Economic recovery will continue in Vermont, albeit sluggishly, in the coming fiscal year before “accelerating” in 2015, Vermont’s state economists predict.
Blaming slow growth largely on federal fiscal policy, Tom Kavet and Jeff Carr on Tuesday reported signs that the economy is gaining some of the traction they’ve predicted for the past 18 months. But, “only time will tell if the economic forecast underpinning this consensus revenue forecast update will actually come to pass,” as Carr’s report reads.
The Legislature’s Joint Fiscal Committee was briefed on the forecast Tuesday, shortly before a more in-depth presentation was made to Gov. Peter Shumlin and the Vermont Emergency Board. The board voted to update revenue forecasts as recommended by Kavet, consulting economist for the Legislature, and Carr, consulting economist for the Shumlin administration.
Overall, the Transportation Fund is expected to climb an extra $39.1 million in the next two years, fueled largely by collections of the newly implemented gas tax. The General Fund forecast also was upgraded, but only slightly: $4 million in FY14 and just $600,000 the following fiscal year. The Education Fund was downgraded by $500,000 for the current budget cycle and remains static in FY15.
July 1 marked the start of the 2014 fiscal year. The last fiscal year ended with the General Fund about 2 percent, or $26 million, above target. The Transportation and Education funds fell 0.4 percent and 0.21 percent short of projections, respectively.
Some of the personal income tax Vermont collected in the spring, therefore, “probably stole from future revenue,” Kavet told the Joint Fiscal Committee.
The high personal income tax receipts that carried the FY13 budget, however, were attributed more to one-time events than a long-term spike in income. Carr and Kavet said that many people cashed in their assets at a higher than normal rate at the end of 2012, fearing a rise in federal income tax rates after the new year.
Some of the personal income tax Vermont collected in the spring, therefore, “probably stole from future revenue,” Kavet told the Joint Fiscal Committee.
Carr echoed this concern, saying the “asset churning” (as the cashing-in is called) could reduce personal income tax receipts this year and next, and possibly even in FY16. In his report to the Emergency Board, which meets on fiscal issues when the Legislature is not in session, Carr said the degree of impact “is perhaps the central forecast question” for the next two to three years.
Given such uncertainty related to personal income tax and other sources of volatility, the economists recommended building up reserve funds to hedge against misfortune — a strategy Shumlin wholeheartedly endorsed.
Volatility from personal, corporate and gas taxes
Personal income tax comprised more than half of the state’s roughly $1.288 billion General Fund revenues in the last fiscal year. Its status, therefore, is likely to remain prominent on analysts’ radar.
But downgraded after last year’s asset churning, the updated forecast anticipates only a 3.9 percent growth in personal income tax collections in the coming year and 7.6 percent in FY15. This represents a marked decline from the 10.6 percent predicted growth that was just surpassed in FY13.
Corporate income tax collections, the General Fund’s fourth-largest revenue source, might go down before they go up. The forecast accounts for a 3.3 percent drop in the coming year, followed by a 3.1 percent gain after that. This downgrade is informed, in part, by record-high corporate income tax refunds in FY13.
Yet, overall, business is looking up, Kavet reports.
He said this equates to lower corporate taxes because, as businesses grow through capital investments and new hires, they often take a loss on paper. Their tax obligations end up lower than the estimated tax payments they’ve already made, resulting in refunds.
Kavet and Carr pointed out that both the personal and corporate income tax revenues are increasingly dominated by fewer numbers of very large payers; various events affecting those payers, therefore, could render those revenues vulnerable. Combined with the growing prominence of personal and corporate income taxes as revenue sources for the General Fund, they said, this makes the forecast all the more fickle.
Still more volatility comes from the new, price-based gas tax and related Transportation Infrastructure Bond (TIB) funding, Kavet and Carr said. Energy prices are notorious for their swings, they said, and the energy price forecasts on which their predictions are made have been fluctuating wildly and even contradicting each other.
Underscoring such unpredictability, Kavet and Carr recommended growing reserve funds to save the state from having to scramble in the event that forecasts prove overly optimistic.
“Good idea. Across the board,” Shumlin responded, saying he’s been calling for a boost in reserves from 5 percent to 8 percent for some time. “That should be at the top of our priority list as the good times return,” he said.
Housing perspective
A point of interest and some caution regarding housing figures emerged from the meetings.
Kavet reiterated to both the Joint Fiscal Committee and the Emergency Board that although housing starts are up, they were so far down from the Great Recession that the gains should not be given too much meaning.
May 2013 saw 1,107 housing starts, compared to just 754 in July 2009, Kavet’s report shows. But that 46 percent increase over four years does not come close to making up for an 80 percent drop from the housing peak of 3,723 starts in March 2006, he said. Even with the recent uptick, residential construction in Vermont remains 70 percent down from 2006.
Shumlin, however, questioned the wisdom of using “the peak of the recession that got us into this mess” as the benchmark for the state’s progress going forward. “I would argue we may never want to get back to where we were,” he said.
Carr, in turn, reasoned that the past decade’s data show the close relationship between housing prices and consumer confidence. The relative “firming” of the real estate market, he said, corresponds to a matching rise in consumer confidence.
“That’s important because consumption is still roughly two-thirds of our economy,” Carr said.
He presented the upswing in housing starts and prices as partial evidence that the long-predicted economic recovery is starting to take hold — a prediction on which the more optimistic FY15 forecast is based.
While housing starts are up, however, overall construction is down. Public sector building — which had received an injection from federal stimulus funds, Tropical Storm Irene recovery construction and major projects such as the Lowell wind farm — has now slowed. Residential construction remains “lackluster” and private, nonresidential construction still lags, Carr reported.
“Now that these special projects have run their respective courses, it is up to the private sector to pick up where these big-ticket projects left off,” he wrote in his report to the Emergency Board.
Yet until contractors see significant gains in housing prices, Kavet said, they are not apt to start building, especially speculatively. And until residential construction continues, he told the JFC, there’s not going to be much job growth in construction.
Other ups and downs
Poor performance of sales and use taxes in FY13 was blamed largely on federal payroll tax increases. This adjustment may even out: Collections are projected to increase at least 3 percent in each of the next two years, as opposed to last year’s 1.4 percent growth. Sales and use comprises the second largest source of revenue in the general fund.
Meals and rooms taxes, the third-largest single source of general funds revenue, also face limited expectations, although last winter’s snowfall helped Vermont ski resorts claim a full 8 percent of the nation’s skiers. Just 1.9 percent growth is forecast for FY14, followed by 3.8 percent the following year.
Cigarette and tobacco taxes ranked the fifth-largest source of general fund revenue in FY13, but continued declines are predicted as usage drops off. Shumlin quipped that his counterparts in Washington and Colorado are considering an alternative “sin tax,” referring to a tax on marijuana, which was recently legalized in those states. Speculating as to how much revenue that may generate, Shumlin smiled and said, “It might be a lot.”
Insurance taxes, another major source of general fund revenue at roughly $55 million last year, is expected to decline dramatically with the loss of taxable health care business. In fact, Kavet predicts a near elimination of this revenue stream as the state moves toward a single-payer health care system. For now, a 1.3 percent annual contraction is forecast.
A new electric energy tax drove significant growth last year, but still underperformed compared to expectations. Kavet said this disappointment is not unusual with new taxes, as their revenues are hard to predict. Also, assuming the Vermont Yankee wins pending legal and regulatory approval to continue operations, the nuclear plant has experienced more downtime recently, perhaps indicative of its age and unlikely to reverse. Citing a fixed electric tax rate and limitations on production, Kavet downplayed the tax’s role going forward.
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