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Lawmakers on the House Ways and Means Committee confronted a reality that Vermont businesses are already living with. Federal tax changes and trade disruptions are creating uncertainty that businesses cannot control, while Vermont’s selective conformity framework puts state policymakers in a position to either reduce that strain or add to it. As federal pressures build, the conformity debate this session is less about following Washington and more about how Vermont chooses to support its own economy.

Federal tax changes are rarely neutral for states. Vermont does not conform automatically to the federal tax code. Changes that affect the calculation of federal taxable income generally flow through unless the state explicitly decouples, while provisions that occur below the line or are structured differently often require affirmative legislative action. As a result, conformity decisions are not passive. They are deliberate policy choices that shape whether Vermont’s tax system reflects current economic conditions or introduces added cost and complexity for employers already navigating uncertainty.

In periods of stability, these decisions matter. In periods of disruption, they matter more.

What Federal Conformity Means for Vermont Businesses

To ground the discussion in real world application, the Committee heard detailed testimony from Mike Hackett, Partner and Tax Practice Leader at Gallagher Flynn and Company. Hackett walked lawmakers through how key provisions of H.R. 1 operate across business types and why conformity decisions have tangible consequences for Vermont employers.

He emphasized that when Vermont decouples from federal tax treatment, the impact is not abstract. It shows up as additional calculations, higher professional fees, and increased compliance complexity for businesses simply trying to follow the law. In an already challenging operating environment, that added friction can influence whether businesses invest, expand, or delay decisions.

From there, the testimony focused on several provisions with broad relevance across Vermont’s economy.

Research and Experimental Expenditures

One of the most significant provisions discussed was the restoration of current deductibility for domestic research and development expenses. Hackett explained that prior capitalization requirements created a disconnect between taxable income and actual business economics, forcing companies to pay tax on income they never truly realized.

These impacts extend well beyond traditional research-intensive industries. Vermont employers rely on R&D spending for process improvements, engineering, compliance driven innovation, and product development across manufacturing, construction, software, and research driven fields. Allowing these costs to be deducted when incurred improves cash flow and supports reinvestment at a time when margins are under pressure.

Business Interest Deductions

H.R. 1 also restores the calculation of interest deduction limits to a framework used prior to 2022. Vermont has historically conformed to this approach. Hackett noted that decoupling here would be a meaningful departure for the state, immediately limiting businesses’ ability to deduct ordinary financing costs while also requiring separate state and federal calculations.

In an environment of higher interest rates and rising capital costs, interest deductibility directly affects access to capital and the feasibility of investment across sectors. Maintaining alignment here helps avoid layering additional cost and complexity onto routine business financing decisions.

Expensing of Depreciable Business Assets

Updates to federal expensing limits, particularly under Section 179, reflect inflation and rising equipment costs. Vermont already conforms to these rules. Hackett cautioned that failing to update conformity would leave outdated thresholds in place while prices continue to rise, requiring businesses to track separate depreciation systems without changing behavior in a productive way.

Enhanced expensing provisions support investment in the physical backbone of Vermont’s economy, including manufacturing equipment, construction machinery, agricultural assets, technology systems, and hospitality infrastructure.

An Unintended Small Business Consequence

Hackett also highlighted a technical but important issue affecting small businesses that amended federal returns related to prior R&D capitalization rules. Without state action, some Vermont businesses could permanently lose the ability to deduct legitimate expenses for Vermont tax purposes. Those dollars were spent, but the deductions disappear under current state law.

This outcome was never intended by federal policy and disproportionately affects small employers managing tight cash flow, underscoring how technical conformity decisions can have very real consequences.

Conformity as a Vermont Decision

What emerged clearly from the hearing is that conformity is not an endorsement of federal policy. It is a Vermont decision about how much friction the state is willing to layer onto businesses already absorbing external shocks.

When federal actions introduce volatility, state policy choices can either amplify that uncertainty or help stabilize operations. In this context, conforming to key federal provisions can reduce compliance costs, improve predictability, and support continued investment in Vermont’s economy.

The Bottom Line

This week’s testimony underscored that Vermont’s tax decisions this session will be shaped less by ideology and more by whether the state uses the tools it controls to respond to forces it does not.

Federal policy may be driving uncertainty, but Vermont has choices. Conformity decisions that prioritize predictability, simplicity, and investment give businesses the clarity they need to navigate disruption and continue contributing to Vermont’s economy.

The Vermont Chamber will continue to engage lawmakers with data-informed analysis and real-world context to ensure tax policy supports affordability, predictability, and long-term economic resilience for businesses across the state.

This year’s Vermont Economic Conference reinforced a clear throughline. Vermont’s economic future is not constrained by a lack of potential. It is shaped by the choices that either expand capacity or deepen constraint.

The keynote message from Jack Crivici-Kramer captured that reality succinctly. Vermont needs construction, not obstruction. That applies not only to housing and infrastructure, but also to policy design, where clarity, speed, and predictability determine whether investment happens here or elsewhere.

Vermont’s economy is not failing, but it is operating with very little margin for error. Housing supply, workforce availability, and affordability pressures are not abstract challenges. They are the conditions within which every legislative decision now operates.

When capacity is constrained, policy choices carry greater weight. Costs compound faster. Tradeoffs become sharper. Assumptions that might hold in a growing economy break down quickly in an economy that is not adding people or housing at scale.

The Vermont Chamber remains bullish on Vermont’s future. The question before policymakers is whether the decisions made now strengthen affordability, competitiveness, and long-term economic resilience, or compound the pressures employers are already navigating.

Where Capacity Constraints Meet Fiscal Policy

These constraints are already shaping the Legislature’s most consequential fiscal debates this session, particularly around education finance and property taxes.

Earlier this week, Vermont Chamber President Amy Spear testified before the Senate Finance Committee on S.220, which establishes allowable growth in education spending. The testimony emphasized a reality familiar to Vermont employers: when revenues are uncertain and costs rise, growth must be managed.

Despite years of reform discussions, Vermont is facing another projected average education property tax increase of nearly 12 percent for fiscal year 2026, following more than 40 percent growth over the past five years. That trajectory is disconnected from wage growth, household income trends, and business revenue growth, reflecting cost drift rather than sustainable growth.

Revenue volatility compounds the challenge. Corporate income tax collections continue to fluctuate, increasing reliance on property taxes as a fiscal backstop. Those costs do not stop at the tax bill. They flow through rents, housing costs, goods and services, and consumer prices, amplifying affordability pressures across the economy.

While not comprehensive reform, S.220 introduces interim fiscal discipline by establishing guardrails to slow cost escalation, stabilize the spending baseline, and preserve options for longer-term solutions.

Property Tax Classification: Implementation Update

At the same time, the House Ways and Means Committee continues work on Act 73 implementation, reviewing language that establishes three property tax classifications: homestead, nonhomestead residential, and nonhomestead nonresidential. All parcels will be assigned to one or more categories.

Under the draft framework, nonhomestead residential primarily includes second homes, seasonal homes, and short-term rentals. Long-term rentals, workforce housing, and larger multifamily properties are classified as nonhomestead nonresidential, alongside business and industrial property. Mixed-use properties will be proportionally classified based on use, requiring additional parcel-level data collection and reporting.

While this language does not change education tax rates, it sets the structure that will guide how future fiscal pressures are distributed.

From Conference Takeaways to Legislative Action

The Vermont Economic Conference reinforced a message that applies directly to the work underway this session. Vermont needs construction, not obstruction. That principle matters as much in fiscal policy and tax design as it does in housing and infrastructure.

Building durable systems requires intentional policy design, coordinated sequencing, and an understanding of how decisions interact across education finance, revenue structure, and affordability. When implementation details are treated as secondary, instability follows. When they are addressed deliberately, they can strengthen confidence and expand capacity over time.

As the legislative session advances, the Vermont Chamber’s government affairs team remains focused on ensuring these issues are addressed as part of a connected strategy rather than in isolation. That means advocating for policies that expand capacity, reinforce fiscal discipline, thoughtfully hone regulation, and improve predictability for employers and communities statewide.