Vermont Legislature SmartTranscripts:

[Rep. Carolyn Branagan (Member)]: Say that or what, but thanks for asking.

[Rep. Emilie Kornheiser (Chair)]: So we're still the Ways and Means Committee, and it's still February 11. And we are going to be working on a piece of language that I'm interested in including in the miscellaneous tax bill, which started as a bill on our wall that Representative Conlon and I sponsored together. And this is sort of one of many responses to the federal tax law that passed this summer. And it's sort of another tax loophole that the federal government, in its wisdom, created this summer. And so with that, I'm gonna have Kirby explain it to you instead of me because that's his job, not mine. And I think we're gonna we're gonna need to sort of revisit this a couple of times. But this is our first conversation.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Again, Herbie King, legislative council. So as Chittenden mentioned, we're talking about language reacting to HR one from last summer. Signed on July 4. Coincidentally, I think. So I thought with this that some of you may have a lot of questions about it. I think we'll just start with the federal law and then go into the Vermont language of FRA. We're going to advertise for Cornell and also whoever else is advertising on their page. I do like their site for federal law. So what was created in HR one was this new section 25 f, which creates a federal tax credit. So just to be very clear throughout all this discussion, we are talking about a federal income tax credit. We are not talking about a Vermont income tax credit. This new federal income tax credit was created that allows a taxpayer a credit and as a refresher, I think you all know, a credit means that that is an amount taken off your tax liability that you will not have to pay. It's different than a deduction where that would reduce what gets taxed. A credit means, so in this case we're talking about a $1,700 credit, that would be $1,700 off your tax liability. So this creates a federal credit of up to $1,700 for contributions to something called a scholarship granting organization. The creation of this means that there's the creation of scholarship granting organizations. They're not exactly a pre existing thing right now because have these organizations will have to follow certain rules and organize themselves in certain ways in order to make themselves eligible for people to make contributions and to be able to claim the credits. That's why there's probably not existing organizations that would fall under all those requirements. And we'll just walk through that. Another aspect of this credit though, and why we are talking about it and why there is a state response possible, is that part of the federal law is that for a person to claim this up to $1,700 federal tax credit, it has to be to an organization that is recognized and listed by the state that it's in as qualified. So Vermont has the ability under the federal law to recognize these organizations. And the only way for this credit to be claimed by someone is if that organization that they're making a contribution to is on Vermont, has been recognized as on the list for the current year for Vermont. So there's the big basics, but we'll get into the ins and outs of it now. The first place to stop I think is what is a qualified contribution? It's a charitable contribution of cash. That means you can't donate your car to a scholarship granting organization that uses the contribution to fund scholarships for eligible students solely within the state in which it's organized. So to break that down, if there's a Vermont SGO that gets recognized, one of the rules is that SGO has to give scholarships only to Vermont students. It does not mean that only a Vermont resident can contribute though. There's a little nuance there. A person from another state could contribute and claim the federal credit. It's just that the organization has to give scholarships to students in the state. An eligible student is another part of this. This is more rules that the, a lot of these rules that we're talking about are things the SGOs are going to have to follow. There's the federal law that we'll have to follow and then that's and ostensibly or not ostensibly really, but like in theory, the state will also should be betting this federal law when recognizing them. So, one of the rules is that these certain amount of scholarships have to go to eligible students. The term eligible student means an individual who is a member of a household with an income which for the calendar year is not greater than 300% of the area gross or area median gross income and is eligible to enroll in a public elementary school or secondary school. For Vermont, I think I hear at least one person Googling what is Vermont's area of meeting. Vermont, that's around 300,000 depending but it's it's based on county, so so there's variation. So this is meant to be some means testing, but the means testing is is

[Rep. Carolyn Branagan (Member)]: Very medium gross income you're saying is $100,000?

[Herb "Herbie/Kirby" King (Legislative Counsel)]: 300.

[Rep. Emilie Kornheiser (Chair)]: No. No.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: What I'm saying is this number you're seeing, it's like on average across the state is around $300 give or take a few $10,000 We can verify that. This is the numbers that HUD puts out.

[Rep. Carolyn Branagan (Member)]: Alright, so I was just starting with area median income for the state and it could be 300% of that. Yes. So in order for the 300,000 you're talking about, the area median income would have to be 100,000.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Oh, I thought you were saying that my number is too high, but you're saying it might be too low.

[Rep. Carolyn Branagan (Member)]: I think it's too high. I thought area median income was closer to 70.

[Rep. Emilie Kornheiser (Chair)]: That's 70. Let us

[Rep. Carolyn Branagan (Member)]: Very median gross income.

[Rep. Emilie Kornheiser (Chair)]: Yeah. Keep that down the same exact. Right. Right. I'll change the term. AMI. Let's hold that question. I can hear Sure.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Yeah. That's definitely something that I can punt JFO. They're not being pulled into this at all so far. So okay. Yeah. Was just trying to give you, like, a ballpark for some context about that. So that's that's one of the requirements. I'm going to jump to the scholarship granting organizations next because some of the other terms are used for that. Scholarship granting organization means any organization which is it has to be a five zero one(three) cannot be a private foundation. It has to prevent the co mingling of qualified contributions with other amounts by maintaining one or more separate account exclusively for qualified contributions. It has to follow these additional requirements, which we'll get to in a second. And that has to be included on that list that I was talking about as being recognized by the state. The additional requirements are the organization provides scholarships to 10 or more students who do not all attend the same school. The organization spends not less than 90% of the income of the organization on scholarships for eligible students. The organization does not provide scholarships for any expenses other than qualified elementary or secondary education expenses. In this context, that means tuition, that means in some cases uniforms. It can mean computers, things like that, that are related. There's some question about whether things like tutoring count because of the way it references another part of federal law. This is the part where I tell you like another important thing to know about this, which is that this is new. There is a requirement that the US Treasury put out regulations to answer some of the unknowns and to fill in the gaps in what we're looking at. And those regulations have not been released at this point. What the IRS has done so far is it has invited states to possibly enroll early, so to speak, in this. And it's also pulled out a feeler for questions for things that should be addressed by the regulations. But from what I've seen so far, not even a draft version of the rules that have been put out. I raise that now because this question of what are the qualifying expenses seems like something that those rules will probably try to answer. The next it says such organization provides the scholarship eligible students with priority for students awarded a scholarship the previous school year. And any eligible students who have a sibling who was awarded a scholarship. It also requires the organization not to earmark or set aside contributions for scholarships on behalf of a particular student. And requires the organization to verify the annual household income and family size to meet the requirement we were talking about before. And limits the awarding of scholarship eligible students who are a member of a household for which they do not meet the requirement. Let me go back up to the one before. Okay. We talked about the expenses. There's there's just a lot of typical language for federal tax credit such as there's no double dipping where you try to count this contribution on your federal taxes and you also count it as a charitable contribution or something else. Can't do that. There's a carryforward allow. And then we have the subsection on the state list of scholarship granting organizations. And since this is very relevant to what you're looking at, I'll read that. So the way that the state's involvement works is it says, not later than January 1 of each calendar year, a state that voluntarily elects to participate in this section shall provide to the Secretary of Treasury a list of the scholarship granting organizations that meet the requirements and are located in the state. And then the process is the election under this paragraph shall be made by the governor of the state or by such other individual agency or entity as is designated under state law to make such elections on behalf of the state with respect to federal tax benefits. You may ask, this says the governor and then there's this or another entity within the state with the ability to do so. It would be helpful for us if the federal law answered the question of who does this. Because of that or that I've highlighted, it does not. It's an open question, which means that it goes to separation of the powers at the state level, legislative power, executive power. I don't have any reason to believe having the ability as legislature does to make laws that you can make a law dictating participation here. There may be other stances on that question. And I can just say that the federal law does not dispose of the question for us. And it comes down to that question of power at the state level under the Vermont constitution. Because it says by such other individual agency or entity as designated under state law, that's where you come in. State law is not preempted from designating this. It clearly is permissive. So have at it. And then the last subsection here is about regulations and guidance. And that's what I mentioned before about how the IRS has worked on that. And that's yet to be released.

[Rep. Emilie Kornheiser (Chair)]: Does anyone have questions about the underlying federal piece, and then we'll go to what the actual bill does? So

[Unidentified member]: if I understand you, you're saying that there's not a listing of scholarship granting organizations for us to select or look at? No.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Under this, it would be up to the state to identify what those are. If you do nothing, it would be up to the governor under this language. If you do nothing at all, as far as any state law around this, it would be purely up to the governor and the governor would have to follow the federal requirements. But there's not even a lot of language here to ensure that vetting is done. Could it be like VSAC?

[Unidentified member]: Would that be considered maybe a branching organization?

[Herb "Herbie/Kirby" King (Legislative Counsel)]: I think it's probably unlikely because of the requirement that it be a five zero one(three). Maybe something affiliated with VSAC.

[Rep. Carolyn Branagan (Member)]: I'm not sure you were secondary students. Right,

[Herb "Herbie/Kirby" King (Legislative Counsel)]: no higher education.

[Unidentified member]: Jeremy, you went through the list about eligibility. You talked about a student who had a sibling. Is that student disqualified or qualified?

[Herb "Herbie/Kirby" King (Legislative Counsel)]: They have priority under the federal language.

[Rep. Carolyn Branagan (Member)]: So if I understand it also, the credit would not be, it's only eligible for people making a donation in the state if the state opts in. Yes. So either the governor decides to opt in or the legislature could opt in.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: If the state doesn't have any recognized SGOs, it means that a person cannot contribute to a Vermont SGO and get the credit. I don't read this as precluding a Vermont resident from contributing to an SGO in another state.

[Rep. Emilie Kornheiser (Chair)]: Okay. So we're gonna move to the legislative language unless someone else says something.

[Unidentified member]: Then we wanna opt out. Is that correct?

[Rep. Emilie Kornheiser (Chair)]: I want to opt out. I don't to speak for you. Representative Conlon also wants to opt out. If you'd like to join me in the way, that would be delightful.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: We know two people want to opt out because their names are on

[Rep. Emilie Kornheiser (Chair)]: Let's talk let's talk through it, and then I'm happy to.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Okay. So h seven seventy has some findings. Would you like me to to read those? Or

[Rep. Emilie Kornheiser (Chair)]: Sure.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Okay. So the findings provided here are the general assembly finds one that section 25F that we were just looking at creates a new federal program to subsidize scholarships for expenses at public and private schools. Two, under the terms of the statutes, States may voluntarily elect to participate in the program or they may decline to participate. Three, the decision concerning whether or not to participate in the program is to be made by the governor of the state or by such other individual agency or entity as it's designated under state law to make such elections on behalf of the state with respect to federal tax benefits. And so the proposed addition to Vermont statutes is in title two. This is under the executive. Think it's under the executive. I think so. It did have out of the legislative title.

[Rep. Emilie Kornheiser (Chair)]: Anyway. I see you looking at me, but I'm not going go up.

[Rep. Carolyn Branagan (Member)]: No, I was

[Rep. Emilie Kornheiser (Chair)]: at the titles.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: No, no, no. Can you read

[Rep. Emilie Kornheiser (Chair)]: from

[Herb "Herbie/Kirby" King (Legislative Counsel)]: them? It's not that significant.

[Rep. Emilie Kornheiser (Chair)]: Okay, great.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Because it affects both legislative and executive here.

[Rep. Emilie Kornheiser (Chair)]: You decide you want to move titles later. That's fine. We can do that.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: So the designated entity participation in federal tax credit program, subsection A, in accordance with the federal law we were just looking at. The General Assembly doesn't itself as the sole entity to make an election. B, Vermont shall not participate in the federal tax credit program for contributions to scholarship granting organizations. C, an election to the contrary made by another state official or entity is void and shall have no effect. So pretty clear about where you stand. And that is it. That's all. That's the bill.

[Rep. Emilie Kornheiser (Chair)]: Thank you. Any questions for Kirby? I'm just having so much fun out there.

[Rep. Carolyn Branagan (Member)]: I

[Rep. Emilie Kornheiser (Chair)]: don't see any other questions for Kirby. I'll answer your question, Representative Branagan. So, I mean, we passed Act 73. It was all about achieving scale. And I want to make sure that everything we're doing is focused on the education system that we have and not any added payoff that the federal level may cause. I also just, on tax ethics grounds, like to avoid as many loopholes as possible, even if they are federal tax loopholes and not state tax loopholes. And I know that there's mixed opinions on that particular question. But, yeah. Thank you. Spending this. Yeah?

[Unidentified member]: It seems as though that the Feds are establishing some sort of scholarship program for private schools, like school choice, which we have left out in 'seventy three. It seems as though it's a counterbalance to that. Is that the right assessment?

[Rep. Emilie Kornheiser (Chair)]: When this was first moving through the federal machinace, I can't say that word right now. It's not gonna come out, so I'm not gonna try. When it was moving through the federal process, the tax credit was much larger at first. And it was really A policy that I deeply disagreed with, but was actually a quite brilliant complete workaround from the entire state level education system. In that it created a system where basically you're using the federal tax code to entirely create a private choice system in every state. It got limited significantly from that point, but that was how it was hanging out at first. And so I'm taking it at that original intent and saying that that's not what we have decided we're doing in

[Rep. Carolyn Branagan (Member)]: Vermont. When

[Unidentified member]: did the federal thing come about? It was

[Rep. Emilie Kornheiser (Chair)]: part of the whole federal bill that passed the O triple B. Yeah. And we're gonna take more testimony on this, so I don't want, happy to talk now, but other people other than me say, and Kirby can say stuff. Yeah, yeah. Represent welcome. I just wanna give fun trivia. It's modeled after New Hampshire, so it ended up being, like, times more expensive than they thought it would be. And the biggest recipient modeled after New Hampshire is from. And the biggest single recipient was Amazon. Think it's kind of a Interesting. Okay. Programs and services, so it's not necessarily skeletal function. I mean, you can find a witness that could also say that, that would be super helpful to add to that. Thank you. Because I love that.

[Rep. Carolyn Branagan (Member)]: I guess I do want to ask Kirby clarifying questions Because with it says that no money shall be held in the name of an account of a particular student. So it's not like you could decide it's not a $5.29 comparable account. You can't give money to your grandchild in this way and have them use that money for public elementary or private elementary or high school, right?

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Yeah, the way I read the provision that you're talking about is to prevent some sort of, I don't know, put pro quo is the right way to put it, but to say, you know, I'll donate this to you, but my grandkid will be applying. So to prevent that kind of activity is way I'm reading that provision.

[Rep. Emilie Kornheiser (Chair)]: My understanding is that it doesn't really necessarily. It nods to that, but does not close its full loophole.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: It says social organization does not earmark or set aside contributions for scholarships on behalf of any particular student.

[Rep. Emilie Kornheiser (Chair)]: You could not earmark, but still match, essentially.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: It certainly does not say a student shall not be awarded a scholarship if a contribution was received by a family member. Yeah, it does not go that far.

[Rep. Emilie Kornheiser (Chair)]: Yeah.

[Rep. Carolyn Branagan (Member)]: Do we you may know, madam chair, more in a sense of what are other states doing with this right now? Is it just taking effect and people may have opted in, they may not have opted in?

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Because the regulations aren't released, because it's not taking effect immediately, I'm not aware that there's a lot of state movement at this point. I think the conversation like this is maybe where a lot of states are. I haven't specifically checked though. I mean, there's definitely a reason why the IRS put out the notification that states can sign up early. Presumably that's because some states wanted to.

[Rep. Carolyn Branagan (Member)]: Yeah, sure field.

[Unidentified member]: Interesting.

[Rep. Emilie Kornheiser (Chair)]: And the other piece of intent from Representative Conlon and I was that we don't want this to happen without a full legislative debate. I was surprised how few people have heard about it who care deeply about these issues, and so didn't want it to happen before they have that conversation, because it has a big impact, given our scale.

[Rep. Carolyn Branagan (Member)]: And your concerns are that not only once this is established, the credit could be increased to match dollar for dollar, but that it could be opened up and changed so that it does go around the hole, as I understand

[Rep. Emilie Kornheiser (Chair)]: it correctly.

[Rep. Carolyn Branagan (Member)]: So once the camel, the nose of the camel is on the tent, then you're looking at the rest of the camel coming soon after.

[Rep. Emilie Kornheiser (Chair)]: Yes, thank you.

[Rep. Carolyn Branagan (Member)]: That was the count, or did I sign?

[Unidentified member]: No, I just had the notice. I just

[Rep. Emilie Kornheiser (Chair)]: wanted to add maybe the other thing. Vermont doesn't matter in the scheme of the nation, but the reality is that the costs have so far exceeded projections in every place that's done it, and somebody's paying for that, and so what are we going to give up if as a nation this is what we choose

[Rep. Carolyn Branagan (Member)]: to do? What costs are

[Rep. Emilie Kornheiser (Chair)]: you talking It's foregoing taxes. Your foregoing revenues.

[Rep. Carolyn Branagan (Member)]: That's federal, so that flows to us.

[Rep. Emilie Kornheiser (Chair)]: As your health care subsidies and the ACA.

[Rep. Carolyn Branagan (Member)]: Federal level, not in state. Yes.

[Rep. Emilie Kornheiser (Chair)]: It's not in state. And that's what I was saying about the principles around the state's influence on federal tax law. I understand there's a real difference of opinion about how much we allow the erosion of the federal tax code at the state level, given that it's the federal tax code. But I genuinely, personally rigid about it. This will affect every state as well. It will, because it will, as I think the chair said, it will frighten the system.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: I think there is a federal estimate of the cost of the whole program. And if you do want to have JFO in, they can help.

[Rep. Carolyn Branagan (Member)]: There's some wild, huge assumptions as to the uptake.

[Herb "Herbie/Kirby" King (Legislative Counsel)]: Recollection is that it was a lot higher than I

[Rep. Carolyn Branagan (Member)]: would have thought. Really?

[Rep. Emilie Kornheiser (Chair)]: It's fairly high.

[Unidentified member]: So I noticed we have the honorable former member here. He just happens to be here as he comments?

[Rep. Emilie Kornheiser (Chair)]: He said he was just curious, I don't want to put him on the spot, but he can come back another time and testify if he wants to. Unless you're interested in testifying now.

[Unidentified former member (guest)]: Just starting to take a look at it.

[Rep. Emilie Kornheiser (Chair)]: I'd like to mention that the former member is one of those rare people who really understands the importance of the fee bill. I think Carolyn said you can have one of the cookies

[Rep. Carolyn Branagan (Member)]: she likes. Exactly.

[Rep. Emilie Kornheiser (Chair)]: Yourself to the homemade Thank you very much, Ruby. And I think with that, we will head to the floor, and see you all tomorrow. When we are talking about prekindergarten, we are going to finish Emilie Byrne's testimony.

[Unidentified member]: Again. And

[Rep. Emilie Kornheiser (Chair)]: then very soon after that, we're going to probably shuttle this issue off to the Hearing and Services Committee who has time again, and then get it back from them from