Senate Finance considers delaying retroactive tax change on qualified small-business stock

Deputy Commissioner Rebecca, speaking for the Department of Taxes, told the Senate Finance Committee that a provision in the miscellaneous tax conformity package decouples Vermont from a federal exclusion for qualified small-business stock and, as written, would make that previously excluded federal income taxable in Vermont.

"This federal excluded income will become taxable in Vermont," Rebecca said, and noted the provision was drafted to be retroactive to tax year 2025. She argued the department and taxpayers would benefit if the effective date were moved forward one year to tax year 2026 so the agency can map federal return fields and create return rules before implementation.

Pat Davidson of the Joint Fiscal Office reviewed the fiscal note and cash-flow implications and said the timing change would not, in their view, materially alter the tables in the fiscal note because of how the state books revenue; both staff estimates and the sponsor's comments placed anticipated first-year revenue from the decoupler in the low millions. "I believe that this is gonna in the first year of implementation, we've raised about $2,400,000, just decoupling from the qualified small business stock," Rebecca said when summarizing the fiscal estimate.

Committee members worried about fairness to taxpayers who filed returns for tax year 2025 without notice of a new tax liability. The committee's working conclusion was procedural: the sponsor will draft a floor amendment to change the effective date to tax year 2026 so the change is prospective for taxpayers and gives the Department of Taxes time to implement the necessary administrative systems.

The committee discussed next steps for an amendment and for timely floor notice; the motion to move the miscellaneous tax bill forward (H 9 51 as received from appropriations) was made during the session and the committee scheduled the bill for floor presentation.

What happens next: the sponsor said they would craft the floor amendment and present it on the floor; committee staff and the Department of Taxes will prepare the implementation details if the effective date is changed.