Business & Economy

Analysis: What’s behind the state’s revenue downgrade

When state revenue forecasts were downgraded Thursday, Gov. Peter Shumlin and administration officials acknowledged the significance while downplaying concern.

“It’s serious, but it’s manageable,” Jim Reardon, Commissioner of the Department of Finance and Management, said Thursday afternoon.

Shumlin is asking his team to submit plans for a 4 percent reduction in the agency budgets that were just finalized in May. The Joint Fiscal Committee will meet next in September to consider proposed recission.

General Fund revenue estimates for FY15 have been reduced by $31.3 million, or about 2 percent of the $1.4 billion spending plan. The Transportation and Education funds were downgraded $2.4 million and $2.5 million, respectively. Revenues expectations for the following year also were downgraded by comparable amounts.

Reardon said education programs likely will not be affected because it’s looking like their budgets were set high. Less money, therefore, will not be missed.

Administration Secretary Jeb Spaulding primarily attributed the downgrade to a longer-than-expected ripple effect from federal tax code changes at the end of 2012. Many people at the time liquidated assets to avoid being taxed on them the following year. The result continues to flatten personal income receipts, the theory goes.

Tom Kavet, right, says while Vermont's credit rating is still triple-A rated or double A+, the national downgrade makes the overall economy more fragile. VTD/Josh Larkin

Tom Kavet (right) and Jeff Carr. VTDigger file photo

State economists have acknowledged as much since May, when April’s personal income tax receipts fell about $20 million short. The low numbers took them and other officials by surprise. The phenomena was experienced in other states, as well.

But the consensus revenue forecast paints a more complicated picture.

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Tom Kavet, the Legislature’s consulting economist, and Jeff Carr, the administration’s counterpart, point to several factors contributing to Vermont’s slower than expected economic recovery. Some reflect national or international trends beyond the state’s control, others bring regional differences in Vermont’s economy into focus, and a few surprises have yet to be fully explained or understood.

Nationally, a “perplexing” decline in Gross Domestic Product in early 2014 caused economic models to shift, the economists said. Other factors show promise the economy is growing, so the force behind GDP decline may not be clear for months.

In his report to the Joint Fiscal Committee, Kavet said Moody’s models, on which the state’s are based, called for even more of a downgrade than he and Carr decided to initiate. They think it’s likely the GDP drop “is a mismeasurement” of reduced health health care, to be either offset in the near future or ultimately written out of the econometric calculations.

“Accordingly, we have adjusted macroeconomic assumptions used in this forecast to reflect a slower growth trajectory than that assumed in January, but not as severe as that assumed by Moody’s and others in June and July,” Kavet wrote.

And within the personal income tax category, Kavet noted that personal income tax withholdings — the money taken out of workers’ paychecks — were below not only FY14 projections, but even below last year’s actual level.

“This unusual, though not unprecedented, decline may reflect on the quality of the jobs currently being generated, with lower paying and more part-time positions now in the mix,” Kavet’s report says.

Vermont’s official unemployment rate has long been the lowest in New England, and it’s among the lowest in the nation. But when part-time and underemployed workers are factored in, the alternative rate has remained relatively high compared to previous state trends.

Kavet’s report also points out marked variations in workforce sizes and unemployment rates around the state. Chittenden County remains Vermont’s economic anchor, and Orleans County is showing strong improvement, for example. But Orange and Windsor counties “have lost more than 1,000 and 2,000 jobs, respectively, since their prior cyclical peaks.”

Aside from personal income and employment factors, underperformance in Vermont’s sales and use tax — the state’s second largest source of revenue — is a concern, Kavet said.

“Despite consumer spending growth,” Kavet’s report states, “an ever expanding list of tax exemptions (to which bulk compost” was added in FY15) and tax avoidance via growing Internet sales will continue to retard future revenue growth.”

And housing prices actually declined in the first quarter of 2014. Corresponding stagnation or drops in property tax values could prolong pressure that’s helping to drive up property tax rates to fund education.

Lottery revenues are also falling short. A drop in electric energy tax revenues, due to the scheduled closing of the Vermont Yankee nuclear power plant, already is accounted for.

Counteracting the downgrade were several bright spots, including meals and rooms tax collections, which came in $2.6 million ahead of targets in FY14.

“This was primarily the result of what everyone else referred to as ‘bad’ winter weather, but was a boon to Vermont ski areas,” Kavet said. He and Carr also credited immigrant-funded EB-5 investments — dominated by Jay Peak Resort’s continued expansions — for Orleans County’s encouraging labor market.

Corporate taxes also performed strongly, with $6.5 million to spare on their forecasted collections. Due to business hiring cycles and tax structures, however, this growth may carry forward to spike corporate refunds in FY15 and FY16, Kavet said. Similarly, growth in banking and insurance revenues are likely to be limited by future tax credits.

Overall, Reardon said the downgrade is simply a “recalibration” to keep expectations current with market forces.

He said the $31.3 million General Fund recission will be “serious,” but he put it in the context of $200 million budget gaps the state dealt with at the height of the recession.

“This is a slight downward adjustment to an increase” in expected revenues, Reardon said. “Back then, it wasn’t a decrease to an increase. It was a decrease.”

At that time, economic indicators were changing so quickly, the state moved to quarterly, rather than twice yearly, forecast updates. The next one this fiscal year is loosely scheduled for January, but the Legislature’s Joint Fiscal Committee will meet in the meantime to deliberate over budget cuts.

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Hilary Niles

About Hilary

Hilary Niles joined VTDigger in June 2013 as data specialist and business reporter. She returns to New England from the Missouri School of Journalism in Columbia, where she completed her master's coursework. While there, she worked at Investigative Reporters & Editors and covered state and local government for radio, print and the Web. She’s been a researcher-in-residence at American University’s Investigative Reporting Workshop in Washington, D.C.; a reporter and community radio program director in the New Hampshire; and, in Boston, a public radio producer. She studied English at the University of New Hampshire and documentary writing at the Salt Institute for Documentary Studies in Maine.

Email: [email protected]

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