Department, and the Vermont Chamber, H.933 is designed to expand opportunity for Vermont’s small businesses. The bill aligns Vermont with federal tax policy, strengthens tools like the R&D credit, and improves predictability for businesses looking to invest and grow.

A late-stage proposal, the the Priestley Cole amendment, introduced a tax structure with significant implications for employers before being withdrawn ahead of a vote. The amendment would establish a new minimum tax tied to federal adjusted gross income and increase top marginal tax rates. For many Vermont businesses, particularly pass-through entities, this would increase tax liability regardless of actual profitability and add complexity to long-term planning.

What it means for business:

Many small businesses in Vermont are structured as pass-through entities, meaning business income is reported on the owner’s personal tax return. In practice, that income often represents revenue used to cover payroll, inventory, equipment, and operating costs. By tying a minimum tax to adjusted gross income, the amendment creates a disconnect between tax burden and a business’s actual financial position.

Under the withdrawn proposal, taxpayers with federal adjusted gross income above $150,000 would pay the greater of their standard tax liability or 3% of that income. For businesses with narrow margins or fluctuating revenue, this establishes a floor on tax liability that may not reflect profitability.

The amendment also proposes increasing Vermont’s top marginal income tax rates to 11.75% on income between $500,000 and $1,000,000 and 13.75% on income over $1,000,000. Because these rates apply to pass-through income, they directly affect business owners and may influence decisions related to hiring, reinvestment, and expansion.

These changes come at a time when Vermont continues to face challenges with economic momentum, workforce availability, and affordability. Tax policy plays a direct role in shaping business confidence and the state’s ability to attract and retain employers and talent.

Vermont has already made a clear policy choice to maintain a progressive tax system. The question is how to balance that structure with policies that support economic growth and affordability. While the amendment includes adjustments at lower income levels, its primary mechanism is a combination of higher rates and a new minimum tax structure.

H.933 was developed to support growth, improve predictability, and better position Vermont businesses to compete. The Priestley Cole amendment introduces additional tax exposure and complexity that could limit reinvestment, slow growth, and reduce predictability for Vermont employers.

Although the amendment has been withdrawn and is expected to be taken up in Ways and Means, its implications remain important for Vermont’s business community.

The Vermont Chamber will continue to engage as this proposal is considered to ensure policymakers understand the real-world impact on businesses and working Vermonters, and to support policies that strengthen economic growth, workforce development, and long-term competitiveness.