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.