[T]he state’s economists are excited about potential personal spending growth thanks to low gas prices. Their enthusiasm at the semi-annual Emergency Board meeting Tuesday, however, masked the takeaway news: They downgraded state revenues for three fiscal years running.
Jeffrey Carr, the Shumlin administration’s economist, and Tom Kavet, the economic adviser for the Vermont Legislature, are ecstatic about the roughly $2,500 the average Vermonter will have to spend this year due to falling oil and gas prices, and they are optimistic that the psychological impact of renewed consumer interest in purchases will outstrip the volatility that has hampered a growth in wages.
“We’re looking at the economy finally starting to pick up steam like we haven’t seen in some time,” Kavet said. “A big part of that is the drop in oil prices.”
The good news for consumers isn’t going to help the state budget, at least in the short term. Vermont revenues will take a series of small hits in rapid succession. Kavet and Carr predict that the state’s revenues will come up $10 million short in fiscal year 2015; $18.6 million below 2014 targets set in fiscal year 2016 and $8.1 million less than expectations in 2017.
The fiscal year 2015 shortfall is covered by the budget adjustment proposal, which lowers state spending by $12 million in the current year, according to Jim Reardon, the commissioner of the Department of Finance and Management.
But there is no plan for coping with $18.6 million in reduced revenues in fiscal year 2016. Gov. Peter Shumlin did not include the downgrade in his budget, which was released for legislative review last week. He says he wasn’t given the revenue forecast numbers until Monday night. In many years, the budget often comes out before the revenue forecast is ready for prime time, and Shumlin told reporters he had to work with the numbers available as of last week.
The $18.6 million hole comes on top of a $94 million budget gap for fiscal year 2016. Reardon says, technically, the governor’s budget presented last week closes the gap.
“Based on revenue we saw coming in, we expected there might be a downgrade, but we didn’t know what that number would be,” Shumlin said. “Now we have the number, so now we’ll all be working together to beat that number. We have to find $18 million somewhere.”
The governor said he’s heartened that the downgrade wasn’t larger. He wouldn’t say whether he would use a mix of new revenues and cuts to resolve the new gap.
“We’re going to work with the Legislature to deal with any changes,” Shumlin said. “By the time we all sit around this table at the end of May when we actually make the final decisions, I expect a lot things might have changed, but we’re going to manage to the money as we always do.”
Rundown on forecast details
Gas prices will remain low in 2015, according to estimates from Moody’s Analytics and the U.S. Energy Information Administration. Several factors, including changes in demand for oil and gas in emerging markets like China and Brazil, and new technologies for extracting natural gas have changed the global energy market, Kavet and Carr say.
The low gas and oil prices function like a tax break windfall for households and businesses in Vermont, the economists say. Consumer confidence nationally is at the highest level in nearly a decade. As a result, there will likely be an increase in consumer spending, both by residents of the state and tourists, and that could boost higher sales tax receipts.
“I’m a little reluctant to get out front, but the energy price stimulus has the potential to be very significant, and it’s actually tangible now, it’s something that’s actually happening, rather than us having to expect something is going to happen,” Carr said.
The state’s economists outlined national and global factors that could create economic “headwinds of concern” for 2015. They described their investigation into factors that have contributed to the low performance of certain revenue collections in 2014.
Companies that have been sitting on cash reserves are hiring, but as they start to bring on new employees and provide training, profitability drops. When businesses spend more money, there are typically more corporate tax refunds and lower estimated tax payment collections.
“We have a record amount of business carry forward and what it means is that if their liabilities come down quickly there will be a lot of refunding,” Carr said. “And there will be fewer payments in the estimating process.”
As the nation reaches full employment, the Federal Reserve will likely raise interest rates for borrowing in the middle of the year, and that could cool down the economy somewhat.
Wages have dropped over the last six years, nationally and in Vermont. The average hourly wage in the United States has declined from $24.63 per hour to $24.57 per hour, or by roughly a penny per year.
Changes in personal income have a direct impact on the state’s tax receipts, according to the economists.
Personal income is one of three volatile areas of taxation that have been difficult for Kavet and Carr to forecast. Corporate taxes also go up and down because of market factors, while estate taxes are especially unpredictable.
Corporate, estate and personal income taxes in fiscal 2004 represented 50 percent of the sources for General Fund revenue. Now those three sources represent 60 percent, Kavet said. The estate tax estimates can swing by $20 million from one year to the next.
“You can say, alright, it’s getting bigger all the time, but in any given year it’s something of a random walk,” Kavet said.
Carr and Kavet took a “deep dive” into how they calculate the revenue numbers and have changed the way they arrive at individual numbers in their forecast.
“We’ve been doing this for 34 years, and we’ve never spent so much time looking at things underneath the hood for the various bases, really one by one,” Carr said.
Not only are the state’s sources of revenue becoming more volatile, the way the revenues are flowing has changed.
Carr and Kavet say in the near term, the state will be more dependent on end of year personal income tax payments made in April. That makes state budgeting during the legislative session tricky.
“It’s not lost on us there’s not a lot of time if April doesn’t work out,” Carr said. “But when you look at things and what’s happened the last three fiscal years and the way revenues have flowed it’s changed. It’s not like we didn’t get the revenue, it’s that we have to adjust the bases and reallocate it among the components.”
